december, 2001managerial economics project the coca-cola company 1 managerial economics term project...

December, 2001 Managerial Economics ProjectThe Coca-Cola Company

1

Managerial Economics Term Project

’The Coca-Cola Company’

December, 2001


2

Agenda

• Background & Structure

• Background Analysis & Current Situation

• Economic Environment

• Industry

• Firm: The Coca-Cola Company

• Forecasts and Conclusion


3

Background & Structure


4

Background

• The Coca-Cola Company is the largest manufacturer, distributer and marketer of soft drink concentrates and syrups in the world.

• The company was incorporated in September 1919 as a successor to the business of a company with the same name that had been organized in 1892 at Atlanta.

• Finished beverage products bearing the company’s trademarks sold in the US since 1886.

• Today sold in nearly 200 countries.

• The company also markets and distributes juice and juice-drink products.


5

Fountain Syrups

35%

Bever. Concentr

57%

Juice drinks*

8%

US Gallon Sales Distribution

Core Business & Structure

In 2000, 57% of the sales were the sales of beverage concentrates and syrups to 84 authorized bottlers in 396 territories.

35% of them were the fountain syrups sold to 525 fountain retailers and wholesalers

The remaining 8% were attributable to juice and juice-drink products sold by The Minute Maid Company

Product range

• Soft drink and non-carbonated bever. concentrates

• Syrups including fountain syrups,

• Juice & juice-drink products,

• Some other finished beverages,


6

Raw materials

Syrup Bottling Packaged product

Individual

The Value Chain

Concentrates and syrups for bottled and canned beverages

Concentrates and syrups are sold to authorized bottling operations.

The bottlers combine the syrup with carbonated water to produce the finished soft drinks.

The finished soft drinks are packaged for sale to retailers or wholesalers.

Then the finished product are sold to the consumer


7

Raw materials

Syrup Fountain sales

Individual

The Value Chain - Cont.

Fountain syrups

Fountain syrups are manufactured and sold by the Coca-Cola Company to authorized fountain wholesalers and retailers (Outside the US, fountain syrups are manufactured by authorized bottling companies)

Authorized fountain retailers use dispensing equipment to mix the syrup with carbonated or still water

Then the finished products are sold to the consumer.


8

The Bottling System

Bottling System : One of the greatest strengths of Coca Cola. Enables to conduct business on a global scale while maintaining its focus on individual local territories,

Bottlers use in-depth understanding of the local business environment to offer brands and services to meet the unique local needs ensuring the highest standards of product quality and uniformity,

Bottlers serve as strategic business partners to the company on every major continent and leaders in a global bottling system,

The Coca-Cola Company and bottlers take advantage of virtually limitless worldwide growth opportunities


9

Target Markets

In 2000, US gallon sales represented approximately 30% of the company’s worldwide sales.

The principle markets outside the US are Mexico, Brazil, Japan and Germany, which

together accounted for approximately 26% of the worldwide gallon sales.

North America

30%

Latin America

26%

Asia Pacific

16%

Africa & Middle East7%

Europe21%

GLOBAL SNAPHOT

Population Avg consumptionNorth America 310 mill. 1 prd. everydayLatin America 519 mill. 4 prd each week Europe 686 mill. 2 prd each week Asia Pacific 3,200 mill. 1 prd each 2 weeks Africa & M East 1,200 mill. 1 prd each 2 weeks

Global Gallon Sales Distribution

Today the Coca-Cola Company products are sold in nearly 200 countries ...


10

Segmentation

As a result now company can better focus its energy, resources and talent

on growth through differentiated products.

The Coca-Cola company reshaped

its business to realize the market

potential, accordingly their

strategy is to respond consumers

across entire market,

focusing on four basic segments:

Refreshment

Rejuvenation

Health &

Nutrition

Replenishment


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Segmentation - Cont.

Refreshment : Company refresh consumers while appealing to different tastes, different cultures and lifestyles. Major brands in this segment are Coca-Cola, Fanta and Sprite.

Rejuvenation: Consumers are turning more to ready-to-drink coffees, teas, and herbal beverages. Rejuvenation drinks help people improve to feel physically and mentally. Major brands are Nestea and Nescafé coffees in Europe and Asia, Belté teas in Italy and Yang Guang teas in Hong Kong, Macau and Saipan.

Health & Nutrition : Today, led by juices and milks, health and nutrition beverages represent roughly 40% of all ready-to-drink commercial beverages. Consumers want great tasting beverages that also provide nutrients for health Minute Maid Premium orange juice is, for example, fortified with calcium to help develop and maintain strong bones, or with vitamins C and E

Replenishment : Even that life styles change all over the world, there is one beverage that remains as the essential element for all the people; water.


12

Products

Coca-Cola

Fanta

Minute Maid

Sprite

Diet Coke

POWERaDE

The major global

brands that are

introduced

Today the Coca-Cola Company offers 230 brands worldwide,

including soft drinks and non-carbonated beverages, sports drinks,

juice drinks, milk-products, bottled waters, teas and coffees.


13

The Economic Environment


14

GDP, Growth, Spending and Federal Reserve

• 1996: Increased receipts and lower rate of spending growth.

• 1997: Rapid economic growth, increase in GDP by 1.1%.

• 1998: First surplus since 1969 and the largest as a % of GDP since 1956.

• 1999: Second consecutive year the budget posted a surplus, the first back to back surpluses since 1956-1957.

• 2000: Eighth consecutive year of improvement in the Federal budget. Surplus was 2.4% of GDP.


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Basic Economic Statistics 1995-2000

1995 1996 1997 1998 1999 2000

Economic Growth 2.6 3.8 4.7 3.9 4.3 3.8

Inflation 2.5 3.0 2.2 1.4 2.6 4.9

Job Growth 2.7 2.5 3.1 3.1 2.7 1.1

Unemployment 5.6 5.5 5.1 4.6 4.3 11.2

Interest Rate 5.5 5.25 5.5 4.75 5.5 6.00

(Federal Funds)


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Federal Debt held by the Public as a % of GDP

Year % of GDP1995 49.21996 48.51997 46.11998 43.11999 39.9

Some Macro Economic Indicators

Spending as a Percentage of GDP

Year % of GDP1995 20.71996 20.31997 19.61998 19.11999 18.7

Both Spending and Federal Dept held by the public as a percentage of GDP dropped


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Production

In 1998, total production per employee rose by 11.6% to $1,013,384. The productivity measure can be accounted for a number of reasons:

First, the workers have become more skilled and efficient at producing the goods in question.

Second, the beverage industry may have access to more advanced capital equipment.

Third, the cost factors in production may have changed (lower wages or materials, for example).

Fourth, the structure of the industry may have been transformed - the outputs of the industry may have changed over time.


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Investment

Long term trends in capital investment in an industry is one of several indicators of the longer-term growth prospects for an industry.

For the beverage industry, total annual investment fluctuated between $620.6 million in 1990 and $1.2 billion in 1998.

The average composition of these investments varied from 82.5% of total investment devoted to equipment and machinery in 1990 to 71.5% in 1998.

The increase in investment capital reflects Coca-Cola’s confidence in the company’s growth prospects.


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Relevant Forces & Trends

Between January 1995 and April 2001, the prime interest rates fluctuated between 8 and 9.5%, due in large part to the high rate of consumer confidence.

In recent months, consumer confidence has waned and the government responded by reducing interest rates until they reached a 19-year low of 5.5%.

Despite the drop of consumer confidence, the beverage industry has continued to grow, because soft drinks and juices are inferior goods, which will be purchased even during economic downturn.

In 2000, the beverage industry volume grew slightly +0.2% to 9.95 billion. On the other hand, the retail value of the beverage industry increased by +4% from the previous year to $60.2 billion, far out-stripping volume growth as major bottlers raised prices.


20

Unemployment

In the beverage industry, unemployment rose from 4.4% in 1999 to 6.6% as of October 2001.

Similarly, by the end of the year 2000, Coca-Cola employed approximately 36,900 persons, compared to approximately 37,400 at the end of 1999.


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Overall….

Between years 1995 and 2000 almost 48% of the economic growth for the last 4 years are based on Food and Soft drinks industry in USA.

With a market share of more than 44.6%, The Coca-Cola Company has been contributed to this improvement more than any other producer.


22

Industry


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The Beverage industry

• The beverage industry contains two major categories, alcoholic and non-alcoholic. Coke operates in the non-alcoholic segment

• There are several categories within the non-alcoholic segment, including: soft drinks, juices, sports drinks, bottled water and hot drinks

• The US market for beverages is valued at $160 Billion annually

• Soft drinks account for 59%, fruit juices 26%, hot drinks 9% and bottled water 5%

• The 2000 US GDP was 9.872 Trillion so the domestic beverage industry accounted for approximately 1.62% of the overall GDP


24

New Markets and Areas For Growth

•The beverage industry is worldwide, but the US is still the

largest single market in the world

•Colas are currently responsible for 60% of all carbonated beverage sales

•Coke and Pepsi account for 35% of all carbonated beverage sales

•Since 1995 the Sports Drink segment has experienced double digit annual growth

•Coke’s Sports Drink brand, Powerade, currently represents only 12% of the sports drink market vs. Pepsi’s Gatorade brand that controls 80%

•Currently the bottled water segment has grown at 10-12% annually since 1995 and there are over 900 different bottled water brands in the US


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Market Structure and Competitors

• The industry consists of 3 major players, Coke, Pepsi, and Cadbury-Shweppes.

• These three firms account for more than 90% of the overall market

• Coke owns 5 of the top 10 brands, Pepsi owns 3 and Cadbury owns 2

• Coke has 45% of the softdrink market share and is also the dominant juice manufacturer with 9.5% of the market. This is primarily due to their MinuteMaid brand of juices

• Pepsi is the second largest firm and has a 30% share of the overall softdrink market

• Cadbury has a 13% market share that should expand with the recent purchase of the RC Cola brand


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Firm : Coca-Cola Company


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Market Power

The Market is characterized as an oligopoly with 3 companies controlling 90% of the market.

Coca-Cola has the advantage of its brand name recognition to compete with low-cost generic or store brands.

However, Coca-Cola’s market power is still limited due to close substitutes like Pepsi.

Overall, Coca-Cola has a very strong market power based on the strongest brand name in the world.


28

Production

Being the biggest company in a nonalcoholic beverages industry The Coca-Cola uses economies of scale and economies of scope

Fixed costs of the company are much less than its variable costs

During the last 5 years, costs of company increased from approximately 15 billion to 16.7 billion

Revenues of the company during the same period has increased from $18.7 billion to $20.5 billion

1516.7

18.720.5

0

5

10

15

20

25

Cost Revenue

MMM $


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Inputs

Juice concentrates

Natural water

Carbonate

Different kinds of sweeteners

Other Inputs

Main InputsHigh fructose corn syrup (in the domestic market)

Sucrose (outside the USA)

Inputs are abundance and relatively cheap, the companies in this industry don’t have difficulties in providing inputs


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Demand factors

)Price of the product. Since, there are competitors in the market changing in own-price can have correspondent effect on demand for the company's products.

Price of related goods. Price of related goods includes price of substitutes and complements

Income level of consumers. Products of the company are normal goods, and decrease in the income level would affect adversely the demand for Coca-Cola's products

Seasonality. )The volume of sales in the beverages business may be affected by seasons and weather conditions.


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Elasticity

Own-price elasticity is very high

(oligopoly market)

Cross price elasticity is very high(oligopoly market)

Advertising elasticity is relatively high. (oligopoly market)

Income elasticity is not high

(slope of income factor in demand function is very small)


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Projections & Conclusion


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Forecasts

The Economic Environment

High tech/IT leads to longest expansion in U.S (1991 – 2000).

In 2001, economic slowdown accelerated by Sept 11th attacks.

0

2000

4000

6000

8000

10000

12000

1996

1998

2000

2002

2004

Year

GD

P (

$Bill

ion

)

Real GDP Forecast Natural GDP

Recession characterized by low inflation.

Rapid recovery towards second half of 2002.


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The Non-Alcoholic Beverage Industry

Expanding into new markets (food and snacks)

Stable input prices expected

Mergers and acquisitions leads to better efficiency

High tech/IT provides better distribution logistics and inventory control.

Next revolution : Smart vending machines

Forecasts - Cont.


35

The Coca Cola Company

Increased capital investment to improve efficiency

Increased Marketing/Advertising spending

Acquisitions to enter new markets/improve market presence

Short run : Meet forecasts for sales and revenue growth

Long run : Increasing market share, new markets, improve brand loyalty

Forecasts - Cont.


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Revenue Growth & Market share

0

10

20

30

40

50

60

70

1996 1998 2000 2002 2004Year

Tota

l Re

ve

nu

e (

$ B

illio

n)

Coca Cola Coca Cola Forecast

Industry Industry Forecast

Coca Cola’s revenue growth tracks industry’s revenue growth

Market share comparison with PepsiCo

40

42

44

46

48

50

1996 1998 2000 2002 2004

Year

KO

Mar

ket

Sh

are

(%)

30

32

34

36

Pe

ps

i Ma

rke

t S

ha

re (

%)

Coca Cola Coca Cola Forecast

Pepsi Cola Pepsi Cola Forecast"


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Conclusion

Tremendous growth prospects in domestic/foreign markets

Increased advertisement spending – improves brand loyalty

Experienced management, strategic growth and innovation

Better market share, more popular brands than competitors

Coca Cola an attractive investment in non-alcoholic beverage industry


38

Thank you ...

december, 2001managerial economics project the coca-cola company 1 managerial economics term project...

Documents

cocacola company forecasts

managerial economics

fountain retailers

fountain wholesalers

juice juicedrink products

finished products

background structure

consumer slide