Managerial Economics Term Project ’The Coca-Cola Company’ December, 2001 December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project Agenda Background & Structure Background Analysis & Current Situation Economic Environment Industry Firm: The Coca-Cola Company Forecasts and Conclusion December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project Background & Structure December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project 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. December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project 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, December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project The Value Chain Concentrates and syrups for bottled and canned beverages Raw materials Syrup Bottling Packaged product Individual 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 December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project The Value Chain - Cont. Fountain syrups Raw materials Syrup Fountain sales Individual 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. December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project 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 December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project Target Markets Today the Coca-Cola Company products are sold in nearly 200 countries ... GLOBAL SNAPHOT Population Avg consumption North America 310 mill. 1 prd. everyday Latin 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 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. December, 2001 Managerial Economics Project The Coca-Cola Company

Segmentation Refreshment Replenishment Rejuvenation Health & Nutrition 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: Replenishment Rejuvenation Health & Nutrition As a result now company can better focus its energy, resources and talent on growth through differentiated products. December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project 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. December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project Products 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. Coca-Cola Fanta Minute Maid Sprite Diet Coke POWERaDE The major global brands that are introduced December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project The Economic Environment December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project 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. December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project 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)   December, 2001 Managerial Economics Project The Coca-Cola Company

Federal Debt held by the Some Macro Economic Indicators Federal Debt held by the Public as a % of GDP Year % of GDP 1995 49.2 1996 48.5 1997 46.1 1998 43.1 1999 39.9 Spending as a Percentage of GDP Year % of GDP 1995 20.7 1996 20.3 1997 19.6 1998 19.1 1999 18.7 Both Spending and Federal Dept held by the public as a percentage of GDP dropped December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project 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. December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project 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. December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project 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. December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project 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. December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project 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. December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project Industry December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project 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 December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project 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 December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project 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 December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project Firm : Coca-Cola Company December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project 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. December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project 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 December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project Inputs Inputs are abundance and relatively cheap, the companies in this industry don’t have difficulties in providing inputs Main Inputs High fructose corn syrup (in the domestic market) Sucrose (outside the USA) Juice concentrates Natural water Carbonate Different kinds of sweeteners Other Inputs December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project 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. December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project Elasticity Own-price elasticity is very high (oligopoly market) Cross price elasticity is very high Advertising elasticity is relatively high. Income elasticity is not high (slope of income factor in demand function is very small) December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project Projections & Conclusion December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project 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. Recession characterized by low inflation. Rapid recovery towards second half of 2002. December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project Forecasts - Cont. 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 December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project Forecasts - Cont. 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 December, 2001 Managerial Economics Project The Coca-Cola Company

Coca Cola’s revenue growth tracks industry’s revenue growth Revenue Growth & Market share Coca Cola’s revenue growth tracks industry’s revenue growth Market share comparison with PepsiCo December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project 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 December, 2001 Managerial Economics Project The Coca-Cola Company

Managerial Economics Project Thank you ... December, 2001 Managerial Economics Project The Coca-Cola Company