Coca-Cola ice-cold Coca-Cola Classic (or one of
Coca-Cola Enterprises is the self-proclaimed largest bottler of “liquid, nonalcoholic refreshment” in the world. More than 350 million people live in Coke territory and since late last century most have been addicted to the sweetened water.
Anyone who prefers sipping an ice-cold Coca-Cola Classic (or one of their companion sodas such as Diet Coke, Sprite, Mr. Pibb, Cherry Coke, Mello Yellow, etc.) should start deciding how much they are willing to pay for them in the grocery store following the New Year. Coca-Cola Enterprises Inc., or CCE, is planning to progressively raise the price of their soft drinks by as much as 5% during the next year.
This increase is being directly prompted by the imposition of a higher annual target growth for 2000 of 6% by the Coca-Cola Corporation of Atlanta, Georgia, which owns a 40% share in the bottler. This target volume growth is double that of last year’s expectation and triple that of this year’s growth.While some people are blaming inflation and rising marginal costs (see Figure 1 below) for the price hike and Coca-Cola Co. is pressing fault on the negative impact of foreign currency, another factor may also be creating pressure for Coke to regain lost incoming revenues. This summer’s contamination scares and product recalls in Belgium, France and Poland definitely hurt sales in Europe, as well as removed 17 million cases from the supply of products. Another costly segment of this issue was the compensation and distributing costs of 15 million liters worth of coupons for free Coca-Cola products the disgruntled residents of Belgium received. CCE estimated that the total loss was about $103 million, including a case volume decline of 6-7% in Europe.
Figure 1: Revenues and Costs for CCE’s last decade of operation This graph shows the annual total revenues of CCE from sales as well as the costs associated with operation, delivery, and administrative expenditures, all in terms of millions of dollars. While this graph includes neither long-term debt nor shareholder payments, it does indicate a noticeable jump in marginal costs of production in the last few years. This is closely paralleled by an increase in revenues, indicative of previous price increases.Regardless of the cause, let’s look at the consequences of this price increase driven by Mama Coke… While a few consumers are die-hard Coke or Pepsi drinkers, some us easily become indifferent once faced with a grocer’s aisle filled with refreshment possibilities.
Since Coke and Pepsi can be considered substitutes for each other, the Law of Demand tells us that, holding other factors constant, I will buy the one that costs less. Therefore, Coke is willing to sacrifice a certain number of sales to Pepsi or other soft-drink manufacturers by betting on the greater revenues brought in with the price increase.As Coke’s market price increases from P to P’, quantity demanded is decreased by some amount from Q to Q’. This is shown as a movement down the supply curve from point a to point b. For CCE economists to determine whether an increase in price will be profitable, they would verify P’*Q’ * P*Q. This would require statistics on the exact consumer demand for their products.
Figure 2: Generalized Supply and Demand Equilibrium for Coke productsCoca-Cola Enterprises has a fairly elastic supply because production equipment and technology needed to produce an additional unit are already included in the corporation’s assets and therefore the marginal cost of that unit is low.Coke claims that they are attempting to force their products to become a “superior good” by increasing consumer cost while simultaneously releasing a new advertising campaign. In an economic sense this means that when consumer income rises, the demand for Coke will rise as well.
Whether this scheme will succeed or not is yet to be determined; however, Pepsi Co., the number two producer of soft drinks, is hoping to take advantage of this opportunity. If the Law of Demand will holds true, they should be able to steal some of the industry’s market share in North America. While Coke prices may rise as much as 5%, Pepsi announced a week later that they were increasing their prices by only 2-3%.Basically, Atlanta’s sugar-water company is stepping out a bit further onto the limb of consumer tolerance by continuing to increase prices. While there were rumors that plans were on the drawing board for vending machines which up the price when the temperature rises, Coke says that the technology they’re exploring is only to give customers an interactive experience.
Hopefully for Coke, that is the economists on staff have done their homework and are advising them well for the coming yearBibliography: