Market Models Pattern of Change: The Case of Coca-Cola Corporation
In this case, my industry of choice is the world soft drink industry, while the company to be analyzed is the Coca Cola Corporation. Soft drink industry has been one of the main areas of interest among investors in world food industry. The industry can be traced back to the mid 17th century Europe and America, where people would take water from natural springs to avoid drinking the highly contaminated waters in cities such as London, Paris and New York (Stuart & Robert, 2004). The pattern increased with agrarian and industrial revolutions, with people increasingly suffering from diseases related to water contamination due to the increasing number of industrial wastes. Mineral water was also believed to contain some minerals or healing powers that could see people recover from waterborne diseases. In addition, some small companies took the advantage of the situation to sell spring water to the people within the cities in small bottles, marking the begging of the now massive soft drink industry.
Today, soft drink industry has grown from the primitive healing water conception of the 17th century to a highly profitable industry dominated by a few corporations, mainly the Coke, Pepsi, Dr. Pepper and Nestle. These organizations are also some of the most profitable organizations in the modern world, covering a large number of geographical areas and reaching out to millions of people throughout the world. Competition in this industry is relatively high, with each of the four companies employing unique strategies in an attempt to outdo its competitors.
For decades, the Coca Cola Company, simply the Coke, has dominated the world market for soft drinks. The company is actually a public traded corporation that originated in the United States and specializes in manufacturing and distribution of soft drinks throughout the world. Coke Inc was founded in 1892. Since then, the corporation has been operating from its headquarters in Atlanta, Georgia. However, the company has gone global, with multiple outlets throughout the world. By 2005, the company reached 4.5 million cases in terms of sales, which meant that it was the largest brand in the world (Deichert, 2006). Currently, the company remains the leading market capitalization with a net worth of more than 2253 billion dollars. The closest competitor to Coke is Pepsi, an American beverage manufacturer with a net worth of about $1400 billion, while Nestle and Dr. Pepper take the remaining two positions respectively. It is worth noting that on the world market for soft drinks, the Coca Cola Company and Pepsi share about 82% of the market share, while Nestle and Dr. Pepper dominate most of the remaining 18% (Deichert, 2006).
The fact that the four companies dominate the world soft drink and beverage industry means that the four companies primarily dominate the industry Coca Cola operates in, which creates an oligopoly form of marketing model. In this case, it is worth defining the coca cola company as operating under the oligopoly marketing model, where it compete with a few corporations on the worldwide market (Tucker, 2009).
Oligopoly is a market structure that is defined by a stiff competition between or among a small number of large organizations. These organizations normally have market power, but they are always troubled by the actions the rivals are taking every day when they attempt to make any business decision. According to Farnham (2010), each of the members of the oligopoly must consider what action the rivals are doing at any one time, which affects the decisions a member of the oligopoly market makes and the moves each of the companies attempt to make within the competitive market. Since the model involves a few firms competing with each other, the market behavior the companies adopt and display is mutually independence. The companies tend to depend on each other, which makes the oligopoly and the companies operating in such a model unique (Vora, 2002).
Despite the fact that the soft drinks and beverage industry is highly profitable, the industry has a whole volume of challenges. The current soft drink market is particularly less attractive because consumers have been affected by the recent economic crisis, especially in the United States and the European Union. This has made the consumers become more concerned with their spending, which creates a challenge among the four competition marketers in the soft drink and beverage industry.
Despite its effectiveness in saving the four companies from excessive competition from new market entrants, oligopoly business model applied by Coca Cola and the three other competitors on the world market has for the last few years affected by a change in its pattern. The industry has lost about 260 million cases to other industries since 2007. The coca cola company reports that the sale of soft drinks in the United States alone dropped from a high of 36.4 billion liters in 2011 to around 16.2 billion liters in 2007. Coca cola has reported a 12% loss of its market since 2007 due to the impact of recession.
Due to the changing nature of the economy, the oligopoly model of marketing is experiencing some changes that affect the business strategies applied by Coke and its competitors. For instance, there has been a trend in price wars, where the competitors are fighting over the control of the market based on best price. The coca cola company and its archrival Pepsi are the best examples of the industries that have been affected by the recession, which in turn influences the change in the pattern of oligopoly. While previously the companies were taking their competition war to other issues such as advertising, promotion, branding and community support, the economic recession has forced them to take their competition war to a focus on price. The companies are focusing on the prices they offer to the customers, with an emphasis on price reduction in order to entice the customer who are already cutting on the amounts of money they safe for such luxuries as soft drinks. The pattern has affected the soft drink and beverage industry since 2007, which has seen them frequently reduce their prices to beat the competitors. Within the context of oligopoly, the reduction in price by Pepsi is likely to affect the pattern of change at Coca Cola because the demand curve on one company relies on the behavior the competitors are adopting within the competitive market. For instance, if Pepsi decides to lower its price for similar products, then Coke is likely to lose a number of its customers. In response, the price of the substitute will have to change, meaning that Coca Cola has to cut its price in order to cope up with the changing market. The price war has therefore followed this pattern over the last five years.
Apart from price changes and branding, competitiveness in the soft drink industry is defined with changes in the number of substitutes each company introduces to the market. Coca Cola and her competitors, particularly Pepsi, have been competing over the market for substitute products. In soft drink industry, the modern market is changing as the people become more wary of their health due to the high amounts of sugars in the products. Realizing this, Coca cola first introduced sugarless drinks in the market, including sugarless Coke soda. In response, Pepsi introduced a variety of sugarless brands such as Mirinda and Cola, with an aim of taking the market share from Coke.
As described above, there are four main competitors in the soft drink and beverage industry. For Coca Cola Company, the biggest threat is Pepsi, while both Nestle and Dr. Pepper come second. However, it is worth noting that the latter two companies present a high competition for the European and Asian markets, placing a threat to both Coca Cola and Pepsi.
PepsiCo Inc. is the main competitor to Coca Cola Company, sharing 40% of the American soft drinks and beverage market, equal to Coca Cola’s market share. However, on the world market, Pepsi tanks one position behind Coke by both the market value and the revenue. The company is a multinational food and beverage industry with its headquarters in Purchase, New York. It was founded around 1965, some 80 years after the foundation of Coca Cola. However, this was a merger between the Pepsi cola and the Frito-Lay Corporation. Although this is the actual origin of the company, it is worth noting that the Pepsi Company was founded around 1880s in North Carolina when the pharmacist Caleb Bradman developed a soft drink and named it the Pepsi-Cola, with the Pepsi-Cola registering as a company around 1902. Throughout the 20th century, Pepsi evolved through a number of mergers and acquisitions, placing the company as a multinational competitor to Coca Cola.
The pricing strategy at Pepsi is based mainly on competition in the market. The company’s pricing is very flexible. The company can regularly change its product prices with time depending on the competition and market trends. In addition, price cuts at Pepsi normally take place immediately, with the company having a record of cutting the price down up to half of the original or needed price (Vora, 2002). This is one of the main competitive natures that company holds against Coca cola, and has used this strategy to attract large number of customers from the coke clientele over the last 2o years. In fact, since the company started competing with Coca Cola in the 1990s, it has used this strategy to reach its current 40% market share, and even surpassing the Cola in volume of sales in early 2000s. However, the flexibility of Pepsi’s pricing strategy is also a disadvantage to the company’s performance because it has been earning losses due to sudden and deep price cuts.
Unlike Coca Cola Company and Pepsi Co, Nestle is not an American but a Swiss multinational food and beverage producer and distributer, with massive sales in Europe, north American, Asia and Africa. The company derives its name form the founder, Henri Nestle, who founded his milk-based baby foods at Vevey, Switzerland in 1866, but sold the company to two American brothers Charles and George Page who were investing in Switzerland. The company has grown from this small organization to a multinational food and beverage company, including soft drinks and beverage products in its list of produced goods. The pricing strategy at Nestle does fluctuate, but the company has maintained a culture of fixing its prices at a reasonable margin to avoid excessive losses, unlike Pepsi. Secondly, the company has been developing new brands and brand sizes and introducing them during certain periods when competitors are reducing their prices.
From the analysis of the competitors pricing models, it is worth determining the best pricing strategy for Coca Cola. In this case, the greatest threat is the strategy employed at Pepsi because the sudden and deep price cut normally attracts large numbers of customers towards Pepsi and creating a loss of market for Coca Cola. It is important, however, to consider this as an opportunity for Coca cola to establish a competitive pricing strategy. For instance, once the competitor has cut its prices by a large percentage, there is a likelihood that it will end up making massive loses. To recover the losses, Pepsi will be increasing the prices of some of its products, which Coca Cola can reduce slightly to attract the customers shying away from Pepsi products. In this way, a competitive advantage is duly created.
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