The effects of Pricing and non pricing strategies with reference to Coca-Coca Inc.

The effects of Pricing and non pricing strategies with reference to Coca-Coca Inc.

 Introduction.

Pricing is a marketing strategy used to increase additional revenue and profit. Pricing strategies make use of the prices to draw in new clients while maximizing profit from their current customers. Non pricing strategies use other methods other than price to draw in new customers. Branding is an ideal way of maintaining customers and the market share without changing the price. Pricing strategies are common during economic difficulties, but most strategists often combine non pricing strategies together with pricing strategies.

There are several pricing strategies used in the marketing business. The importance of pricing strategy cannot be underrated as the element of marketing in any production department determines the success or failure rate of the product or service. Pricing affects the promotion and sales strategies of the implementing company.

To develop and adopt a pricing strategy, the company must take into consideration the overall marketing and growth strategy to determine the kind of target buyer the company is targeting and the overall product position and its current market status. When planning the kind of strategy to adopt, the promotional and distribution techniques should also be taken into account. All the underlining costs involved should be calculated and the bottom line of all the costs involved determined and matched to weigh their impact and how demand will affect their sales at different prices. The charges by the competitors must also be considered when setting the objectives of the pricing strategy. For instance at what price will the sales are maximized to earn maximum profit. To obtain the best pricing strategy, the company objectives must be clearly spelt out. In some cases the pricing policy is meant to recover some initial costs and continue with normal business, others would want to maximize profit or increase the number of customers served. A company may also want to reduce fluctuations in its profits and stabilize its income.

Pricing methods can be adopted to achieve different and varied objectives. For instance the cost plus pricing, the price is normally set at cost plus the target profit margin. While in target costing the price is fixed to obtain a target return while psychological pricing the consumer is allowed to pay the highest he has agreed to pay. While in value based pricing the price is set at a value which is relatively equal to the others.

In the new product pricing, the pricing strategy is normally chosen to maximize the products market share. This is a common strategy; it’s also known as skimming. This strategy involves charging high prices to attract customers who do not care about the prices and instead feel the high prices are associated with the products high quality. But to maximize the market share, most firms set low prices. It works better if there are extra cost savings in terms of selling in volumes.

The coca-cola company is a multinational American Corporation that Specializes on the manufacture and distribution of non-alcoholic syrups and beverage concentrates. Its headquarters is in Atlanta, Georgia. Its flagship product Coca-Cola was invented in the year 1886 by John Stith Pemberton, a pharmacist by profession. The brand name and the Coca-Cola formula was sold and bought by Asa Griggs Candler in the year 1889. He later incorporated and registered it under the name The Coca-Cola Company in 1892.

Coca-Cola has over 500 different brands in over 200 countries worldwide. On a single day Coca-Cola serves over 1.7 Billion customers. Coca-Cola operates a franchised system of distribution where it only produces the syrup concentrate and sells to the independent bottlers throughout the world. Currently Coca-Cola owns anchor bottler in the USA. Coca-Cola Company thrives in the art of branding and rebranding.

Muhtar Kent is the chief executive and also the chairman of The Coca-Cola Company. Its listed in the New York Stock Exchange (NSE) under the initials KO and is part of the S&P 500 index the Russell 1000/growth stock index.

Coca-Cola utilizes the Non-price competition in its marketing strategy. It distinguishes its products on the basis of their superior designs and quality products which are refreshing and energizing compared to its major rival Pepsi. Coca-Cola has extensive distribution network and is steadfast in its quest for customer satisfaction and low pricing strategy. It’s involved in heavy and expensive promotional expenditures i.e. sales promotions, free gifts, new product and brand development, advertising and market research. Coca-Cola engages in non-price competition despite the extra additional costs instead of lowering its retail prices and also to avoid an imminent price war with its fierce competitor Pepsi. Coca-Cola Company has over the years acquired many companies. In 1960 it acquired Minute Maid, between the years 1993, 1995 and 2001 it acquired the cola brand from India, Barq’s and the brand Odwalla that makes fruit juices and bars respectively. In 2007 it acquired the Fuze beverage and Castanea Partners. These acquisitions help it in its non pricing strategy of always rebranding its products and aggressively marketing policies.

The greatest consumption of The Coca-cola company product is the USA at 42% of its total sales, while Asia and Latin America account for 37% while the rest of the world share the remaining 21%.Coca-Cola faces its major rival in the beverage market, Pepsi. Its operations are following the acquisition of CCE, a North American based company (Coca-Cola Enterprise) in the year 2010, the sales increased tremendously in the North American segment. The integration of CCE was aimed at combining it with other food oriented businesses; these were the Minute Maid and the Odwallo juice business and the complex Company-owned bottling and packaging operations in Philadelphia and Pennsylvania. These operations were unified and renamed Coca-Cola refreshments or CCR.

The operations and sales of Coco-Cola Company were also affected by the changes in the economy. When employment levels dropped and unemployment levels rose between the years 2008 to most parts of 2009 parts of 2010 there was a slight drop in the sales of Coca-Cola company that saw it change its strategies and acquired many companies in and out of America that enjoyed a large market share and adopted their brands to regain and maintain its profitability.  For instance in the year 2008 and parts of 2009 and 2010 when the US economy recorded a negative 8% growth, www. research.stlouisfed.org/publications/iet/, the employment level during that period was at an all time low which stood at negative 4% growth while unemployment was at 10%. The composite of long term government bonds stood at 4.5% while the three months CDs stood at slightly over 3% that nosedived to almost 0.1% in 2009 while the GDP was at its lowest growth negative growth of 4.5%.

In the year 2011 the investments in Coca-Cola Company in North America reduced by 54% to stand at $26 million while investments to Eurasia and Africa also reduced by 2.4% to stand at $284 million. In the year 2012 the investment to North America was $39 million, an increase of 50% while investment to Eurasia and Africa increased to $1155 million which resulted to a total increase of 206.7%.  These means some investments were transferred to other countries with profitable returns or there was extra investment and acquisitions of other brands to try and maintain its hold on the beverage market.

Pepsi is the main competitor of Coca-Cola. It’s a carbonated drink, originally created and developed as Brad’s drink in the year 1893, later on 28th august 1898 it was renamed Pepsi-cola then rebranded again to Pepsi in 1961. It has other brands like RC Cola, Irn Bru, Big Cola, and even Pepsi Cola.

In 1990, some tests were carried out between Coca- Cola and Pepsi Cola. It was concluded that Pepsi was more preferable to consumers because of its original lemon taste and the use of Vanillin instead of the vanilla as used by Coca-Cola. The sales of Pepsi shot up and those of Coca-Cola dropped. In the year 1985, Coca-Cola company embarked on a series of publicity and changed its formula later it reintroduced the coke classic. Currently Coca-Cola controls 42.7% while Pepsi cola controls 30.8% of the American market respectively. (Beverage Digest’s, 2008)In the year ending 2012, Pepsi cola registered a decrease of 5.2% in its net income i.e. in the year 2011 the net income of Pepsi cola was $8944 million while in the year 2012 $8479.  This was most likely because of the hard economic times and probably because of the tough competition from the Coca-Cola Company. In the year 2012, the drop in net revenue of Pepsi Cola of 5.2% was attributed mostly to the expansion of the beverage industry in Mexico. The drop in net revenue was compensated by an effective net pricing strategy that regained 1% of its previously lost revenue.

There was also a decrease of 2% in sales volume that was driven by a drop of 4% in North American sales volume. The North American sales volume due to a decline in CSDs by 4% and reduction of sales volume of 3% in non carbonated drinks. These were the Tropicana brand and the Gatorade sports drink. The reported operating profit declined by 10% because of high commodity prices that affected its business operations. The high advertising costs

were partially recouped by the effective net pricing and the planned cost restructuring.

By the end of the year 2012, Pepsi refocused its energy and started to recover lost ground from Coca-Cola. It started aggressively marketing and accelerating the benefits and advantages of one Pepsi company, leveraging its strong position in both the food and beverage industry becoming an efficient and highly effective company. In the same year, Pepsi partnered and formed a joint venture with Taco Bell to produce the Doritos Locos Tacos, that became its biggest and most profitable selling product and in a period of nine months it made a record sales of $325 million. Other products were also introduced alongside Doritos Locos Taco i.e. Cool Ranch- Flavored and Mountain Dew Baja Blast Freeze. In the US, Doritos is one of the number one selling salty snack, Mountain Dew is also the best selling number one carbonated single serve drink. Pepsi has significantly stepped up and heightened its advertising and marketing investment and now its focusing its energing on its best and most popular drinks i.e. Pepsi, 7up, Sierra mist, Mountain dew, Mirinda, Doritos among others.

The health and state of the economy also affects the performance of most companies. When the economy is a recession, the general income of the average household reduces and the amount of saving also reduces by the same margin. The need for more employees normally also reduces during the recession as most companies spend less money on new investments, buildings, equipment and stocks these is due reduced trading activities.

The Total net operating revenue for Coca-Cola Company increased by 5.4% in 2012 from $20571 million in 2011 to $21680 million in 2012. The capital expenditures were $711 million, $1364 million and $1447 million in the years 2010, 2011, 2012 respectively. (Vance, 2003).This investments were all in the acquisition of new companies and different brands. The identifiable operating assets were $32793, $33422 and 34114 in the years 2010, 2011 and 2012. These represented a steady increase in growth of the identifiable asset of 1.9% in 2011 and 2.1% in 2012. The investment in the North American segment were minimal as the acquired assets under the CCR umbrella were enormous the actual investment made were $57 million compared to $291 million in Eurasia and Africa in 2010, a difference of about 410.5%. These means that in the year 2010 the investments in Eurasia and Africa were slightly over four times more than the investments in North America. The American economy was not performing well and Coca-Cola was investing in other markets. The Coca-Coca company first quarter results for the year 2013 represented an overall 4% growth in the world market. These represented a growth of 5% in the American market and 3% in the remaining external market. The drivers of profitability were the Global sparkling beverage which grew by 3% and the Coca-Cola brand that also grew with a similar margin. The revenues in the first quarter of 2013 reduced by 1% due to the impact of structural and investment activities. The operating income also reduced by 4%. (Khan, 1993).

The other drivers of profitability were the nonalcoholic ready to drink beverages (NARTD) whose consumption grew by 3% in the first quarter of 2013 and the immediate consumption of sparkling also grew by 2% in the same period. The Fanta brand sales volume grew by 6% while Sprite also grew by 5%. These growths were driven by the constant innovation in packaging, sweeteners and aggressive activation of international marketing campaigns.

The worldwide still beverage sales volume grew by 6% in the first quarter, which also included the ready to drink tea, juices, packaged water, sports and energy drinks.

The ready to drink tea brands made a strong impact in the market with its leading brands such as Gold peak and honest Tea in the American market. Ayataka green tea also made a mark in the Japanese market and also the Fuze Tea which expanded globally.

The juices and the juice drinks sales volume grew by 9% globally also the energy drinks grew by the same margin. Packaged water grew by 1% in the international market. The ILOHAS single service water and the Ayataka premium tea in Japan grew by 22% and 13% respectively. All these innovations are targeted at capturing the global market.

The earnings per share (EPS) was $0.39 for the first quarter of 2013 which was 13% below the last earning per share of the last quarter. The basic EPS for the year 2012 was $2 which was an improvement of 6% from the previous year, 2011 that was $1.85 which compared to the year 2010 represented a decrease of 26% as the basic EPS for 2010 was $2.53. (Ehrhardt and Brigham 2008).

The diluted EPS for the year 2012 was $1.97 which represented an increase of 6% compared to 2011 Diluted EPS of $1.85. There was a decrease in Diluted EPS of 27% in 2011 compared to 2010 which was $2.53.

The long term growth plans targets increase in authorized shares of common stock from the current 5.6 billion to 11.2 billion and also to effect 2:1 (two for one) stock split among the current share holders.

  To diversify and consolidate its dominance in the beverage and syrup global market The Coca-Cola Company embarked on acquisitions and expansion programs in emerging markets. In the year 2012 a total of $1.535 billion had been spent on company’s acquisitions and investment in emerging markets. These were related to the Aujan Industries Company J.S.C one of the largest beverage company in Middle East, the Mikumi Coca-Cola Bottling plant in Japan. The other ones were in Cambodia, Guatemala and even Vietnam. These acquisitions had a positive effect on the EPS first quarter results of 2013 which were affected by other factors related to structural changes and the international currency fluctuations in the monetary market. These acquisitions target  the growth in the global market and also the main North American market which account for over 42% of the Coca-Cola sales with its leading brand Coke taking 78% of its total sales worldwide.

Pepsi on the other hand has invested heavily in modern technology and research. Through its research and development initiatives, it has developed several other products and improved its efficiency. They have built new capabilities and invented breakthrough innovations that provide sustainable and profitable incremental growth. The innovations from the products developed previously accounted for slightly more than 8% of its net revenue in the year 2012. These innovations mostly border on rebranding and aggressive advertising. The new innovations have contributed positively towards meeting consumer demands. The tasty, convenient and affordable nutrition provides a variety of choices under different brand names i.e. Prime Energy Chews (for sportsmen), Quaker Real Medleys, and Chudo Kasha cereal for the Russian market. Others were with reduced sugar levels, Regulated salt and fat saturation levels.

Pepsi innovations were prompted by the wide variety of Coca-Cola innovations that were doing very well and proving to be very successful in the beverage market. The non carbonated drinks were also doing better. Pepsi had to develop its own brands to compete effectively with Coca-Cola. Now the battle front has moved from the USA to other parts of the globe. Pepsi is doing very well in Arabic countries while Coca-Cola has concentrated in Europe and parts of Africa.

 

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