Coco Cola: World’s Top 10 Most Valuable Brand

Based on an article from ‘The Star’ published on September 16, 2012, Coca Cola had been holding the top spot of the “world’s most valuable brand” survey. Coca Cola had been selling their carbonated drinks including Original Coke, Diet Coke, caffeine-free Coca Cola, Coca Cola Cherry, Coca Cola vanilla and special editions like Coca Cola with lemon, lime or coffee in more than 200 countries all over the world. It was reported that the profit earned was better than expected for the first quarter of 2012.

  Coca Cola managed to survive and make profit for 126 years, despite the tremendous production cost. The production cost of Coca Cola falls into three main categories, labor cost, material cost, and factory overhead. Among the three inputs, labor cost is comparably high. Thus in order to utilize the resources efficiently, Coca Cola would have to cut down the expenses in other categories. For example, the gasoline price spike triggered the selling price of Coke due the high transportation cost. With the intention of reducing the input price, more production facilities in more locations should be built, so that the company does not have to spend so much on transportation.

  Coca Cola had been introducing new and innovative products throughout these years. The company had spent a huge amount of money on surveys, researches, and development, to understand the market’s taste and trend. By doing this, the company had forgone the option to invest in new machines that can improve production. This became the opportunity of Coca Cola.

 The global demand of Coca Cola is assessed to be 1.5 billion servings per day. The quantity demanded of Coca Cola and the price always has an inverse relationship. The higher the price, the lower the quantity demanded by customers, and vice versa. This is shown by the Law of Demand, which results from substitution effect and income effect. When the price of a bottle of coke increases, the opportunity cost of consumers for choosing coke increases simultaneously. Thus consumers will switch to other substitutes such as Pepsi and Sprite, this causes the quantity of demanded for Coca Cola to fall. Meantime, when the price of a bottle of coke-a normal good, rises, and the income of consumers remain, consumers would not be able to afford the same amount the use to consume. Therefore the quantity demanded will drop. A couple of years ago, samples of coke were tested and the results show positive pesticide residue that may cause cancer in a few samples. This crisis forms a great impact on Coca Cola’s demand, the sales decreases by 11 percent at that period of time. In consequence, consumers started to switch from Coca Cola to other natural drinks.

  On the other hand, the Law of supply shows a positive relationship between price and quantity supplied. In the short run, when the price is higher, producers are willing to produce more to earn more profit. However, the price will only go up until a certain level as if the price boosted too high, consumers will switch to other close substitutes available. The high input price such as bottling cost, commodity cost, especially sugar, left Coca Cola enterprise with no choice but to increase the selling price and make consumers share out the cost. Also, Coca Cola’s demand had been increasing, particularly noticeable when Coca Cola partnered with McDonald’s.  

Coca Cola’s demand curve appears to be relatively elastic, having the elasticity greater than 1. This is due to the close substitute available in the market such as Pepsi- the second largest soda beverage producer. With that, a small change in price brings up a huge change in quantity demanded. For example, if Coca Cola happen to increase its price, more likely that they will lose their customers as there are other alternatives in the market that cost lower. Consumers tend to be more sensitive to the price when both products seems to be similar to them, not to mention that the market is now flooded with all kind of carbonated drinks. Besides, the income of consumers also determines the elasticity. For middle income group, the demand is elastic. When the price rises, it would be harder for this group of people to consume. Whereas for the other group of consumers that earns a higher income, they would not be as sensitive to the increment of price. There is also a positive relation between the change in income of consumers and the quantity demanded. Therefore, it is clearly shown that Coca Cola is a normal good, as people buy more when their income increases. Furthermore, coke is never a necessity to consumers. So the quantity demanded will fluctuate at times. Unlike necessity, people need the particular good no matter what the price is. In that case, the quantity demanded would be more stable with not many changes. Besides, the cross elasticity of demand appears to be positive between Coca Cola and its substitutes. Apparently, when the price of Coca Cola increases, the demand of Pepsi also increases.

   In all, the Coca Cola enterprise had been performing well all these years. Despite quality produces, the company also spends resources to produce products that match consumer’s preference. For example, produce beverages in different prices, sizes, and flavors for people from different region that might have different preference. Also, due to the elastic demand curve, the prices have never undergone any tremendous changes. The company is also experiencing growth and going global. With, they are able to offset the high commodity prices.