Macro Economical Environment Of Coca Cola: Trends, Analysis And Impact

Coca Cola’s operational activities in UK and India

Discuss about the Macro Economical Environment of Coca Cola.

This report is being prepared to focus on the macro economical environment of Coca Cola in the last ten years. The report takes into account the strategic positioning of the organization and its current status of business in the developing market. Coca Cola is a giant market player engaged in the business of manufacturing, selling and allotment of extensive range of soft drinks across the world. Coca Cola is a company which has got widespread capacity for product growth and market expansion in an international market (Foster, 2012). In this broad economic sector the company is involved in domestic and international operations. The company’s profit margin and turnover level is proportionate to their growth intensity and improvement criterion in the emergent market (Oliver, 2013). The company has got a huge customer base and it is working continuously to maintain the standard of customer service it has offered over the years.

Coca Cola employs around 4500 people across the seven manufacturing units in Great Britain. While in India the number of its manufacturing units stands at 24. The company has got a dedicated sales team in West London which takes care of the marketing, promotional activities and distribution of new items and brands existing globally. Their responsibility lies in making the distribution and sales flow of soft drinks a continuous activity all over the world. In the product development criteria Coca Cola UK have some dazzling drinks like Diet Coke, Coke Zero, Fanta and Sprite to go along with vitamin water and sports drinks. The company’s strategy has always been to focus on consumer development and efficient market growth. Coca Cola is blessed with extensive supply chain facility which guarantees complete availability of the products to its consumers. Its marketing strategy has been brilliant and it has put itself in the right place at the right time. It has taken care of customer and regional values which have ensured a strong bond in customer relationship.         

The Indian market is a favorite destination for many foreign companies and Coca Cola was no different. The market is huge in terms of geography and population. Moreover the company offers a variety of brands to its customers and that too in different bottle sizes of 200 ml, 250 ml, 300, 500ml to 2 litres. Coca Cola was quick to recognize that Indians have a weakness for sweets and thus increased the sweetness level of their products for the Indian market. Coca Cola has reacted through proper implementation and improvement of their strategies to satisfy the Indian Customer’s needs.

Analysis of market structure in which Coca Cola operates in UK and India

Coca Cola operates in an oligopoly market, the reason being the major share of the market is controlled by two firms, Coca Cola and Pepsi. There is presence of other small players in the market but in comparison to Coca Cola their market share is negligible. Companies of small stature find it difficult to invest on a large scale in investing to launch a brand. There are barriers to entry too in this kind of market. The investment criteria play a huge role in preventing companies from entering this sector. Manufacturing soft drinks is cost heavy which requires noteworthy investment in advertising, promotion and production equipment (www.coca-cola.co.uk, 2016). Moreover in the soft drinks industry market the bargaining influence of suppliers is weak. All the ingredients are readily available in the market with the presence of lot of suppliers. Moreover these days’ companies have substitutes like sweetener and corn syrup for things like sugar.

The soft drinks market at present is resting in the matured stage of lifecycle where growth has become a stagnant factor. It is during this stage that a product tends to decline, but growth for Coca Cola has never been sluggish with its continuous endeavor in increasing its products and brands in order to lengthen the life cycle.  Though it has been stated as a giant in the field of Soft drinks industry, it has never been short of competitors like Limca, Pepsi and Mirinda (Lemley & McKenna, 2012). But as leaders do, Coca Cola has bettered itself to stay ahead of others in UK, though it faces a stiff completion from Pepsi in India. The cola sector has been a tad static but the fruit based drink category has shown a lot of growth in recent times.

Coca Cola India is purely dedicated to the Indian economy. In the Indian market scenario Coca Cola’s strength lies in its diversified product portfolio, heavy investment and the fact that it is an easily recognizable brand among people,. Though in 2004, Coca Cola had to face some health issue challenges with protestors claiming the company of using unethical means for manufacturing products high on chemical. Indian people do have a positive feel about Coca Cola which brings in a sense of belongingness. Moreover, physical factors of India make it a strong case for the sale of the product in the Indian markets.

GDP growth

UK: Before Britain took the decision to leave European Union; the state of Britain’s economy growth was pretty slow. Manufacturing has been struggling (www.bankofengland.co.uk., 2016).

Macroeconomic Indicators and its Impact on Coca Cola’s economic activity

GDP’s growth rate in India is measured by the change in the seasonally attuned assessment of the goods and services that are being produced in the Indian economy during the quarter. India is ranked among the top ten largest economies in the world and is the second most populous after China. In India, manufacturing accounts for 15% of the GDP and service industry taking the large chunk of share which stands at 60%.

In the second quarter of the year 2016, the GDP in India saw an upward rise by 1.40%. Since 1996 till 2016, India’s average growth rate in GDP stands at 1.68% which saw its peak during the second quarter of 2009 at 5.80% and a record low of -1.80% in the first quarter of 2009.

GDP from Manufacturing:Last 4901.64 Billion & Previous 4908.33 Billion

Highest 5407.38 Billion and Lowest 3455.83 Billion

Things like diet coke has contributed to every GDP with new versions of its. One could replicate for free the physical inputs of Diet Coke, but as Coca Cola owns the right of the recipe, one has to pay them for the same. The GDP would get lowered as Coca Cola’s earnings from manufacturing Diet Coke would stand at zero. It will only earn from the recipe it would rent out. This will still be a win-win situation even if the GDP goes down.

GDP per Capita growth comparison of Uk and India

(As created by author)

UK has shown a steady growth in case of the country’s GDP over the years whereas India’s was lying dead dumb till 2000 after which it has made a slow but steady progress.

UK’s inflation hit a record equaling low in January because of low energy prices and cheaper fuels. Inflation as measured by the Consumer Price Index slumped to 0.3% in January, 2015 from 0.5% in December as reported by the Office for National Statistics. The Retail Prices Index (RPI) also took a downward slide falling from 1.6% to 1.1%. if the inflation rate is up by 3% it signifies that the prices are 3% higher than it was a year ago, which means people need to spend 3% more to buy the same things.

Indian economy is in a desirable position with high growth and declining inflation. As per Gulati & Saini, (2013), reports of Central Statistical Office states that GDP is up from 5.6% in 2012-2013 to 7.2 in 2014-2015 and even more in 2015-15 at 7.6%, whereas, inflation has fallen from 7.4% in 2012-13 to a meager 2% in 2014-15 and further down at -2.8% in 2015-16.

Growth in bank credit ranges in between 9% to 11% in the previous two years. Banks are not willing to lend anymore as bad debts have piled up.

Inflation has the habit of increasing the cost of production. So, an increase in inflation will see Coca Cola increasing its pricing. This price increase might end up with Coca cola losing out on customers as it is a product of desire and not necessity. In 2005, a 2 litre coca cola was 99p whereas at present date it would cost around 1.98 pound. Continuous inflation has made Coca Cola doubled the price. Likewise the company can be forced to lessen their prices in order to increase consumption.

UK’s unemployment is witnessing an average of 7.15% from 1971 till date. Employment has increased in UK and its jobless rate has been stagnant at 4.9% in the three months till July 2016 which is the same as it has been in the previous years.

Unemployment has been a major factor for the Indian economy. In 2013 the unemployment rate of India dropped to 4.90% from 2012’s 5.20% (Mitra & Verick, 2013). India’s unemployment rate averages 7.32% from 1983 till 2013. It reached its peak in 2009 standing at 9.4% and saw a record low of 4.9% in 2013 (Hasan et al., 2012).

Rise in unemployment rates would have an adverse effect on Coca Cola and its demand would decrease. The ‘Theory of Consumption’ states that the more income one has, the more inclined towards the consumption of goods. The inverse also takes place. When UK people are low on not reusable income, they are less likely to buy Coca Cola products because the money then goes to other essential foodstuffs.

Unemployment comparison graph of UK and India

 (As created by author)

Unemployemnt rate comparison of UK and India which shows in that UK’s unemployment rate has shown a growth after the 2008 economic crisis whereas India’s has been very much steady and showing an inclination of sliding down everytime. Though the graph also shows that the UK unemployment rate graph is declining after 2010 which concludes that there are more job opportunities now than it was previously. When the unemployment growth has been on the higher side in both the countries the company has tend to have a lower sales growth as compared to other years, either by cutting down cost or closing down on manufacturing units or outlets.

A country’s Balance of Payments position is due to its economic health. The BOP consists of Capital Account/Financial Account and Current Account. Current Account BOP has more scope than balance of trade. It takes into account not only the exports and imports of goods but also stuffs which are invisible in nature like tourism, insurance, income on investments and foreign travel.

The last few years have witnessed an alarming downslide to UK’s balance of payments. According to Coutts & Rowthorn, (2013), in between 2000 and 2010, the average foreign payment deficit of UK was over 25 billion pound which sky rocketed in 2012 to 62 billion pound and even further in 2013 to 73 billion pound. In 2014 it stands at 90 billion pound which as reported is 5% over UK’s GDP. The reason being a gap between the goods and services sold abroad and the amount UK pays for imports. UK’s heavy borrowings are a major factor which it does to compensate the deficit in foreign payments.

India BOP on current accounts is where it has to make payments to other countries on account of the imports of goods it makes, along with the shipping services, people travelling abroad and insurance matters that are being taken up by other countries. It also has to pay royalties to foreign entities and interests on foreign investments in the country. These are some of the debit objects for which India has to make payments to the rest of the world. Likewise, when foreign countries import goods from India it has to make payments to this country.

In case of Capital Account it is the story of non-resident Indians who maintain their surplus funds with Indian Banks. Another major object in the BOP of capital account is the presence of foreign investment in India through foreign companies. Foreign investments are basically of two types: Portfolio investment in which foreign institutional investors (FIIs) acquire equity shares and Indian companies and Government’s bonds (Tomlinson, 2013). Foreign Direct Investment is another such area where companies of foreign land set up factories on Indian soil either on their own or through collaboration with Indian companies.

As per Drèze & Sen, (2013), highlights of Indian BOP Position:

Jan-Mar 2015 saw a surplus of US $30 billion, its sixth consecutive BOP surplus

The surplus of BOP is at 5.7% of nominal GDP, current account deficit standing at 0.3% and merchandise trade deficit is at 5.3%.

In2014, India’s BOP surplus was 3% of GDP which was highest in 7 years.

The UK Monetary policy is put by the Monetary Policy Committee (MPC) of the Bank of England. They choose on the interest rates but they have to aim and meet the government’s inflation target.

The Bank of England has the responsibility of studying inflationary rates in the economy which includes a lot of economic variables such as confidence of consumers, unemployment factor, exchange rate index and economic growth (Wu, & Xia, 2016). Taking into consideration all these factors the Bank of England decides whether the inflation will rise or take a downward slide. Expecting higher rate of inflation and higher growth has the tendency of increasing the interest rates whereas the drop in inflation rate will see a lower growth resulting in decrease in interest rates.

There are certain advantages in MPC setting up interest rates:

-MPC’s independent nature is not subject to any political pressure. They are not being pressurized in lowering the interest rates before an election which used to be a major problem in the economy of UK.

-The rates of interests have a commanding effect in controlling UK’s consumer spending because many people having taken up loans and mortgages.

-Inflation has remained low at 2% as per the Government’s liking (King & Low, 2014).

-Inflation expectations have been reduced by the MPC. This has injected confidence among the people that inflation will remain low. It has helped in keeping the wage demand low which has in turn helped in keeping inflation low. Bank of England sets the interest rate which is also known as the base rate. Higher interest rates does not support people in saving and borrowing and people with loans will be facing less disposable income that might result in less consumption (www.bankofengland.co.uk., 2016). In this scenario Investors will find it according to their liking in saving in UK banks. Rising interest rates are likely to witness a fall in investment and consumption. Higher interest rates do not encourages firms and individuals in making purchases and involve in risky investments.

The formulation and execution of the monetary policy of India is done by the Reserve Bank of India (www.rbi.org.in, 2016). Through this policy the central bank has the power to control money and the rate of interest. The monetary policy is undertaken to persuade the money supply and making money available for achieving certain specific objectives (Rajan, & Yanamandra, 2015). India’s monetary policy is concerned with regulating the credit volume formed by Banks. Monetary Policy’s main objective is to bring in price stability and financial stability (Damji, 2012).

Fiscal policy can be defined as the Government’s policy in taxing people and the way it spends the money. Governments need to borrow and spend for two important reasons: either to consume or to produce.

In the year 2009, the UK government followed expansionary fiscal procedure. In the face of deep recession when the GD fell 6%, the government cut VAT in order to boost up consumer spending (Herndon, Ash & Pollin, (2014). Government’s borrowing took a rise in 2009-10. Britain’s latest growth has not changed anything from the time it entered recession six years ago, the GDP is still below its earlier peak.

Government of India has adopted certain objectives of fiscal policy which are:

Mobilizing sufficient funds for financing various program and projects taken up for economic development.

Developing the private sector where necessary through financial inducement

Optimum utilization of resources are being arranged

Factors of Unemployment and poverty are removed

Lessening the degree of inequality in income distribution and wealth

Indian Government’s fiscal policy is having a great impact on the economy of the country. This has lead to significant development of the industrial sector (De, 2012). The taxation burden on India is much more which reduces the saving capacity of the people. Adding to that is the failure of country’s fiscal policy in checking the country’s inequality in distribution of income (Muller & Kolk, 2015).

In the face of falling economy it is obvious that the business of a UK based company like Coca Cola is also likely to fall down. The profit earning becomes a difficult prospect and for that the shareholders suffer too.

For Indian market, if there is devaluation in the currency rate of India, the profit margin of Coca cola would take a hit. The net operating revenues and operating income will be affected. The financial results of Coca Cola gets affected if there is any change in the currency rate, or there is any change in the fiscal or monetary policy of the company (Schneider & Enste, 2013).

Trade policy instruments for international trade agreements include export taxes, import quotas, import tariffs and export quotas. Certain change in the trade policy of a host country would affect the operations of a company (Borchert, Gootiiz & Mattoo, 2014).

Overseas trade is an important factor in UK’s inclination. The UK government is in the continuous process of helping UK businesses succeed internationally and encourage certain foreign companies to work with UK (Hayes, 2016). For many years, UK had a trade deficit, the reason being it imported more goods and services than it actually exported. For UK a devaluation in the currency will result in cheaper exports. But the firms importing raw materials will have to settle for higher cost of imports. UK firms selling price inelastic goods will see an increase in their demand when there is a fall in the foreign price. Reports suggest UK goods to be price inelastic where depreciation is related to small increase in the demand. Rise in pound’s value with a speculation over other country’s economy, firms tend to become uncompetitive.

The foreign trade policy offers the basic structure policy of interpreting the vision into goals and targets. Exports in India saw a high growth during the period of 2004-05-2008-09. The exports grew at an average growth rate of 23.9%, increased from UK $83.5 billion in 2004-05 to US $185.3 billion in 2008-09 (www.rbi.org.in., 2016). The Reserve Bank of India’s Reference rate for Great Britain Pound as of today is 86.4823 (www.rbi.org.in., 2016). A slight change in this figure will have its effect on the multinational companies working in India.

Coca Cola is a global company and its business is situated around the world. A certain change in the import export rate of a country in which it is operating can affect its profitability directly or in that case can increase its expenditure also as with foreign currency, foreign money is also involved. Temporary exchange rate fluctuations do not have that much of an effect on imports as rates are set 12-15 months before . So the company has to take into account the trade policy factors and abide the rules and regulations as laid down in that policy.

Comparison of the exchange rate of UK and Indiia

 (As created by author)

There is always an element of risk for Coca Cola India if the company’s Indian revenue depreciates with its main trading currency which is the US dollar or in othersense even the UK currency. India does have the habit of maintaining a weak value of its currency when compared to big countries like US or the UK.

Conclusion:

The report took into account all the possible data available in concluding how the economic factors of two countries affects a company like Coca Cola. No matter how big an organization it is, there are bound to be some reparations when these factors affect a country’s economy. As Coca Cola operates in these countries it has to take into account all the possible measures so that its operation is not hampered and it does not suffer a huge loss in the process. Factors like unemployment, inflation does have certain adverse effects on the workings of the company.

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