Study Notes

Why is Coca Cola so profitable?

Level:
AS, A-Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 23 Jan 2023

The study note looks at Coca Cola which has consistently been one of the most profitable food and drinks companies in the world.

Coca-Cola is a highly profitable company due to a combination of factors, including strong brand recognition, diversified product portfolio, and a global distribution network.

Here are some data that demonstrate the company's profitability:

  • Revenue: Coca-Cola reported revenue of $37.3 billion in 2020.
  • Market share: Coca-Cola holds a significant market share in the non-alcoholic beverage industry, with a 42% share of the global soft drink market, according to Euromonitor.
  • Brand value: Coca-Cola is one of the most valuable brands in the world, with an estimated brand value of $87.3 billion in 2021, according to Interbrand.
  • Diversification: Coca-Cola has diversified its product portfolio to include a wide range of non-alcoholic beverages, including juices, teas, energy drinks, water and more, which has helped to mitigate risk and increase revenue.
  • Distribution: Coca-Cola has a global distribution network that allows it to reach customers in more than 200 countries and territories, which has helped to increase its revenue and profitability.
  • Advertising: Coca-Cola has a long history of effective advertising, which has helped to build brand recognition and customer loyalty. The company invested $4.4 billion on advertising and promotions in 2020.
  • Innovation: Coca-Cola regularly introduces new flavors and packaging options, which helps to increase customer engagement and drive sales.

In summary, Coca-Cola's strong brand recognition, diversified product portfolio, global distribution network, effective advertising, and constant innovation, have all contributed to the company's profitability.

Coca Cola and Economies of Scale

Explain with examples how Coca Cola can benefit from economies of scale.

Economies of scale refer to the unit cost advantages that a company can achieve by producing and distributing goods on a large scale. Coca-Cola can benefit from economies of scale in several ways:

  • Purchasing power: As one of the largest companies in the world, Coca-Cola has significant purchasing power, which allows it to negotiate lower prices for raw materials, packaging, and other inputs. This can result in lower production costs and higher profits. This is also known as monopsony power.
  • Distribution: Coca-Cola has a global distribution network that allows it to reach customers in more than 200 countries and territories. This large scale allows the company to spread its fixed costs, such as transportation and logistics, over a larger volume of goods, resulting in lower per-unit costs.
  • Advertising: Coca-Cola has a large advertising budget, which allows it to reach a wide audience and build brand recognition. This large scale allows the company to spread its advertising costs over a large volume of goods, resulting in lower per-unit costs. This is known as a marketing economy of scale.
  • Manufacturing: Coca-Cola operates a large-scale manufacturing system, which allows the company to produce goods at a lower cost per unit. For example, Coca-Cola's manufacturing process is highly automated, which allows them to produce large quantities of goods at a lower cost. Additionally, the company also benefits from economies of scale in its distribution network, by producing and packaging goods in large quantities, they reduce the costs associated with packaging and transportation. These are known as technical economies of scale.
  • Research and Development: Coca-Cola spends a significant amount on research and development (R&D) to innovate and improve their products. This allows them to improve their production process, reduce costs and create new products that cater to the changing consumer preferences, this large scale allows the company to spread the research and development costs over a large volume of goods, resulting in lower per-unit costs.

Overall, Coca-Cola's large scale allows it to take advantage of economies of scale in production, distribution, advertising, manufacturing, and R&D, which can result in lower long run costs, higher efficiency, and therefore increased profitability.

Who are the main competitors to Coca Cola in the UK?

In the UK, Coca-Cola faces competition from a number of other non-alcoholic beverage companies. Some of the main competitors to Coca-Cola in the UK include:

  • PepsiCo: PepsiCo is one of Coca-Cola's main competitors in the UK. The company reported revenue of $67.2 billion in 2020 and holds a market share of 11.9% in the carbonated soft drinks market, according to Euromonitor.
  • Britvic: Britvic is a UK-based company that produces a wide range of non-alcoholic beverages, including juices, teas, and soft drinks. The company reported revenue of £1.3 billion in 2020 and holds a market share of 8.5% in the carbonated soft drinks market, according to Euromonitor.
  • AG Barr: AG Barr is a UK-based company that produces a wide range of non-alcoholic beverages, including soft drinks and energy drinks. The company reported revenue of £266.2 million in 2020 and holds a market share of 3.5% in the carbonated soft drinks market, according to Euromonitor.
  • Red Bull: Red Bull is an energy drink company that operates globally. The company reported revenue of €7.5 billion in 2020 and holds a market share of 2.7% in the energy drinks market, according to Euromonitor.
  • Monster Beverage: Monster Beverage is an energy drink company that operates globally. The company reported revenue of $3.7 billion in 2020 and holds a market share of 2.1% in the energy drinks market, according to Euromonitor.

Additionally, Coca-Cola also faces competition from other beverage companies and local brands depending on the country, region, and market segment.

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