Comprehensive Product Costing And Analysis For Coca-Cola And Pepsi

Manufacturing location of the product

The following project is based on comprehensive product costing. The product selected is one of the most popular drinks of the world which is Coke produced by Coca-Cola Company. The company has its origin in the United States. The following project aims to discuss the most effective and efficient ways to find out the elements related to the product costing of the following. The company was formed as a medicine company in the 19^th century by John Pemberton. However after some time a businessman named Asa Griggs Candler bought the company and changed its fortunes from a mere medicine producing company to its present status of a dominating soft drink company of the world. The main features of this particular project are provided below. They are categorized as follows;

Coca Cola is one of the largest manufacturers of cold drinks and beverages across the world. The particular product has its manufacturing plant all across the globe. The main reason behind this is the wide acceptability of Coke across the globe. The company has mainly its bottling units all across the world. The company has least number of plants in its place of origin which is in North America. It has its production and bottling plants in USA and Canada. In the South Americas the company has its plants located at almost all of the countries. This includes the likes of Argentina, Bahamas, Brazil, Chile, El-Salvador, Mexico and many more as such. In Europe it has similar presence in all over the continent with different kind of factories in Ireland, Italy, France, Sweden, Switzerland, Romania, Spain and in many other countries. IN Africa too the company has its plants in almost all the countries. Last but not the least it has a strong presence in Asia with huge number of units in India, Pakistan, China, West Asia and many other countries. Thus in a short and brief statement its business can be easily identified with the number of companies it has under its fold and the number of workers working under the management of the company (Sekaran & Bougie, 2016).  

Gross Profit margin is the financial metric that determines the financial health of the company. It also determines the business model that the company follows by revealing the proportion of the money that is left over from the revenues after accounting for the cost of the different types of goods sold by the company (Andrews & Shimp 2017). However the following project aims to determine the profit margin of the selected product. According to the annual reports of Coca Cola Company, the organization has managed to improve the revenue sequentially to $8927 million by an increase of 17.06% faster than the increase in the gross profit of the company which is close to 16.1% that sums up to $5,675 million. The following activity led to the contraction in the gross profit margin to 63.57%. The quarterly gross profit margin remained around the average rate of 62.07%.

Determining sell price and calculating cost of the product

Source: (Hansen, 2016)

Source: (Eccles & Serafeim, 2015)

The gross profit margin of the company stands at 63.57% which is quite impressive. However the management of the company in different geographical locations of the globe decides the price of the products depending upon a number of different factors. This includes the likes of;

• Product demand of the public
• Price that gives the maximum revenue
• Price should be determined according to the competitors prices
• Target market idea should be kept to determine the exact price

Source: (As created by the Author)

The competitive product in this case has been selected as Pepsi. PepsiCo is another large American multinational soft drinks company headquartered in New York, USA. Pepsi is the largest competitor of Coke till date. With a net annual income of around US $4.908 billion the product Pepsi of the company provides a tough competition to its counterpart in the market. The gross profit margin of the following company is as follows;

Source: (Hansen, 2016)

It can be seen from the following table that the gross profit margin of Pepsi has been around 54.42%. Comparing the profit margin with that of the profit margin of the Coca-Cola the difference can be easily spotted. According to, Andrews & Shimp (2017) the main reason behind this is the failure of the management of Pepsi to be incapable of reducing the cost of the different products produced by the company. The increase in the price of products will thus lead to loss of customers which in turn will lead to the decreasing revenue from sales. According to, Menon & Yao (2017) the following activity will thus lead to the failure of the company in the long run and decrease the profit margins.

As mentioned earlier Coke and Pepsi are two of the largest and the leading soft drinks and beverages companies. These Products are two of the premier global brands in the globe and thus competition between these two different brands is quite natural. These brands can be compared in a number of different parameters based on their performances, sales, marketing and promotional aspects in the market.

1. Earnings

Pepsi owns a varied range of market than that of Coke. The presence of a varied market under Pepsi’s belt is a clear advantage to them. However statistics suggest somewhat different. Coca-Cola has been able to drive more earnings in the bottom line. Though the earnings of Coke have been showing a downward trend for quite some years, the product manages to stay way forward than its competitor because of its advance and superior margins (Eccles & Serafeim, 2015).

Competitor analysis and differences in cost

Source: (Hansen, 2016)

1. Sales

The comparison of the sales of the two mentioned companies will show that Coke has been able to generate more income but Pepsi has an advantage in the sales as because they are able to generate more top line revenues for a long time.

Source: (Hansen, 2016)

1. Dividend Increase

The management of both the companies has been able to meet the demands of the shareholders for a long time now. They have committed themselves to continuously pay and grow their quarterly dividends that help to meet the goals and financial returns for their shareholders.

Source: (Hansen, 2016)

1. Dividend Growth

Both the companies have been able to grow their dividend in the market. Pepsi has been able to turn the table over Coke in this regard as because the former company has been able to earn a dividend of around 10%. On the other hand, Coke as a product has been able to earn a dividend of 8.5% over the year.

Source: (Hansen, 2016)

  Coke is one of the most recognizable brands globally. The brand is known for its strong brand image, fair price policy and having a successful value chain policy. A value chain includes all the different activities starting from obtaining of the different raw materials for the production of the different brands. The different activities under the value chain analysis of Coca-Cola are as follows;

• Inbound Logistics- Coke has been able to manage a large supply chain that consists of a large number of different farmers as well as suppliers (Steenkamp, 2017). The company treats all the suppliers as their own business partners. Such a friendly gesture helps the organization to establish a strong bond with the company which paves the way for the packaging and manufacturing of the different goods and services for the following industry. The cost for the inbound
• Operations- The operational functions of the mentioned product and its product depend on the concentrated developments and the administrative functions of the headquarters.Coca-Cola has managed to turn the business of Coke into a global business that operates on a local scale in each and every community. The marketing and promotional operations of the company are spread across a number of different channels.
• Marketing and Sales- The marketing and sales department of the organization has been successful in presenting the product in a great way and also making it a globally recognized brand. The logo of Coke is one of the most recognized brands.

          Source: (coca-colacompany.com, 2018)

The most important ingredient of Coke is Sugar or sucrose that is used to bring the sweet taste in the soft drink. The increase in the price of sugar will lead to the increase in the soft drink over the time period. The sudden change in the market price of sugar will have a sharp effect on the price of the mentioned product. Research estimates that increase in the price of the SSB’s generates a small yet significant reduction in the purchase. As for now Sugar is estimated to trade at 11.00 Cents/LB by the end of the quarter, according to Trading Economics global macro models and analysts expectations. It can be estimated that sugar will be traded at 12.40 in the next year.

Source: (Varsamis et al. 2017)

The increase in the price of the sugar will lead to the increase in the price of the soft drink. The following activity must be faced with effective counter measures to ensure the stability of the prices. Some of the effective measures will include;

1. Material Cost-The cost of materials that are bought by the company must be decreased by means of buying less. Thoughtful sourcing will involve striking a fine balance between price and quality.
2. Labor Cost-According to, Gillespie & Riddle (2015) the labor cost should be reduced by either reducing the number of labors or conducting a slight decrease in the salary of the labors.
3. Reduction in miscellaneous cost-The reduction in the other miscellaneous cost like electricity, promotions, advertising and other items will also help to reduce costs.

Value chain analysis for the product

Source: (Varsamis et al. 2017)

Conclusion 

The comprehensive calculations and discussion of the different elements of costing of Coke is a great source of knowledge for future researches on the same subject. The most important element of the following research is the inclusion of the statistical and theoretical comparisons on the basis of the different factors like profit margin, sales and dividend has helped to make the report more compact and strong in nature. Last but not the least the discussion of one of the factors leading to the rise of Coke and the ways by which the company controls such a price rise has enriched the contains of the report. 

References

(2018). Coca-Cola Journey Homepage. [online] The Coca-Cola Company. Available at: https://www.coca-colacompany.com/ [Accessed 6 Aug. 2018].

Andrews, J. C., & Shimp, T. A. (2017). Advertising, promotion, and other aspects of integrated marketing communications. Nelson Education.

Eccles, R. G., & Serafeim, G. (2015). Corporate and integrated reporting. Corporate Stewardship: Achieving Sustainable Effectiveness, 156.

Eccles, R. G., & Serafeim, G. (2015). Corporate and integrated reporting. Corporate Stewardship: Achieving Sustainable Effectiveness, 156.

Gattorna, J. (2017). Strategic supply chain management Creating shareholder value by aligning supply chain strategy with business strategy. In Strategic Supply Chain Alignment(pp. 32-52). Routledge.

Gillespie, K., & Riddle, L. (2015). Global marketing. Routledge.

Gituma, M. M. (2017). Effects of Marketing Mix on Sales Performance: A Case of Unga Feeds Limited (Doctoral dissertation, United States International University-Africa).

Menon, A. R., & Yao, D. A. (2017). Elevating repositioning costs: Strategy dynamics and competitive interactions. Strategic Management Journal, 38(10), 1953-1963.

Pan, Q. H., He, X., Skouri, K., Chen, S. C., & Teng, J. T. (2018). An inventory replenishment system with two inventory-based substitutable products. International Journal of Production Economics.

Steenkamp, J. B. (2017). Customer Propositions for Global Brands. In Global Brand Strategy (pp. 45-73). Palgrave Macmillan, London.

Steenkamp, J. B. (2017). Global Marketing Mix Decisions: Global Integration, Not Standardization. In Global Brand Strategy (pp. 75-109). Palgrave Macmillan, London.

Tugendhaft, A., Manyema, M., Veerman, L. J., Chola, L., Labadarios, D., & Hofman, K. J. (2016). Cost of inaction on sugar-sweetened beverage consumption: implications for obesity in South Africa. Public health nutrition, 19(13), 2296-2304.

Van Doorn, G., & Miloyan, B. (2017). The Pepsi Paradox: A Review. Food Quality and Preference.

Varsamis, P., Larsen, R. N., Grace, M., Owen, N., Dunstan, D. W., & Kingwell, B. A. (2017). A comparison of sugar composition in popular soft drinks in Australia, Europe and the USA. Journal of Nutrition & Intermediary Metabolism, 8, 104.Fuller, G. W. (2016). New food product development: from concept to marketplace. CRC Press.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons.

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