Why Coke has barely increased in price

Why Coke has barely increased in price

In our lives, we often lament that "the price of xxx has recently gone up again". In addition to the goods that have increased in price, the few goods that have not increased in price are often ignored by us.

Ten years ago we bought a newspaper for 50 cents, but now we still buy a newspaper for 50 cents.

10 years ago the computer city to buy a mainstream configuration of the computer, maybe four or five thousand dollars, and now you go to the computer city or buy a computer online is also the current mainstream configuration, the price is still four or five thousand dollars.

The most typical example of "no price increase" or Coca-Cola - 20 years ago, a bottle of Coke is 3 yuan; 10 years ago, a bottle of Coke is also 3 yuan; now, a bottle of Coke or 3 yuan.

The reason for the price increase is well explained because it is an inflationary phenomenon in our lives, very common and very intuitive. For one thing, the broad money supply has grown three times over the past 10 years, and the size of the economy has increased 1.8 times, with money being issued faster than economic growth; for another, people's overall income has increased, whether buying or selling things, price increases are natural.

The analysis of those things that do not increase in price is relatively more complex, perhaps giving us more insight.

One explanation is that Coke, computers, and newspapers are industrial goods that can rely on large-scale production to reduce costs. Coca-Cola's automated production line, for example, can fill thousands of bottles of Coke a minute. In the corresponding cost structure, labor accounts for very little, the significant increase in labor costs in the past few years has little impact on it, so the selling price can be maintained in a relatively stable state.

Many of the goods and services, such as haircuts, breakfast stores selling doughnuts, etc., involve a lot of human links, labor costs have increased repeatedly over the past few years, and prices have risen.

However, the scale of production and low cost only explains that Coca-Cola does have the ability not to raise prices, but does not explain its willingness not to raise prices.

This brings us to the structure of Coke's market.

Coke, as a beverage, has many substitutes. If the price of Coke doubles, consumers may switch to something else. Still, the consideration of substitutes is a short-term competitive strategy, and not enough to explain why Coke has not raised prices for decades. Then the key to Coke's lack of price increases may be another factor.

The Coke industry is a duopoly competition, basically two big players - Coca-Cola and Pepsi - are playing, and they choose not to raise prices for market competition.

At the current price point, the entire carbonated beverage industry was worth more than $80 billion in 2016, while the profit margin was only about 5%, and this was achieved on the premise that most of the market was occupied by the two mega players, Coca-Cola and Pepsi.

At a glance, we think this is a hard industry - not a small scale, but the profit margin is very low. It can also be understood the other way around, Coca-Cola and Pepsi, two companies that have been so large, that the cost of the low can not be lower, but also so little profit margin. If a competitor wants to enter the industry, but can not do so large scale, there is no way to reduce the unit cost to as low as Coca-Cola and Pepsi, then it is impossible to make money.

Therefore, this industry has very high barriers to competition, although the profit margin is not high, the two big players rely on scale, but also to make money.

Conversely, if the price is raised, the profit margin is increased at first, but new competitors will continue to enter. As the price war opens, the price of the product will get lower and lower, and profits will get lower and lower.

In economics, this competitive pattern has a special term, called "Gounod equilibrium", is to say that such a situation: a product market only two sellers, selling things no difference between the two sellers without any collusion between each other, but all know each other will produce how much, how to price so that both sides will be can determine the optimal output to maximize profits.

In this equilibrium, low prices and meager profits keep most competitors out of the industry, while a few giants rely on the scale to survive and earn a still-substantial total profit.

In business, price is a comprehensive phenomenon that is not determined solely by cost, and likewise not solely by demand. It is also influenced by the structure of the market - whether buyer or seller, money supply or consumer structure - and is ultimately reflected in the equilibrium between supply and demand.

For Chinese companies, the new round of industrial upgrading is a process of reconstructing competitive barriers along with restructuring the market.

One competitive strategy is to provide differentiated products to enhance bargaining power with consumers and obtain higher profit margins; another strategy is, like Coca-Cola and Pepsi, to competitively consolidate the industry and maintain meager profits. This low-cost strategy cannot be built on the departed advantages of manpower, land, and environment, but needs to be built on the new elements of positioning capability, product capability, information capability, and the ability to maintain consumer relationships.