The Coca-Cola Company and Exxon Mobil Corporation

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Table of Contents

Abstract
Introduction
Price Elasticity
Income Elasticity
Market Type
Cross Price Elasticity of Demand
Operational Costs
Professional Practices
References

Abstract

This paper provides a study of two major American multinational companies, The Coca-Cola Company and Exxon Mobil Corp. The research is based on a review of both online sources related to the activity of the two companies and scholarly literature. The short history of the two firms is supplied; the analyses of the price and income elasticity of demand for the enterprises’ products, and of the market type the businesses operate in, are offered, as well as the examination of the cross-price elasticity of demand of the named companies’ products and some other goods. Further, the operational costs of the companies and the professional practices employed in them are scrutinized. The paper also provides a number of conclusions and recommendations regarding the choices that may be made in respect of the two businesses.

Introduction

Coca Cola and Exxon gas are consumer-based corporations that have a strong presence in their market sectors. There are many considerations when selecting a company to invest in. Aspects of each corporation have been thoroughly examined and a recommendation has been implemented.

Coca Cola

In 1886, a pharmacist from Atlanta, Georgia, by the name of Dr. John Pemberton, invented the formula for the soft drink by mixing carbonated water with a flavored syrup. At the time, the soda fountain was a popular social gathering spot so making a soda-fountain drink and entering the beverage market seemed like a good idea to Dr. Pemberton. Frank Robinson, his partner, and bookkeeper had excellent penmanship and was the one who designed the logo for the drink and also registered Coca-Cola’s formula with the patent office.

(Cantwell, n.d.) In 1888, Dr. Pemberton sold portions of his company to various parties. Asa Griggs Candler, a businessman from Atlanta, bought most of the interest and became the sole owner of Coca-Cola. Candler had excellent marketing strategies and spread the word of Coca-Cola by offering coupons for free drinks, hiring traveling salesmen, plastering logos on calendars and posters and getting people to try the drink. In 1894, Joseph Biedenharn became the first to put Coca-Cola in bottles.

In 1899 Biederharn along with, three enterprising businessmen from Chattanooga purchased the bottling rights from Candler for $1. (World of Coca-Cola, n.d.) Coca-Cola was sold to Ernest Woodruff in 1919 for 25 million dollars. Today, Coca-Cola is one of America’s largest corporations and often considered the best trademark in the world (Buker, 2016). It is a driving force in the global market and the largest soft drink company in the world. (Buker, 2016)

Exon Gas

ExxonMobil Corporation is a petroleum and petrochemical company that was originally founded under the name Standard Oil in 1870. They are based in Irving, Texas but continue to have a presence around the world. “We hold an industry-leading inventory of resources and are one of the world’s largest integrated refiners, marketers of petroleum products and chemical manufacturers” (ExxonMobil, n.d.). They operate in many countries and continents around the globe, including Canada. ExxonMobil is known by a number of brand names including Exxon, Esso, and Mobil. Over the past decade, ExxonMobil has moved towards creating an integrated work environment that attempts to improve social and sustainable practices (ExxonMobil, n.d.).

Although petroleum is a product that is widely utilized around the world, one day we will run out of oil deposits. It is important to note that the price of petroleum per liter is equivalent to the price of Coca Cola per liter. Petroleum is more costly to obtain, process and transport than Coca Cola. In order to utilize vehicles that use petroleum, an individual must have a driver’s license while on the other hand, anyone can purchase Coca Cola (Dr. Buker, n.d.).

Price Elasticity

The price elasticity of demand is equal to the percent of change in the quantity of the product demanded in the market divided by the percent of change in this product’s price (Ragan, 2014). Therefore, if a small change in price causes a significant change in demand, the product is elastic, and vice versa.

The mean price elasticity of demand for gasoline is estimated to be -0.34 in the short run, and -0.84 in the long run (Brons, Nijkamp, Pels, & Rietveld, 2008, pp. 2113-2114), which means that the product always remains inelastic. Interestingly, the price elasticity of demand for gasoline depends on a number of factors; consumers, on the average, buy less gasoline in the intermediate run when the prices on it are volatile; also, the absolute value of the price elasticity of demand is lower when the volatility in the price of gasoline is high or medium, compared to that when the volatility is low (Lin & Prince, 2013, pp. 111-112).

The absolute value of the mean price elasticity of demand for carbonated soft drinks is reported to be 0.79; this value was obtained by comparing estimates from 14 different studies (Andreyeva, Long, & Brownell, 2010, p. 219). It is stressed that, like all the other foods, carbonated soft drinks are inelastic; however, they are less inelastic than virtually all the other foods (Andreyeva et al., 2010, p. 218).

Income Elasticity

To find the income elasticity of demand (IED), it is needed to take the percent of change in demand for a product and divide it by the percent of change in the income of buyers (Ragan, 2014). If 0 < IED, then a certain good is viewed as normal by consumers (if 1 < IED, then the good is not a necessity, but rather a luxury); at the same time, if IED < 0, then the good is viewed as inferior (if IED < -1, then the good is “very” inferior).

It is stated that fast food (including soft carbonated drinks) is usually viewed as normal by consumers who have below-average income (0 < IED < 1); at the same time, buyers who have above-average income view fast food, including soft carbonated beverages, as inferior (IED < 0) (Kim & Leigh, 2011).

At the same time, the gasoline is reportedly viewed as a normal good. It is stated that the mean IED for gasoline is usually estimated as 0.28 in the short run and 0.66 in the long run; however, these estimations are claimed to be biased, and, after utilizing the mixed-effects multilevel meta-regression, the mean IED turns out to be 0.1 in the short run and 0.23 in the long run (Havranek & Kokes, 2015).

Therefore, IED for gasoline is higher than IED for soft drinks among customers with above-average income. As for clients with below-average income, the additional specification may be needed; for instance, people below the line of poverty who cannot purchase a car will be unlikely to buy any gasoline, so IED may even remain equal to 0, and be lower than for carbonated drinks; for consumers above the line of poverty, but with below-average income, more detailed research might be required.

Market Type

Coca-Cola is a company that operates in the oligopolistic market. Its main rival in the market is Pepsi Co., and the two companies engage in stiff competition. At the same time, other businesses that are present in the market are much smaller and cannot pose any significant competition to the two soft drinks companies. It is also noteworthy that the entry barriers in this industry are quite high; soft beverages production requires costly equipment and advertisement.

Exxon Mobil also operates in an oligopoly. It is stated that it is one of the biggest oil and gas corporation; its main rival is Chevron/Texaco, and there is also a number of significantly smaller competitors in the market (Poole, 2015). Again, the smaller rivals do not pose a significant threat to Exxon Mobil in the market, and the entry barriers in the industry are high, which helps Exxon Mobil to operate in oligopoly.

Because both companies operate in the same type of market, decision-making must be made on the basis of other factors. For instance, if one is considering whether to invest in Exxon Mobil or Coca-Cola, it is stated that Exxon Mobil provides a significantly better stockholder yield (Inkrot, 2015); but still, additional research might be required.

Cross Price Elasticity of Demand

Cross Elasticity of Demand is the “responsiveness of quantity demanded to changes in the price of another product” (Ragan, 2014, p. 98). The following equation is a representation of the direct effect that the price of Y has on the change in quantity demand of X.

X is seen as a constant that reacts to the change in the price of Y. If the goods are substitutes for one another, a price increase for Y would increase the demand for X. On the other hand if the goods are complemented an increase in the price of Y would mean a decrease in the demand for X. We can identify whether a good is a substitute or a complement based on whether η_xy is negative (complement) or positive (substitute). This is an important concept when it comes to understanding whether two goods are in close competitions or if they have little effect on one another (Ragan, 2014, p. 98).

Coca Cola and Pepsi

Coca Cola and Pepsi are close competitors based on the similar products that they produce. This means that they can be considered substitutes for one another. If the price of Coca Cola goes up then we can assume that theoretically the demand for Pepsi will increase and vise versa. Something that we need to note is the preference that individuals have for a product. Although the price of Coca Cola may increase, many individuals prefer the taste and will therefore continue to purchase the brand they prefer.

Exxon and Shell

Exxon and Shell gas are also considered close competitors both producing petroleum and can be considered substitutes for one another. We can once again assume that if the price of Exxon gasoline increases the demand for Shell gasoline will also increase. We can note that many individuals don’t have a preference for the gasoline that they purchase and search for cheapest price which would support the theoretical response.

Coca Cola and Exxon

Coca Cola and Exxon gasoline supply products that have little to no relationship. This would mean that they have a low cross elasticity because they are not in close competition.

Operational Costs

Coca-Cola’s cost of production is low due to the main ingredients required for the soft drink: water, coloring, sugar or sweetener. (Buker, 2016) Their fixed costs include rent or lease payments for the factories, salaries given to executive workers, insurance of machines used for production and property taxes. (Gowani, 2014) Producing gasoline on the other hand is more costly as it involves finding, drilling, refining and shipping. The fixed costs for Exxon will be significantly higher due to more sophisticated machinery and higher insurance cost. 95 percent of the gas stations are not owned by Exxon but by local businessmen (Cohen, 2011) In addition, Exxon is one of the largest taxpayers in the United States (Cohen, 2011).

Nonetheless, the cost of a liter of gasoline is approximately the same as the cost of a liter of Coke. In terms of marketing, Coca-Cola is advertised in over 500 channels all over the world and has been a sponsor of the Olympics for 65 years. Coca-Cola has global advertising campaigns and a variety of merchandise including decorative items, clothing, accessories and art pieces. Coke must advertise in order to maintain its competitiveness in the market. Crude oil is a commodity and consumers are always going to need it to run cars, machinery, etc. Everyone can drink Coke but not everyone can buy gas or drive a car.

Professional Practices

Social

Coca-Cola’s popularity is one of its greater strengths. The company has customer loyalty and is known all over the world. (Gowani) Coca-Cola often uses celebrities its advertising as well as for the “Coca-Cola Pay it Forward Program” which helps inspire and empower teens. (Coca-Cola Company)

Exxon, the world’s biggest oil company, has recently advertising campaign supporting school teachers and science students to improve their image.(Himler)

Political

Oil supply and prices are affected by the political instability in some oil-producing nations. (Cohen, 2011)

Labour

At Coca-Cola, gender balance in the workplace is emphasized. Coca-Cola has developed various partnerships to help women gain financial literacy skills and savings in different parts of the world. (Coca-Cola Company)

Environmental

Sources say that Exxon continues to opaquely fund efforts to debunk global climate change science (Himler) and that “9 out of 10 climate denying scientists have ties to Exxon” (Browning). However, in a recent ad campaign, the company announced that it is doing everything in its power to support science education in the US. (Browning)

In addition, in the past 25 years, the company has invested almost $400 billion in energy projects. Through innovative technology Exxon delivers advanced lubricating oils and greases which can help extend equipment life, increase equipment efficiency and reduce energy use. (ExxonMobil)

Coca-Cola is aware of health issues and has introduced new drinks with less sugar, less calories and more natural ingredients. Their sustainability commitment includes responsible water stewardship, sustainable sugar agriculture, Coca-Cola EKOCENTERs in various parts of the world along with other environmentally friendly projects in countries such as India, Vietnam and Kenya. (Coca-Cola Company)

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