The soft drink industry in the U.S. is dominated by two companies, Coca-Cola and Pepsi. The companies have a broad geographic presence in the international markets and usually introduce a variety of product flavors so as to remain competitive. The industry includes retailing of bottled water, juices, smoothies, ready-to-drink tea and coffee, concentrates and carbonates or sodas. However, the US market is significantly shifting to healthier drinks which do not have chemicals or preservatives. Although the industry is experiencing a decline in sales of carbonated drinks or sodas, it produced a revenue of $158.8 billion in 2014 which also represents a 2.6% growth rate (Corea, 2016). The soft drink industry is projected to slower growth rates in future due to major shifts in consumer trends such as income and preferences.
The market size, growth rate and profitability of soft drink producers are the key economic factors that are considered in the analysis of consumer soft drink industry. In most industries, the changes in supply and demand, usually affect the production levels and pricing. In the soft drink industry, other factors which include consumer preferences and health issues which directly affects the consumption level of soft drink products in the market. The American citizens are more conscious of the benefits they would get from the products they purchase and consume because of available health related information through public campaigns and social media platforms.
Microeconomic Analysis of Current Soft Drink Industry in the U.S.
The consumer demand for carbonated soft drinks has been declining over the recent years due to the change in consumer choice and preferences to healthier drinks. The shift to healthier drinks is encouraged for the consumer consciousness of the health effects of the soft drinks. Restrictions on the number of sugary beverages sold to the consumers also lower the demand for such products. Soda products are being criticized by health officials, communities, and governments for the adverse effects of the beverage ingredients, high sugar content and artificial additives. The increased consumer awareness of health risks of sodas or carbonated drinks arising from obesity and less active lifestyles pose a major threat to the soft drink industry. The soft drink producers would have to differentiate their products and maintain large sales volumes to respond to the decline in consumption levels.
Pepsi, Coca-Cola and other major beverage companies are now developing new healthy beverages through the addition of healthy value to their products and develop healthier brands. For instance, the beverage companies produce mid-calorie soda products that are sought by consumers who want to consume fewer calories and avoid health risks of obesity and other nutritional deficiencies. According to the World Health Organization, the sugar content of regular sodas normally exceeds the recommended level of 25 grams of sugar per day for normal adults (Malik, Schulze & Hu, 2006). Therefore, health officials are concerned that such sugar content levels should be lowered to boost healthier lifestyles among the consumers. The soda companies would reduce the number of soft drink calories by engaging in educating the public about the healthier alternatives, develop smaller portion packaging containers and expand the variety of low-calorie products.
There is a trend of increased consumer preferences for the differentiated products in the soft drink industry. The consumers are often interested in purchasing innovative products rather than simple or plain products. The unique brands or appearance of the products would be more appealing to the customers and increase brand awareness in their minds. The differentiated products can also give a competitive advantage to the soft drink companies. For example, Coca-Cola Companys success is attributed to the variety of tastes besides the regular Coca-Cola soda which includes Vanilla Coke, Diet Coke, Diet Cherry Coke, and Coca-Cola with lemon.
Consumption expenditure in the soft drink industry helps to inform the soft drink companies on the consumption levels in particular market segments. The U.S. consumption expenditure represents a significant percent of the national annual gross domestic product (GDP). It relies on the consumers disposable income. Consumers are more inclined to spend on non-durable products when they have more disposable income. The soft drink companies would make informed decisions on pricing according to the disposable income of consumers and the demand for the soft drink products in these market segments.
Macroeconomic Analysis of the U.S. Economy
Macroeconomics refers to the analysis of the economy as a whole without any special treatment to certain economic niche. Whereas micro-economics concentrates on individuals and how they make decisions macroeconomics is the study of the economy as a whole and how it can affect the demand for a certain product. The macro-economic analysis is very complex because of the high number of factors that affect it. Different indicators are used in macro-analysis to forecast on the economic conditions that help organizations to make better decisions. In a business approach, macroeconomics is used to determine the expansion of production and how the economic conditions will affect new products in the market. Amongst the important questions that can be answered through macroeconomics is the ability of the consumers to have money to buy the new products. Macroeconomics is based on the national output, unemployment, and inflation (Bordo & Haubrich, 2017).
National Gross Domestic Product (GDP)
The growth of the soft drink industry has led to a significant increase in the GDP in the U.S. economy. The large soft drink companies have increased their global presence due to globalization within the industry. More consumers across the globe seek more information on the soft drink products offered by the competitor brands both in the domestic and international markets. An increase in revenues into the country is realized through venturing into foreign markets i.e. exportation of the soft drink products to world markets. A rise in the national GDP would increase the income level of the American people and result in more disposable incomes for consumers to purchase non-durable products. As a result, the market for the soft drinks, which are non-durable, would expand due to the increased demand. The entry of other major soft drink companies into the market would affect the market demand for the existing products. The consolidation of major companies would increase revenue growth and expand their market shares.
Unemployment refers to the availability of jobs for the people, unemployment is a major factor for an organization to consider before embarking on producing new goods in the market. Unemployment affects the ability of consumers to purchase new products in that it denies the people stable incomes to buy and consume new products.
In April 2017, analysts reported that unemployment in America had hit 4.4% which is the lowest rate of unemployment in ten years. This indication shows that the economy is significantly doing well which has increased opportunities for employment and income generation. The low unemployment rate in a decade shows that the United States of America economy has significantly improved since the recession of 2009. The wages has grown by 2.5 percent in April 2017 compared to April 2016. This indicates that the economy is doing well and firms can increase production of goods as well as establish new products because of the surplus incomes in the economy. Tax cuts, infrastructure, and deregulation are the major cause of the low unemployment rate as well as the increase in wages (Bordo & Haubrich, 2017).
Significance to a start-up
For a start-up organization, the greatest market worry is poor sales which can be attributed to a high unemployment rate and poor performance of the economy. However, the low unemployment rate is an encouragement for an organization in the manufacturing business due to the surplus incomes which increases goods and services consumption in the market. Due to the low unemployment rate, the new start-up can go ahead and produce new goods and services because of the ready market. However, it is important for the organization to begin with a few units before expanding the number of units to assess the market.
Inflation can also be used to carry out a macroeconomic analysis because it refers to the gradual increase in the prices of the commodity in the market. Inflation can be assessed through the consumer price index and the GDP deflator. In this case, the current United States inflation rate stands at 2.2 percent as of April 2017. The inflation rate posted in April 2017 is lower than the inflation rate posted in March 2017 which was 2.4 percent. The main causes of the low inflation rate are due to low energy, transport, and health costs. The low inflation rate indicates that a startup can easily create affordable products for the market due to the low transportation and energy costs. The organization should take advantage of the prevailing low inflation rate to create goods which will be sold at a reasonable market price making them more affordable. Low inflation rates is an indicator that an organization will incur low production costs which can be a boost to the bid of the organization to penetrate the market by creating a new product that has a low price than the existing products already in the market (Bordo & Haubrich, 2017).
Management accounting practices
Managerial accounting is important because it provides key information to managers. Unlike financial accounting which provides information to the stakeholders and investors managerial accounting is very important to a startup organization because it promotes better decision making hence, improving business performance and avoiding financial risks that can put an organization in jeopardy (Kristensen, Nielsen, & Grasso, 2016).
Costing is the process through which an organization can estimate the cost of an organization product with the aim of estimating the sale price and profitability of the new product. Product costing is important for every organization because it enables the creation of products that are less costly and can easily be sold in the market. Product costing affects the decision of the raw materials to be used in an organization to make a new product because different raw materials will affect the final product cost differently.
Standard costs refer to the practice of analyzing the various factors, items and processes of creating a product. Standard costs refer to the cost of materials, direct labor and factory overheads which determine the production costs of organization products. Variances in standard costs should be well accounted for to ensure that an organization new product production is sustainable (Kristensen et al., 2016).
Cost volume profit analysis
Cost volume profit analysis is one of many managerial accounting processes that are used to describe the relationship between sales volume, selling price, profitability and product cost. This information and managerial accounting practice is important in managing production costs and sales volume to determine the profitability of the product in response to changes in sales volume, selling price, variable cost and fixed costs (Kristensen et al., 2016).
Bordo, M. D., & Haubrich, J. G. (2017). Deep recessions, fast recoveries, and financial crises: Evidence from the American record. Economic Inquiry, 55(1), 527-541.
Corea, G. (2016). Global value chain: the Coca-Cola syste...
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