Question: Discuss the reasons for Coca Cola’s large profits during the recent summer period.
Coca Cola may have made high profits because of an economic boom. An economic boom means incomes are high, consumers demand more Coca Cola soft drinks, Coca Cola sells more soft drinks and at a higher price so profits rise. However, the effect of a boom on Coca Cola’s profits depends on the magnitude of the boom. A significant boom means a large rise in incomes and consumers demand a lot more soft drinks but a small rise in incomes means only a small rise in soft drinks and only a small rise in profits for Coca-Cola.
Another reason for Coca Cola’s higher profits could be lower raw material prices. Sugar may have been cheaper, allowing Coca Cola’s input costs to fall and profits to rise. On the other hand, Raw material prices can be quite volatile and may only account for a small extent of Coca Cola’s large rise in profits. Sugar prices may suddenly change, maybe sugar prices rise so Coca-Cola’s input costs rise and profits fall. If raw material prices were volatile but constant overall then this would not have effected Coca Cola that much.
Another reason for Coca Cola making large profits is that it was in trend or fashion. If Coca-Cola becomes more fashionable then demand for Coca-Cola rises, Coca Cola sells more soft drinks and at a higher price so profits rise. But, trends are volatile. Trends may suddenly change, Coca-Cola may go out of fashion in the near future, so demand for Coca-Cola falls and Coca Cola makes less profits.
Maybe Coca Cola was making high profits because they were growing and experiencing economies of scale. Coca Cola have grown and benefited from bulk buying, allowing their costs fall and profits to rise. On the other hand, they may have been experiencing disceconomies of scale. For example, may have been suffering from managerial diseconomies whereby their managers found it more difficult to run the bigger firm, actually causing a rise in costs and a fall in profits.
Perhaps Coca Cola made a large profit in the summer because this is the seasonal time period in which people demand soft drinks. Consumers will demand more Coca Cola when it is hot and when they are on holiday. This may be the most important factor. The time of the year may be the most important factor for Coca Cola’s profitability because demand for Coca Cola may rise significantly during holiday periods and be more of a reason than anything else for their higher profits.