Pepsi uan

Table of Contents Introduction ................................................................................................................................... 1 Price Elasticity of Demand ........................................................................................................... 1 Availability of Substitute ............................................................................................................ 1 Level of Income .......................................................................................................................... 1 Time ............................................................................................................................................ 2 Proportion of Income Spent on the Commodity ......................................................................... 2 Market Structure .......................................................................................................................... 3 Level of Competition .................................................................................................................. 3 Local Competitors ....................................................................................................................... 4 Global Competitors ..................................................................................................................... 4 References ...................................................................................................................................... 5

Introduction

Price Elasticity of Demand Price elasticity of demand is the rate of change of demand of the quantity that occurs due to change in price of the quantity. Ed

= % Change in Qd % Change in Price

Pepsi Co has been among the leading companies in the beverage industry despite the fact that it has to face competition at multiple levels like competing with domestic as well as international rival companies of the industry. Following is analysis of ‘the price elasticity of demand’ of Pepsi Co: Availability of Substitute Pepsi operates in a market where substitutes are easily available and the market has been flooded by numerous brands of aerated drinks like Thumbs Up, Coca Cola, Dr Pepper, etc. These competitors of Pepsi Co produce perfect substitutes like Coca Cola produces Sprite in competition to 7 up which implies that priority of consumers is primarily based on price factor (Business Week, 2003). Therefore, if the company increases price of its products then the consumers will definitely shift to the relatively cheaper substitutes like Coca Cola. Level of Income Middle and lower income level segments of the society are sensitive to price and they tend to choose the products which are cheaper. Since the beverage industry has generic and convenient goods, thus brand loyalty does not exist a great deal and most of the societies have large 1|Page

segments of poor and middle income that prefer to buy a commodity offered at cheaper price. Major target market with high potential of growth lies in emerging economies like China, India, Brazil, etc where majority of the population is price sensitive. Therefore, if Pepsi Co increases its prices, the impact will be negative upon the demand of Pepsi. Time The demand of Pepsi Co products is primarily related to the factor of time which implies that the price elasticity of demand varies with the age of time and over the length of a time frame. The elasticity of demand remains elastic in the long run as people get time to shift tastes, preferences or to alternate choices while in the short run, the elasticity of demand remains inelastic (Blomstermo et al. 2002). Thus it is quite difficult for the Pepsi Co to increase prices due to long term negative effects. Proportion of Income Spent on the Commodity Carbonated drinks like Pepsi are basically targeted for the young segment of the market which implies that demand of the Pepsi Co products is relatively elastic in the long run because in case of increase in price, even the hard core Pepsi loyal customers would switch to other choices and preferences due to constraints in their pocket money, however the demand is inelastic in the short run (Betsy, 2003). Therefore, it is implied from the above discussion that the company’s price elasticity of demand is greater than 1 and it is elastic which means that increasing price may result in a shift of demand among the customers of the Pepsi Co.

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Market Structure The beverage industry operates in a very intense situation where the competing firms are many and the competition is faced at multiple levels. In most parts of the world, government intervention is not seen in the market of beverages and companies can easily enter or leave the market. The beverage firms compete neck to neck in the market upon the factor of price and due to saturation in the market; mostly companies devise promotional strategies to enhance their demand and revenues (Smith). Following are few aspects of the market structure in which Pepsi Co. operates: Level of Competition The competition in the market of beverage firms is quite intense and the space to compete on the basis of price is too narrow which reflects insignificant difference among prices offered by different firms. It becomes too difficult for the operating firms to increase their prices as the level of competition is too high and fixed cost structure persists in the market. The cost of inputs is almost the same incurred by different companies like Pepsi, Coca Cola, etc like costs of standard bottling, concentrates, distribution, operations and labour. All major players of the market compete through heavy ments and promotional campaign to increase the demand of their products (Blomstermo et al. 2002). Following is the comparison of prices Pepsi, Coke and Dr Pepper: Pepsi, Pepsi Cola, 7up Cane-330 ml- $1.35 Coca Cola, Sprite, Coke Classic 330 ml- $ 1.35 Dr Pepper, Dr Pepper Diet- 330 ml- $ 1.65 The above figures reveal that the variation of price among the competitors is quite nominal. 3|Page

Local Competitors Pepsi Co operates in numerous countries worldwide and it faces fierce competition from many local firms that better understand the needs and wants of the local market and they have adequate knowledge of consumer behaviour as well. The local firms primarily exploit the factors of culture and religion in the societies which are sensitive to these two factors. Major target market of the Pepsi Co lies in the emerging economies where the local firms give tough competition. In different countries, different local firms are the direct competitors of Pepsi. Like in India, Pepsi competes with RC Cola, Amr Cola, etc and in USA it competes with Dr Pepper, Kraft, etc (Business Week, 2003). Global Competitors Pepsi Co is a multinational enterprise and it has been operating in almost every nook of the world. The company faces strong competition by the rival global firms like Coca Cola, Thumbs Up, Gourmet, etc. The nature of competition is very tough as the companies follow the places where they do not operate at present and such internationalisation by beverage firms results in intensity of competition and saturation of market (Betsy, 2003). Therefore, the basic strategy of Pepsi Co against its global rival firms is ‘Survival’ in the short run to keep its market share and demand intact.

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References 1. Betsy M. (2002), Pepsi and Coke Roll Out Flavors to Boost Sales. The Wall Street Journal. 2. Business Week Online (2003), Call It the Pepsi Blue Generation. 3. Blomstermo, A., Eriksson, K. and Sharma, D.D. (2002), Knowledge and time: a forgotten factor in the internationalisation process of firms Internationalisation, Pergamon, Oxford, pp. 263-83. 4.

Smith, A. F. The Oxford companion to American food and drink. Oxford University Press US. p. 371

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