Numbers & Competitive Response case
Interviewer:
Coca-Cola is trying to boost profitability domestically by raising its prices. It’s
focusing on the grocery store market where the volume is high but the margin
is low. What are the economics of raising the prices and is this a good idea?
Candidate:
Coke plans to increase profitability by raising its prices. They want to know if
it’s a good idea.
Interviewer:
Correct.
Candidate:
Any other objectives?
Interviewer:
They want to keep their market share.
Candidate:
Are we focusing on just Coke or on all related brands?
Interviewer:
You can think of all Coke products as one product, Coke.
Candidate:
What’s Coke’s current market share?
Interviewer:
Not relevant to the question.
Candidate:
How much does it cost to make a can of coke?
Interviewer:
Not relevant to the question.
Candidate:
How many cans does Coke sell to grocery stores and at what price?
Interviewer:
Coke sold 200 million cans at €0.46 each last year. If prices remain stable,
they expect a volume growth of 6%. They want to raise the price to €0.54 per
can and they forecast volume growth of only 1%.
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Candidate:
Ok, let’s calculate the difference.
200,000,000 cans * €0.46 * 1.06 = €97,520,000
200,000,000 cans * €0.54 * 1.01 = €109,080,000
So the difference is €109,080,000 - €97,520,000 = €11,560,000
So even though they would sell 5 million cans less, they’d be making more of
a profit, about €11.5 million more.
Interviewer:
Profitability would be boosted by what percent?
Candidate:
I can take 109 minus 98, which equals 11, divided by 98 equals approximately
11%. By raising prices and selling less, Coke can boost its sales by
approximately 11%.
Interviewer:
To maintain market share, Coke needs to stir up consumer demand with a
major marketing campaign to raise brand awareness and focus on lifestyle
issues. Knowing that, and if you were Pepsi, what would you do?
Candidate:
Pepsi has three choices. It can follow Coke’s lead and raise its prices to
match Coke’s, it can leave prices the same, or it can take advantage of the
price change and lower its price.
If coke spends a fortune marketing its product and it does its job and gets
people into the stores, Pepsi can snatch sales away at the last minute with a
lower price. We are talking grocery stores here. Women do most of the buying
in grocery stores and are often price-conscious. If they saw two brand name
colas, Pepsi and Coke, and if Coke sold for €6 a 12-pack compared to €5 for
a 12-pack of Pepsi, then most shoppers would choose the one on sale or the
one with the lower price. Pepsi might even want to lower its price to gain more
market share.
If Pepsi lowers the prices and cuts marketing costs, it can steal customers
away from Coke through in-store promotions and point-of-contact displays.
Interviewer:
So, if you were Pepsi, what would you do?
Candidate:
Let’s run some numbers. How many cans does Pepsi sell to grocery stores?
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Interviewer:
160 million cans at €0.46 a piece. If Pepsi follows Coke and raises the price,
volume will drop from 6% to 3%. If prices remain the same, volume will
increase from 6% to 12% and if Pepsi reduces the price, volume will increase
from 6% to 20%
Candidate:
160,000,000 * 1.03 = 164,800,000 * €0.54 = €88,992,000
160,000,000 * 1.12 = 179,200,000 * €0.46 = €82,432,000
160,000,000 * 1.20 = 192,000,000 * €0.42 = €80,640,000
It seems like the best alternative is to follow Coke’s lead.
Interviewer:
Even if you knew that Coke’s volume would rise from 1% to 3%?
Candidate:
Yes.
Interviewer:
Nice job.
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