Exploring the Soft Drinks Industry in the UK: Demand & Supply
School
Seoul National University**We aren't endorsed by this school
Course
ECONOMICS 209
Subject
Economics
Date
Dec 11, 2024
Pages
9
Uploaded by JusticeExplorationChinchilla46
1 | P a g e Soft drinks Industry in the United Kingdom By P326849 (Do not include your name!) I confirm that this assignment is my own work. Where I have referred to academic sources, I have provided in-text citations and included the sources in the final reference list.
2 | P a g e Table of Content 1. Introduction .........................................................................................................................3 2. The Market Analysis .............................................................................................................2.1 Analysing the demand side of the soft drink industry in the United Kingdom ...................3 2.2 Analysing the supply side of the soft drink industry in the United Kingdom.......................4 3. Elasticity ..............................................................................................................................6 4. Market Structure ..................................................................................................................7 5. Conclusion ..........................................................................................................................8 References ..............................................................................................................................9
3 | P a g e Introduction Soft drink is the third most widely used beverage in the United Kingdom. As common knowledge, a soft drink is a drink that contains water with added carbon dioxide and syrup made from sugar or fruit. Soft drinks can be divided into many groups depending on their sugar contents, ingredients, and carbonation level. According to British Soft Drinks Association (2021), the main groups of soft drink products are carbonates, fruit juices, dilutable, still & juice drinks, sports & energy drinks, and bottled waters. There were 13,569 million litres sold in 2016 (Statista, 2022), which contributed £6.4 to UK GDP and a total of 233,000 people are employed in the soft drink industry to create this GDP contribution (Oxford economics, 2016). So we can confirm that soft drink has an important role in UK’s economy. In this report, I will discuss how demand and supply are connected to the soft drink industry in the United Kingdom and I will also describe the categories of elasticity and different types of market structure. Demand and Supply Analysis 2.1 Factors affecting the demand side Demand and Supply are two main significant factors that determine the price of a good or service. The law of demand shows that when a product’s price goes up, fewer people want to buy it, hence the quantity demanded of that product decreases. So there is an inverse connection between the quantity demanded and the price of a product. There are numerous factors can affect the demand for soft drinks: •Price changes: when the ingredients of products rise, such as syrup, fruit or sugar, the company might set a higher price to keep their profit. So, according to the law of demand, the increase in prices might make consumers decrease their demand for those soft drink products. •Consumer preferences: consumer drink hobby can change in every season or social trends so the company that adapts to these changes may have more profits. •Health issues: high consumption of sugary soft drinks cause high blood pressure, weight gain and diabetes (Malik and Hu, 2019). They can produce some healthier options for example sugar- free drinks, sports drinks or bottled water.
4 | P a g e Figure 1: total consumption of the soft drink industry in the United Kingdom between 2013 and 2021 (in million litres) (source: https://www.statista.com/statistics/283722/total-soft-drink-consumption-volume-in-the-united-kingdom-uk) Figure 1 (Statista, 2022) gives information about the number of soft drinks (million litres) from 2013 to 2021. The chart shows a fluctuation trend from 2013 to 2021 but in 2018, the number of sales products peaked at 14,201 before declining to 13,970 in 2019. But overall, there is a slight increase from 2013 to 2021 in soft drink consumption. Hence, customers' demand has not significantly changed over the years and soft drink is a daily drink that most UK citizens consume. 2.2 Factors affecting the supply side The law of supply presents that when the price of good increases, the quantity supplied (by producers) also increases. Therefore, the market price and quantity supplied have a positive correlation. Technology is an important factor that can directly affect the quantity supplied. For instance, the more the company develops in technology, the more quality products it can sell. Another significant factor is environmental factors. Water is the main ingredient for soft drinks products, but if something happens like climate change, the company may face many production problems and the quantity supplied might decrease (Frue, 2016).
5 | P a g e Figure 2: The supply curve of the soft drink industry (source: https://sites.google.com/site/amalina0696/) There is also an important element of supply which is tax. We can see in figure 2 that before tax, the price is located at P0 and the quantity supplied is located at Q0. When soft drinks are taxed the price goes up from P0 to P1 and the quantity goes down from Q0 to Q1, this makes the supply curve shifts upwards (from S1 to S2). Thus, the figures show that when the tax was imposed on soft drinks, the company might reduce the supply of products.
6 | P a g e Elasticity Elasticity is an evaluation of how one economic variable responds to changes in another economic variable (Hubbard et al., no date, p.156)There are 4 main types of elasticity: •Price Elasticity of Demand (PED): is defined as the change in the quantity demanded when a product changes its price. •Price Elasticity of Supply (PES): measures the responsiveness of the quantity supplied to the price change of that good. •Income Elasticity of Demand (YED): assesses how modifications in the demand for a product respond to changes in income. •Cross Elasticity of Demand (XED): is the measurement of the change in the quantity demanded of one good compared to the price change of another. In the soft drink industry, Coca-Cola and Pepsi are the 2 perfect substitutes good. Figure 3: average income for full-time employees in the UK from 1999 to 2022 (source: https://www.statista.com/statistics/1002964/average-full-time-annual-earnings-in-the-uk/). Looking back to figure 1 (Statista, 2022), there is a fluctuation trend through the years but it increased by 464 million litres in 2021 compared to 2013. This is supported by figure 3 (Statista, 2022), we can see that there is an overall rise in full-time employees' earnings from
7 | P a g e 2013 to 2021. This demonstrates that as income rises, the demand for carbonated beverages also increases. As mentioned previously, soft drink is a necessary drinks in our daily life and this is again proven in figure 3 (Statista, 2022) that earnings decreased between 2020 and 2021 although demand increased for soft drinks. Accordingly, soft drink is considered normal goods because consumers will buy them despite income levels. According to Ayers and Collinge (2004), the demand for soft drinks is very elastic, producers will be more careful when raising prices which could lead to a drop in overall revenue. As mentioned above, cross elasticity of demand shows that a small change in the price of one good could cause a big change in the demand for another. For instance, if the product Coca-Cola grows its price, consumers might choose another substitute drink like Pepsi. Market structure In economics, the market structure is used to categorise different industries and distinguishes them according to the goods they sell. The are 4 main types of market structures: Perfect Competition, Monopolistic Competition, Monopoly and Oligopoly. Figure 4: Soft drink market share in the UK (Navigation, 2017) From figure 4 above, we can see that in 2012 Coca-Cola, Pepsi Co and Dr. Pepper Snapple Group are the 3 biggest market shares in the soft drink industry in the UK at 37.1%, 30.2% and 21.4% respectively. To determine the market structure, we can use the Herfindahl-Hirschman Index (HHI) to calculate the concentration in an industry. If the result is less than 1500 then the market is competitive, if the number is between 1500- 2500 so the market is moderate competition and if it is over 2500, the market is highly concentrated which means that it is considered an oligopoly. And in this circumstance, the result of the HHI formula is 2874 which is higher than 2500 so it is identified as an oligopoly.
8 | P a g e An oligopoly market structure is a market in which a few large and independent firms provide all or the majority of the market supply of a specific good or service. There are 2 kinds of competition in the oligopoly market: collusion oligopoly and non-collusive oligopoly. Collusion happens when firms agree whether in formally or informally to limit competition among themselves and it can occur in 2 ways. The first one is formal collusion which means an agreement is dealt with between firms to set the price. The other one is tacit collusion which occurs when the firms cooperate but do not have a formal agreement. A typical example of tacit collusion is price leadership, which is when firms with lower market shares chase the price changes by the dominant firms. On the other hand, a non-collusive oligopoly is a market in which instead of cooperating, they choose to compete with each other and act independently, setting their price and quantity of output. For example, Coca-Cola and PepsiCo are a non-collusive oligopoly market structure, these companies hold the majority of the cola market and they decide to not collaborate. Conclusion In conclusion, the soft drink industry in the United Kingdom is expanding. There is a high demand for soft drinks and it has become a daily drink for everyone. Besides, the quantity supplied depends on the technology which can help increase the amount of output and it also depends on nature which can decrease the quantity supplied if some disasters happen. As income rises, the demand for soft drinks also rises so there is a positive relationship between them. Therefore, soft drinks are identified as normal goods. In addition, this industry run in the oligopoly market which provides all or most of the market supply.
9 | P a g e References 1.British Soft Drinks Association. (2021) About soft drink. [online] Available at: https://www.britishsoftdrinks.com/Soft-Drinks (Accessed: 29 Oct 2022). 2.Clark, D. (2022) Average annual earnings for full-time employees in the UK 1999-2022. [online] Statista. Available at: https://www.statista.com/statistics/1002964/average-full-time-annual-earnings-in-the-uk/ (Accessed: 8 Jan 2023). 3.Frue, K. (2016) PESTLE Analysis of Coca Cola. [online] Available at: https://pestleanalysis.com/pestle-analysis-of-coca-cola/#Technological_factors (Accessed: 29 Oct 2022). 4.Hubbard, G., & O’Brien, A, P. (2023) Economics. [Online]. 8thed. London: Pearson. Available at: https://online.vitalsource.com/reader/books/9781800066779/epubcfi/6/8[%3Bvnd.vst.idref%3DTitle]!/4/2/8/1:10[mis%2Ced%20] (Accessed: 7 Jan 2023). 5.Malik, V.S, & Hu, F.B (2019) Sugar-sweetened beverages and cardiometabolic health: An update of the evidence.Nutrients, 11(8), p.1840. doi:10.3390/nu11081840. (Accessed: 29 Oct 2022). 6.Navigation. (2017). Coca Cola market share UK. [online] Available at: http://simyviqoj.web.fc2.com/44forexcom-review/coca-cola-pepsi-market-share-uk-53-fihumum.html (Accessed: 8 Jan 2023). 7.Oxford economics. (2016) The economic impact of the soft drinks levy. [online] Available at: https://www.britishsoftdrinks.com/write/MediaUploads/Publications/The_Economic_Impact_of_the_Soft_Drinks_Levy.pdf (Accessed: 29 Oct 2022). 8.Pal, D. (2015). Elasticity of demand and supply (with diagram). [online] Economics Discussion. Available at: https://www.economicsdiscussion.net/elasticity-of-demand/elasticity-of-demand-and-supply-with-diagram/16244 (Accessed: 7 Jan 2023). 9.Statista. (2022) Soft drinks: Consumption of carbonated drinks in the United Kingdom 2013-2021. [online] Available at: https://www.statista.com/statistics/283898/soft-drinks-consumption-of-carbonated-drinks-in-the-united-kingdom-uk/ (Accessed: 29 Oct 2022).