Elasticity of Pepsi

Introduction: Firm profile and product selection

The origins of Pepsi-cola started in the late 1890s through an invention by Caleb Bradham, a pharmacist, who like all pharmacist had soda fountains in their store. His most famous concoction was a soda that contained pepsin. This was initially called brads drink before he changed the name to Pepsi. Over the years subsequent mergers and acquisitions Pepsi-cola merged with Frito-Lays, and a new company, PepsiCo, was created. Currently, PepsiCo is divided into four divisions: Frito-Lay North America, PepsiCo Beverages North America (PBNA), PepsiCo International (PI) and Quaker Foods North America (QFNA). The Pepsi Bottling Group is the company that packages and distributes Pepsi products (Pepsico, 2008).

The product selected from PepsiCo and analyzed for income and price elasticity is Pepsi. Pepsi is a product of PBNA. PBNA also includes Mountain Dew, Sierra Mist, Tropicana, SoBe and Aquafina. “PBNA manufactures and sells concentrate for some of these brands to licensed bottlers, who sell the branded products to independent distributors and retailers” (Pepsico, 2008). Some of the major competitors for PepsiCo are Bacardi Limited, Coca-Cola Bottling Co. Consolidated, Heineken N.V., Nestle S.A., Ocean Spray, Red Bull, and Southern Wine and Spirits of America, Inc (Marketline, 2008). In this paper Pepsi’s price elasticity will be determined as well as the income elasticity of its customers. These calculations will be used to predict future revenue increases for the company.

Company’s financial information

PepsiCo is the second largest food and beverage industry in the world. “PepsiCo brands are available in nearly 200 countries and generate sales at the retail level of more than $98 billion” (Pepsico, 2008). The company recorded revenues of $39,474 million during the fiscal year of 2007 and $35,137 million during the fiscal year of 2006. This increase in revenue is credited from the strong growth in volume and effective pricing policies (Marketline, 2008; Pepsico 2008). In 2007, PepsiCo grew worldwide with increased revenue of 12% with beverage volume up 4%. However, volume in PBNA was flat compared to 2006 (MSN money 2008).

Definition of elasticity

For purposes to increase revenue of the company, an analysis of price elasticity of demand and income elasticity were calculated. Price elasticity of demand is defined as measuring “responsiveness (or sensitivity) of consumers to a price change” (McConnell & Brue, p. 2). The formula to calculate price elasticity of demand is as followed:

; Or using the midpoint method

A value greater than one is elastic meaning when the price increases, the total revenue decreases. Values less than one are inelastic. This means price and revenue are directly related. As one unit increases so does the other. If elasticity equals one, then quantity demanded and price move the same amount proportionately.

Income elasticity “measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good” (McConnell & Brue, 2004, p. 48).The formula to calculate income elasticity of demand is as followed:

Positive income elasticity is a normal good meaning more quantity of goods are demanded as individuals income rise. Inferior goods have negative income elasticity and the quantity of goods demanded will decrease as personal income rises.

Data and calculations

The data to perform these calculations were taken from the annual reports from PepsiCo and Beverage Digest. From the annual reports at www.pepsico.com, the total revenue in 2007 was $39,474 million and Pepsi accounted for 28% of the sales.

Therefore, Pepsi accounted for $11,052.72 million in sales for 2007. Total revenue in 2006 was $35,137.1 million and Pepsi accounted for 30%.

Hence, Pepsi had $10,541.1 million of total revenue for 2006. The quantity of Pepsi consumed came from www.beverage-digest.com. In 2007, 1,059.8 million units of Pepsi were consumed. In 2006, the number was 1,113.2 million units. The price was determined from revenue and quantity. Since revenue is equal to price times quantity, then price equals revenue divided by quantity.

The calculations for price are as followed:

2007: price per unit = ( )/(1,059,800,000) = $10.43 per unit

2006: price per unit = ($10,541,100,000)/(1,113,200,000) = $9.47 per unit. The following table lists