Essay Sample on the Economic Environment of Business

Introduction

The UK is undoubtedly one of the largest consumers of carbonated soft drinks in the world. This is evident with a large number of both international and local companies producing these soft drinks for the UK public. The affluent population ensures that all these companies get their share of the market. Several factors have shaped the market to what it is today and other factors that play a role in the future of the market. In this paper, the nature of the market and the factors that contribute to its success will be discussed.

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Part 1

The soft drink market in the United Kingdom is as diverse as any other country. Because of the different preferences that different individuals have several brands have been able to enter the market and make a killing out of selling their products. The high degree of innovation among the different manufacturers has enabled the sector to grow to have a vital place in the economy of the United Kingdom. The main manufacturer of soft drinks in the UK is the Coca Cola Enterprises (Ferguson, 2002). They are the producers of the Coca Cola soft drink and accounts for almost 30% of all the sales made in the UK for carbonated drinks. With this percentage, the company has the largest share of the UK market in beverages. The second largest manufacturer of carbonated soft drinks in the UK is Britvic. This company acts as a bottler for PepsiCo company that owns the Pepsi drink. The Britvic company also has its portfolio of drinks the Robinson Fruit Shoot and Tango. Combined, this manufacturer is responsible for almost 13 percent of all the carbonated soft drink sales in the UK. Other manufacturers include, with a sizable share of the sales made in the market include, Suntory, the producer of Lucozade and Ribena and Ag Barr, the producers of Irn-Bru.

The soft drink market in the UK is a unique market with several characteristics that cannot be found anywhere else on earth. This market can be defined as a duopoly between the two main carbonated drinks, Coke and Pepsi. The two have a larger share of the market that the others can barely register. The two have little to no difference in the price that they charge, and thus, there is little to no customer loyalty. The market also enjoys no threat from new entrants to the market. The carbonated soft drink market in the UK is very competitive that for a new bottler to enter and make an impact, they would have to spend billions on marketing. This ensures that there are no entrants to the market. As such, one can comment that the barriers to entry in this market are high because of the funds that a company will have to spend on marketing to have a substantial market share.

Many businesses in the carbonated drink industry in the UK use the break-even analysis to help them price their drinks. They position their prices above the break-even point in the margin of safety part of the graph to guarantee that they make profits.

Part 2

The UK government introduced a taxation system on all producers of carbonated drinks with high sugar content in April 2018. This taxation aimed to raise revenue for the government while at the same time reducing the amounts of sugar that the public consumed in the soft drinks. The government expected the prices of the drinks to go up after the taxation and thus force customers to other alternative drinks with lower sugar content. After the taxation cane to effect, it was noted that more than 62% of people in the United Kingdom did not change the drinks that they were taking because of ta taxation. Before the taxation, 11% of all the shoppers for carbonated drinks said that they planned to stop drinking a lot of sugar from the drink and after the taxation, the number dropped to less than one percent. This drop can be interpreted as the increase in the price of the products gave the buyers one last push to change the way that they consumed the carbonated drinks. However, the number of people that said they intend to keep buying the carbonated surgery drinks rose from 31% before the taxation to 44% after the advent of the tax. Many experts have argued that the reason for this is the that drinks do not pose any immediate health challenges and as a result, many people are unable to stop taking the sugary drinks (Arthur, 2018).

The introduction of the tax on sugary drinks also has a lot of ramifications on the producers of the carbonated soft drinks. The amount of tax that a company producing the soft drink had to pay was dependent on the sugar content in their soft drink and whether or not the sugars had been artificially added or were naturally occurring. Drinks that had a sugar content of above five but below eight grams per 100 milliliters were subjected to a lower rate of taxation as compared to those that had a higher sugar content. Because of this, the amount of taxes that the different companies had to pay was different, leaving other companies better off than others in terms of the revenue that they had after the taxation. This taxation gave the companies that had a lower percentage of sugar in their drinks a competitive advantage.

Several examples show how producers in the UK soft drink market use non-price competition to increase their sales. The main one is Coca Cola introducing drinks with zero sugar to appeal to customers who want their drinks to have no added sugar at all (Sloman and Jones, 2017). This worked to increase its sales in a previously unexplored market. Another example is the packing that RedBull uses to pack its products. Many RedBull cans depict aggressiveness and athleticism which appeal to many people and thus increase their sales.

Another example is the unique selling point of Coca Cola. The brand markets the drink as a secret recipe that only a select few know how to make. This increase the sales of the company as consumers want to try something mysterious and different from what is available in the market at the moment.

Part 3

As seen in the graph above, the value of the sterling pound against the US dollar has been on a steady downtrend. The highest recorded exchange rate in this graph was in July of 2016 while the lowest was in January of 2017. Generally, the value of the pound is going down, and there are many reasons why this is so. The main one is the uncertainty in the political stability of the nation. The recent talks about Brexit have resulted in a confusing time for investors that are seeking to invest in the economy of the country. Investors would rather invest in other markets in Europe or in the Americas, where there is political stability in the country. The strength of the euro and the dollar relative to the pound also affects. If the euro and the dollar become powerful while the pound remains stagnant, the value of the pound will seem to be diminishing while in the real sense, it did not change. Another reason for the reduction of the value of the sterling pound against the US dollar is the current account deficit. Every country in the word has exports and imports. For the economy and the value of the currency of the country to be steady, the value of exports and imports should be almost the same. If the value of the exports is more than that of the imports, then the value of the currency will go up and vice versa. In the UK, the value of imports is higher than that of exports. This creates a trade deficit that pulls down the value of the pound against other major currencies.

As the sterling pound becomes weaker as compared to other currencies of the world, this change has an adverse effect on the carbonated soft drink industry in the UK. When the value of the pound diminishes, the manufacturers will have to pay more for the same goods and services as before. For example, between July of 2016 and January of 2017, the sterling pound diminished in value by over 0.27 pounds against one US dollar (Begg and Ward, 2016). This means that the manufacturers would have to pay their suppliers 0.27 pounds more for every sterling pound that they pay out. At first, this might seem a small value, but many of these companies deal with billions of pounds each year, and it creates a significant difference in the profits of the companies. These companies are forced to pass on the increased prices of production on to the consumers.

Part 4

The recent push for the UK to exit from the EU, there is bound to be challenges for manufacturers of carbonated soft drinks that export to nations in the European Union. One advantage that manufacturers in the UK had when the country was in the EU was that they could move their products and starts businesses in different nations in the EU without too many issues. This worked to make the businesses of UK manufacturers to improve. Brexit will result in the UK manufacturers having to pay huge taxes to operate in other countries in the EU, and this will result in many of them, reducing the profit margins that they get. As a result, the local manufacturers in the different countries in the EU will be offered a competitive advantage over those in the UK. Similarly, manufacturers in the EU will have to pay huge taxes to enter the market of the UK and thus protect the UK market from foreign manufacturers.

As seen in the diagram above, inflation affects the demand and the supply of any of the major carbonated drinks brands in the UK. When there is inflation, manufacturers have to pay more to get the same amount of good and services to their customers. This causes a reduction in the supply of beverages. The demand for these beverages is not affected, but since the supply is less, the prices for these beverages' rockets. The result is a reduction in the sales of the soft drinks but an increase in the prices that are charged for the available soft drinks. The lower purchasing power of the citizens in the country leads to slower economic growth in the country.

Conclusion

As shown above, the carbonated soft drink industry in the UK has a lot of challenges ranging from taxation by the government to inflation to Brexit. This has resulted in the sector experiencing a lot of diminished profits. I believe that this is only going to get worse. The European Union played an important role in the success of the manufacturing industry of the UK. The UK is one of the superpower nations in the EU, and getting out of it will subject the UK manufacturers and businessmen in different countries in the EU to huge taxation by the local governments. Furthermore, with the finalization of the Brexit deal, the sterling pound is yet to face its worst times as compared to other currencies. This will further put a strain on the manufacturers in the UK.

References

Arthur, R. (2018). UK sugar tax has 'minimal impact' on consumer behavior: Nielsen. [online] beveragedaily.com. Available at: https://www.beveragedaily.com/Article/2018/08/14/UK-sugar-tax-has-minimal-impact-on-consumer-behaviour-Nielsen.

Begg, D., and Ward, D. (2016). Economics for Business, 5th ed. Maidenhead: McGraw-Hill Education.

Ferguson, K. (2002). Essentials of Economics. New York: Palgrave.

Sloman, J., and Jones, E. (2017). Essential Economics for Business, 5th ed. UK: Pearson Education Ltd.