Inflation and Business Fluctuations
Federal Reserve Bank Policies and impact on Coca-Cola Profitability
Ordinarily, the Federal Reserve Bank can influence the activities within the economy in three ways. The first is through open market operations, where it can purchase bonds that ultimately increase the money supply and reduce interest rates and vice versa. Secondly, it can lend to banks and other financial institutions. Finally, it can influence changes in interest rates paid to reserves.
United States Federal Reserve Bank, as Coca-Cola's home country, through its committee in charge of open markets, FOMC, has worked towards a target range for the EFFR by monitoring incoming economic data at its disposal in preparation for adjustments to manage risks. While it had kept the fund rate at less than 1%, the Coronavirus pandemic forced the committee to review the rate upwards to control emerging risks (Ozili & Arun, 2020: Board of Governors of the FED, 2022). Since then, other factors contributing to its incremental rise have come up, as shown in the graph below.
Source: Board of Governors of the FED, 2022
A higher fund rate has affected Coca-Cola's profitability negatively, going by the long-term debt accrued by the end of FY2021 (The Coca-Cola Company, 2021: Geng, Jiang & Liang, 2021). Ideally, accruing more debt comes with obligations of interest payments that reduce the number of profits made regardless of more revenues earned.
Source: The Coca-Cola Company, 2021
Latin America's Key Market Policies and impact on Coca-Cola's Growth
Latin America, one of Coca-Cola's key markets, has faced similar impacts that have come with inflation, forcing the central banks, such as Mexico's, to increase their rate to control soaring inflation arising from the pandemic and other factors (Ozili & Arun, 2020). Based on operations, this key market contributes to 27% of Coca-Cola's worldwide unit case volume mix and is only second to Europe, the Middle East and Africa, cumulatively contributing 29% (The Coca-Cola Company, 2021). Suppose the debt and subsequent interest payments were to be paid based on the case volume mix. In that case, Latin America would be the highest contributor to lowering Coca-Cola's growth outlook due to the high cost of business.
US Fiscal Policies and Impact on Profitability
The fiscal policy asserts the influence of the federal government to address taxation, expenditure and borrowing by design to influence business fluctuations. The United States, through its government, has had to address several economic and financial developments: economic activity in the labor markets, inflation, financial conditions, financial stability and international developments. Starting with the labor markets, it is observable that it continues to recover rapidly with strong error demand, but its supply is constrained. The growth has also come with inflation, with service-based firms more affected than product-based firms. From Coca-Cola's perspective, personal consumption expenditures price indexes for beverages have gone up based on the graph below (Board of Governors of the FED, 2022).
It would mean that many Americans moving forward would find it costly to consume Coca-Cola products. For now, however, the impact of inflation cannot be isolated to establish an effect on the company's profitability in the United States. As economies get up to speed after the pandemic, Coca-Cola's operating revenues in FY2021 exceeded those of FY2020 by over 5.6 million dollars (The Coca-Cola Company, 2021).
Source: Board of Governors of the FED, 2022
Latin America's fiscal policies and impact on Coca-Cola's profitability
Moreover, the graph below depicts consumer price inflation in selected foreign economies. As a nation significant to Coca-Cola within the Latin American region, Mexico is bearing the brunt of inflation, going by what the graph details as a general indicator of market operations and activities. In the three years since 2019, inflation has risen despite government intervention. It is projected to continue growing this year. The result of this would be that the cost of doing business moving forward will be high, and despite a turnaround following the pandemic, the growth outlook is likely to be slower.
Source: Source: Board of Governors of the FED, 2022
References
Board of Governors of the Federal Reserve System. (2022, February 25). Monetary Policy Report. Retrieved from
https://www.federalreserve.gov/monetarypolicy/files/20220225_mprfullreport.pdf
Geng, H., Jiang, N., & Liang, Q. (2021, December). Strategic Management and Financial Analysis in the Context of Epidemic--A Case Study of Coca-Cola Company. In 2021 3rd International Conference on Economic Management and Cultural Industry (ICEMCI 2021) (pp. 2396-2404). Atlantis Press.
https://doi.org/10.2991/assehr.k.211209.392
Ozili, P. K., & Arun, T. (2020). Spillover of COVID-19: impact on the Global Economy. In Managing Inflation and Supply Chain Disruptions in the Global Economy (pp. 41-61). IGI Global.
https://mpra.ub.uni-muenchen.de/99850/1/MPRA_paper_99850.pdf
The Coca-Cola Company. (2021). 2021 Business & ESG Report.