Chanee Yarborough
ECON 230
Professor Paul Choi
Introduction
The Federal Reserve and the U.S. government use fiscal and monetary policy as two powerful instruments to drive the economy in the right direction. It has been proven that when used properly, they can have similar effects on both stimulating and slowing down our economy depending upon the severity of the situation. The Bank of Mexico conducts its economy similarly. Neither the Coca-Cola Bottling Company nor any of its subsidiaries are exempt from monetary policy regulations established by the Federal Reserve Bank (Fed). The discount rate, the reserve ratio requirement, and open market operations must therefore be considered by a corporation conducting business in the United States. Besides maintaining competitive prices, controlling logistics costs, and maintaining inventory levels, Coca-Cola's marketing and operation leadership also focus on minimizing the associated volatility in production (2019 Business & Sustainability Report, 2020).
Fiscal Policy
To regulate a country's money supply, a country's central bank formulates a monetary policy that aims to regulate the money supply of a particular country on a macroeconomic level. There are a number of factors that affect interest rates, including the money supply. Open market operations, the discount rate, and the required reserve ratio are three tools that a central bank can use to regulate the money supply. Government securities are bought and sold on the open market in order to regulate the money supply. As a result of the central bank purchasing government securities, the money supply in the economy is increased. When government securities are sold by the central bank, the money supply in the economy decreases. Schmidt (2021) suggests that the increase in money supply reduces the interest rates in the economy. Low-interest rates enable The Coca-Cola Company to borrow at a low cost. By investing further in its operations, the company will be able to continue to grow worldwide.
Impact of fiscal policies on the U.S. and Mexico's Economy
The Coronavirus Aid, Relief, and Economic Security (CARES Act) provided relief for individuals and businesses negatively impacted by the coronavirus outbreak. A $2.2 trillion package which included $454 billion to The Federal Reserve to help stabilize markets, allowing businesses to borrow at a lower rate while layoffs occurred. Other provisions included tax deferrals, tax reductions, grants to state and local governments, and more.
A dwindling of the stimulus is predicted for 2022. The Federal Reserve has indicated it will cease its bond-buying program in March, according to Chmura (2022). In addition, analysts expect the Fed to raise its federal funds rate target three times this year, bringing the rate to 0.75% at the end of the year. After 3 consecutive moves of 0.75 percentage points in 2022, CNBC analyst Jeff Cox reported that the central bank brought its federal funds rate to a range of 3%-3.25% as of September 2022, the highest since early 2008. Many Fed officials expressed plans to increase the Federal Funds Rate until a final level of 4.6% is reached in 2023 as a result of the massive increases in the Fed Funds Rate (Cox, 2022). Accordingly, the Fed is expected to hike rates by half a point next year, without any decreases.
There has been a rapid rise in inflation due to a lack of supply chain coordination as well as labor shortages which have impacted the economy. Chmura reported "we expect consumers to spend less in 2022 due to higher gas and food prices, as compared to 2021's 8.1% annualized growth rate (2022). In 2022, consumers are expected to spend 3.9% less on goods and services - a respectable rate considering they account for 70% of the nation's GDP.
Banco de México, in a similar vein to the Federal Reserve System of the United States, has the primary goal of maintaining a stabilized and healthy economy in its country. On the official website of Banco de México, it is stated that "low inflation and stability of prices" are the top priorities of the system (Banco de Mexico, 2022). Covid has also been a major factor in influencing the fiscal policies of the Banco de Mexico system as well. A report from Banco de México's executive summary suggests that the Governing Board increased its Overnight Interbank Interest Rate target rate to 8.50 percent in response to high inflation, tighter financial conditions, and various trade and geopolitical tensions. Aiming to promote the adjustment of prices, financial markets, and the economy as a whole in a manner that leads to inflation convergence to the 3% target (Banco de Mexico, 2022
Impact of fiscal policies on Coca Cola
There has been a significant fluctuation in the unemployment rate in the United States, specifically between February 2020 and February 2021, as demonstrated by this graph. Because of the Covid pandemic, the unemployment rate increased dramatically. This rate is well lower than the national average due to continuous efforts made by the government to reduce unemployment rates. Based on the data provided by the Bureau of Labor Statistics (BLS), the current unemployment rate for the United States is 3.4% (2022).
A low interest rate due to the CARES Act made borrowing more affordable for The Coca-Cola Company. This led to further investments in the company's operations. According to Trefis Team Contributors, Coca-Cola stock gained 6% in 2022 even with inflation rising. Despite a recovery in demand post-pandemic, Coca-Cola's financial performance has been solid in recent quarters. Over the next few quarters, this trend is expected to continue. Coca-Cola reported $17 billion in sales in 2022, up 17% from 2021 (Trefis Team Contributors). Operating margins also increased for the company. The company's sales for the latest quarter totaled $10.5 billion, which represents 16% year-over-year growth, with a growth of 11% in concentrate sales and a 7% rise in price/mix, as well as a 7% rise in profits (Trefis Team Contributors, 2022).
Mexico's Fiscal Policies on Coca-Cola's Economic Growth
Mexico's fiscal policy will affect the economic growth of the country overall, as well as the growth of the Coca-Cola company in particular. It follows Mexico's recent economic history regardless of its optimistic outlook for the future. The Mexican budget, which includes new statistics regarding national expenditures, shows that government officials are committed to maintaining stable GDP and debt levels between 1.7 and 2.7% (Banco de Mexico, 2022). Furthermore, the 2023 budget projects an increase in revenue of 9.9%, an increase of 0.8% over 2022 (Wire, 2022). According to the Central Bank of Mexico, this increase is partially due to increased interest rates created by changes in fiscal policies (Banco de Mexico, 2022). According to statistics released by the Mexican government in July 2022, the actual amount of cola drinks sold in Mexico most recently amounted to about 1.3 billion liters, which represents a significant increase of more than 1.1 billion liters from the same month last year. Therefore, Coca-Cola's growth has not been negatively affected by Mexico's economic shortfalls.
Key Market
Coke is the world's largest non-alcoholic beverage company thanks to its commitment to reducing its carbon footprint and dedicating itself to ecological sustainability. The company stays close to its bottling partners to deliver value to its customers and consumers in inflationary times. Markets continue to face increased cost pressures and supply challenges. Coca-Cola Co, 2022, reports that the segmented company markets by occasion, brand, price, package, and channel to deliver compelling customer and consumer solutions based on its regular growth management strategy (Coca-Cola Co, 2022). The company, for example, is offering single-serve packages at key transaction-driving price points in India to increase its consumer base. Over 500 million incremental transactions were added to India's bank system in the first quarter, up nearly 20% from the same period last year, resulting from this strategy. A Coca-Cola Co. study has found that approximately 70% of these incremental transactions result from small packages, such as returnable glass bottles and smaller, single-serve PET bottles. This is in accordance with Coca-Cola Co.'s 2022 report.
Conclusion
Despite the challenging economic conditions in the United States and Mexico, Coca-Cola has successfully adjusted its business practices to benefit its profitability and overall prosperity. A number of factors, including inflation, led Coca Cola to adjust its strategies in different world markets. In an inflationary environment, Coca Cola increased the unit price of their beverages in order to maintain sufficient cash flow in order to remain a viable business in the face of rising production costs. It is expected that Coca-Cola will continue to increase profits and economic growth by adhering to fiscal policies and making necessary adjustments.
References
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