Colombia is getting more global in both ways exporting and importing good and services, therefore her industry has to reach foreign markets through headquarters in Colombia and factories abroad or exporting local products. If Colombia has economies of scale, her citizens must take advantages on them. Empirical evidence shows that Colombia faces economies of scale into soft drinks market, the average cost (average cost per unit of production) is lower as volume of production increase. This kind of technology is desired by society due to financial profits are higher and suppliers can invest into science and technology, social programs to improve social welfare and promote culture as musicians and athletes. It must be highlighted, increase financial profits as a final target is not the objective, the objective is to increase financial profits to reach a better society.
Colombia is increasing her Free Trade Agreements (FTA), some of them are with EFTA, Canada, Chile, Mexico, El Salvador, Guatemala, Honduras and the United States of America. Some people point out that Colombia is not ready to be competitive as above countries are. This assertion could be true but it can be false either. The most important is to search for economies of scale that the country can exploit when a country signs a FTA. It means that in high volume of production, the average cost (average cost per unit of production) shows a reduction. I did my homework and found that soft drinks market in Colombia has this type of economy of scale. From official data, I got interesting results. Soft drinks in Colombia contains production bottles of water, bottles of juice, sodas as Coca-Cola and Pepsi, it does not contents spirits and alcoholic drinks. There are 25 firms of soft drinks in Colombia in 2011 which give financial information but one can count approximately 79 according to 2010-2011 industrial census. The most important firms are Industria Nacional de Gaseosas S.A. (Coca-Cola) with 36.2% of total sales in 2011; Gaseosas Posada Tobon S.A with 17.9% of total sales; and Gaseosas Lux S.A with 9.6% of total sales. Coca-Cola is a foreign firm and the others are mainly locals.
Figure 1. Firms and employees in soft drinks market in Colombia 1992-2010
(natural logarithm scale)
Source: own calculations with local bureau of statistics' data.
Colombia can take this advantage of economies of scale in soft drinks market and export them to Mexico, Honduras, El Salvador and other countries in the Caribbean. Figure 1 shows how technological change took place in this economic sector, there were less firms in 1992-1999 than 2000-2010 and more employees working in 1992-1999 than 2000 to 2010, therefore this sector faced a positive technological change form 1992-1999 to 2000-2010. This technological change gave as a result a lower average cost, this fact is highlighted in microeconomic textbooks when market shows economies of scale. Figure 2 shows empirical evidence for soft drinks market in Colombia, there is a decreasing relation and negative slope between volume produced (million of liters) and average cost index. The average cost index is equal to total employees divided by total production. From figure 2 one can point out that as production increase the average cost shows a decline. This kind of technology is desired by any supplier in any market due to as volume increase, it is cheaper produce the latest unit (in this case the latest million of liters). Moreover the supplier’s target should be the market demand but to reach it, she has to play into a monopolistic competition game (to make product differentiation as marketing target) .
Figure 2. Decreasing Average Cost in soft drinks market in Colombia 1992-2010
Soft drinks profits are high in Colombia. For instance Industria Nacional de Gaseosas S.A. (Coca-Cola) showed US$414 million profits before taxes (operating profits) in 2011 and the total soft drinks market showed US$1,4 billions (nine zeros) operating profits in 2011. The relation between operating income and operating costs is showed in table 1. This relation can be read as an increment of 1.0% in operating cost, the operating income is expected to increase in 0,8% and if the inflation shows an increase of 1 (for instance from 3.0% to 4.0%), it is expected that operating income shows a decline in 0.9% (0.009*100). This model is significative through statistical tools. As a citizen, one waits too much from these sectors that have economies of scale, their target has to be increasing profits to reach a better social welfare. Increasing profits for making more financial profits as a target is not the solution for economic problem.
Table 1. Relation between operating income and operating cost for soft drinks market in Colombia 1995-2010
(Random effect model)
variable
|
Coefficients
|
Ln(Operating costs)
|
0.805
|
Inflation
|
-0.009
|
Constant
|
3.689
|
Observations
|
466
|
Hausman test (probability)
|
0.0206
|
Source: own calculations, Stata 12.1.
Excellent Market Studyhas done here..This report has great focus on Colombia soft drink industry and it is excellent way of gaining and understanding of the dynamics and structure of the market..Through very well graphical presentation,it provides current market outlook and pricing issues of soft drink..keep continue sharing such informative blog
ReplyDelete