Question

Assume that you have just been hired as a financial consultant to a startup company that plans to introduce a new beverage to the soft drink market. Your company’s product is advertised as a healthier alternative to soda and other artificially-flavored drinks. The all-natural sparkling beverage has only 25 calories, 5 grams of sugar, no chemicals or preservatives, and comes in four fruit flavors: orange, pineapple, apple, and grape.

Two years ago, the product was introduced in Florida. The phenomenal growth in sales since its introduction demonstrates that the product and its marketing possess tremendous potential. Accordingly, the company wants to explore possibly expanding sales of the product to the rest of the U.S. market.

Although the company has been highly profitable, the management group has little to no financial experience. Most decisions to date have been made on the basis of ‘does it feel right’ as opposed to rigorous, data-based financial analysis. The company has no system of financial oversight and the managers of the company have a limited understanding of sound management accounting practices.

You have been asked to provide the company with a general analysis of this proposed project. Your specific task is to produce a report discussing the following key aspects of this expansion project:

1) A microeconomic analysis of the current state of the soft drink market in the U.S. and how any recent developing trends may affect the demand for this product.

2) A macroeconomic analysis of the state of the U.S. economy and the impact this may have on the demand for this new product.

Answer 1

Part A) Micro Economic Analysis: -

Micro economic analysis is based on industry production and demand for goods and services and disruptions or good news if any. As an industry, the soft drink market is dominated by few key players wherein they control major market share and price their products in a predatory manner.

The recent trends in the industry are such that due to the Covid Virus, expansion activities are difficult to undertake. This is because purchasing or renting land during this time in itself becomes a tough task to be able to do. Further, consumers are reluctant to try new products in such markets wherein the future is uncertain and they prefer older products as a result as they do not have to spend significant time to try new products.

The marketing efforts during this time period can also can be dented due to the fact that people are not allowed to freely interact with one another. Production during this time may also be hit as establishments are told to stay closed.

Thus, we can conclude by saying, that from a microeconomics point of view, the company can expect low demand during this vital period and profit margins would be on the lower side. Further finding a new place to produce will also be difficult and logistics may be hampered due to government restrictions. Production may also take a hit if establishments are told to stay shut during the time period. Thus, we can conclude by saying that the management should be cautious and not expand business during such economic crisis situation.

Part B) Macroeconomic Analysis: -

Now, when we look at the Macroeconomic aspect of the United States, we see that the country is going through an extremely tough phase, wherein recession has come in the economy and it cannot be corrected unless a cure to the disease is found.

The aggregate or total demand for goods and services in the country is steeply falling and this is leading to disruptions for producers who in turn are reducing the total labour force which they have and the living standards of people and their aggregate or total income is falling sharply.

We can conclude by saying that the economy is going through an extremely deep recession crisis wherein the products and services are not in demand and people are finding it tough to find new employment opportunities for themselves.

In such a critical phase therefore, what is needed for the company is to retain its capital rather than expand business as total demand in the country would also have an impact on the soft drink industry and low growth is expected.

Please feel free to ask your doubts in the comments section.