Read the article “Gloomy Forecast” which provides some information on what happened to the sales

of private label soft drinks when the prices of the major brands changed. How would you
use the data to provide a quantitative measure of the sensitivity of demand for private
label soft drinks to changes in prices of the major brands?

Q private label %
The metric we need to measure is . The percentage change in quantity for the private
P major brands %
labels is given as +6.0%. Therefore, we just need to determine the percentage change in price of the
major brands. We determined this by taking a weighted average (based on market share) of the price
increases for Coca Cola, PepsiCo, and Cadbury Schweppes. The weighted average of the percentage
change in price was +3.65%. See full calculation details below:

Therefore, the sensitivity of demand for private label soft drinks to changes in prices of the major
brands is 6.0% / 3.65% = 1.64.

Gloomy forecast Analyst says soft drink industry's summer woes will carry into '05

SCOTT LEITH

8 September 2004 The Atlanta Journal - Constitution

It was a sad summer for soft drinks.

Thanks to factors ranging from higher prices to hurricanes, the summer of 2004 is shaping
up as the industry's worst in more than a decade.
At least that's the view of analyst Bill Pecoriello of Morgan Stanley, who on Tuesday
predicted that troubles will persist into 2005.
In a report issued in the wake of Labor Day, summer's unofficial end, Pecoriello reduced his
sales volume projections for the U.S. soft drink industry for the third time since June.
While the Coca-Cola bottling system has lately emphasized a blend of price increases and
sales volume growth, statistics from the summer show that getting both is tough.
When you add in other issues, it gets even tougher.
"Given the weather, the retail environment, upward pricing and no new blockbuster
products, it was a pretty dismal summer for carbonated soft drink growth," said John
Sicher, editor and publisher of Beverage Digest.
By now, it's clear that the U.S. soft drink industry has its share of challenges. Sales of soft
drinks have been on a slow slide, thanks in part to worries about obesity and increasing
interest in other drinks, such as bottled water and sports drinks. But the problems of
summer 2004 haven't had much to do with these long-term issues.
Much of it comes down to prices. In the recent past, the nation's big bottlers have been
raising wholesale prices. Until this summer, many retailers passed along some, but not all,
of these higher costs to consumers, Pecoriello said.
That practice has changed.
"We are seeing retailers not only pass on the 2-3 percent price increases that the bottlers
have been taking, but taking pricing ahead of that level in order to improve their own
margins," Pecoriello said.
If you're a consumer, this often shows up subtly, in the form of fewer sales in stores.
Marc Cohen of Goldman Sachs noted in a report that the Coke and Pepsi bottling systems
have reduced their use of specials, like selling 12-packs at discounts of two for $5 or three
for $9.
While Cohen sees the trend toward higher prices as healthy for the industry, the downside
comes in volume.
According to Beverage Digest, Coke's sales volume in U.S. supermarkets fell 5.8 percent
year-to-date through Aug. 8, while prices rose 4.1 percent.
Sales volume of private label drinks --- brands like Wal-Mart's Sam's Choice --- climbed 6
percent, as their prices stayed flat.
Cohen isn't expecting Labor Day's results to offer relief. "Bottlers are unlikely to see the
strong volume sales over the holiday that were likely needed to 'catch up' for the
disappointing summer demand," he said.
In a recent interview with Beverage Digest, Coke North America leader Don Knauss noted
that "everyone seemed to hit a bit of a wall in July."
Indeed, soft drink sales weren't the only ones to suffer. "The retailers I've talked to think
higher fuel prices are really hurting discretionary spending," Knauss said.
The weather hasn't helped, either, from Florida's recent hurricanes to cool weather in spots.
With this kind of summer in the books, Pecoriello now expects Coke's North American sales
volume to slip 2.5 percent in the third quarter, which concludes at the end of September.
At bottler Coca-Cola Enterprises, Pecoriello forecasts a drop of 3.5 percent. Photo "Everyone
seemed to hit a bit of a wall in July," says Coke executive Don Knauss. Graphic SUMMER
SALES SLIDE
For the big soft drink makers, prices are up --- and sales are down --- so far in 2004. Most
of the sales decline has happened since Memorial Day, the start of the critical summer
selling season.

Coca-Cola: 35.1% market share

PRICE: UP 4.1%
VOLUME: DOWN 5.8%
Pepsico: 32.3% market share
PRICE: UP 3.4%
VOLUME: DOWN 5.1%
Cadbury Schweppes*: 17.1% market share
PRICE: UP 3.2%
VOLUME: DOWN 0.4%
Private label**: 11.5% market share
PRICE: NO CHANGE
VOLUME: UP 6.0%
* Cadbury Schweppes' soft drink brands include Dr Pepper, 7Up, Sunkist and others **
Store brands, such as Sam's Choice at Wal-Mart

Note: Results are for year-to-date in U.S. supermarkets only, through Aug. 8

Source: Beverage Digest