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Factors affecting demand for soft drinks

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Contents
Introduction .................................................................................................................... 3

Model ............................................................................................................................... 4

a) 6-pack price (cents) ............................................................................................ 5

b) Per Capita income ($ Thousands) .................................................................... 5

c) Price of water (Cents Per Bottle) ...................................................................... 5

d) Population (Millions) ......................................................................................... 5

e) Cost of Living (Index) ........................................................................................ 5

Elasticity .......................................................................................................................... 6

a) Point price Elasticity .......................................................................................... 6

b) Point income elasticity ....................................................................................... 6

c) Point cross-price elasticity ................................................................................. 7

Conclusion ....................................................................................................................... 7

References ....................................................................................................................... 8
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Introduction

There are no doubts the consumption or demand of soft drinks has been on the rise across

the globe. Soft drinks are beverages comprising of carbonated water, sweetening agents, and

flavors, such as Pepsi, monster, Cott, and Coca-Cola. According to a report by

Technavio, (2021) the soft drinks market is likely to grow by USD 316 billion between 2019-

2023. The above growth has been influenced by various food technologies, and health options,

whereby the industry has adopted various flavors and expanded health options (Zero sugar).

There are numerous factors that affect the demand of soft drinks, which include price, health

issues, and consumer preference (Hanks, 2017). Similar to other products, demand for soft

drinks is controlled by its price, where higher prices reduce the demand. This occurs mainly

when the companies face an increased price of ingredients, such as sugar, flavoring agents and

water, which result in increased cost of production hence increased prices. Consequently, a

study by Colchero, Salgado, Unar-Munguia, & Hernandez, (2015) indicates that a10% increase

in the price of sweetened sugar beverages was associated with a 11.6% decrease in quantity

consumed.

Notably, the increased awareness of health issues related to soft-drinks had negative

impact to the demand of the products. For instance, the consumption of soft drinks has been

linked to various disorders, such as obesity, high blood pressure and diabetes, thus the

consumption has decreased. However, to curb the above challenge, companies have adapted

healthier options, such as caffein free, sugar-free drinks, bottled water and fruit juice-based

drinks ((Hanks, 2017). Despite the awareness a study by Kuczmarski, et al., (2010) shows that

low to middle income urban African American and white adults, consumed between 17% and

20% of their daily energy intake from beverages. In addition, the study indicates that regions

with high population exhibit high consumption level compared to low population. Therefore,

the following study seeks to explore the relationship between soft drinks demand and various
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factors, including population, price, cost of living income, income and price of substitute

product (water).

Model

The study used demand for soft drinks data, which comprises of the above variables (6)

collected across the 48 continental states. Ms. Excel was used to analyze the data.

Table 1: Regression statistics

Regression Statistics
Multiple R 0.939525571
R Square 0.882708298
Adjusted R Square 0.868745
Standard Error 519.0854399
Observations 48
The model reported an R square value of 0.8827 indicating that 88.27% of the variation

in demand for soft drinks is explained by the model.

Table 2: ANOVA

ANOVA df SS MS F Significance F
Regression 5 85168090 17033618 63.21632 1.88E-18
Residual 42 11316887 269449.7
Total 47 96484977
As shown, the model is adequate (p=1.88E-18) is explaining the variation of soft drinks

demand.

Table 3: Coefficients

Coefficients Standard t Stat P-value

Error
Intercept 147.0834638 659.1991 0.223124 0.82452
6-Pack Price (Cents) -19.87870977 5.875722 -3.38319 0.001561
Per Capita Income ($ Thousands) 7.432705076 11.32911 0.656072 0.515356
Price of Water (Cents Per Bottle) 27.01732599 24.22795 1.11513 0.271135
Population (Millions) 179.5750286 13.46928 13.33219 1.09E-16
Cost of Living (Index) 30.19113681 19.3367 1.561339 0.125948

𝐷𝑒𝑚𝑎𝑛𝑑 = 147.083 − 19.87 6𝑃𝑎𝑐𝑘 𝑃𝑟𝑖𝑐𝑒 + 7.432𝑃𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 𝑖𝑛𝑐𝑜𝑚𝑒 +

27.017𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑤𝑎𝑡𝑒𝑟 + 179.57𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 + 30.191𝐶𝑜𝑠𝑡 𝑜𝑓 𝑙𝑖𝑣𝑖𝑛𝑔

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a) 6-pack price (cents)

The model indicates that a unit (cent) increase in 6 pack price of the soft drinks reduces

the demand of the soft drinks by 19.87 units (Million). The above is result is expected since

the studies and reports above indicate a negative relationship between price and quantity of the

soft drinks; besides, the coefficient is significant (p=0.0015)

b) Per Capita income ($ Thousands)

The model indicates that a unit ($ Thousand) increase in per capita income increases the

demand of the soft drinks by 7.432 units (Million). The above is result is expected since the

increase in income increase the purchasing power hence more money can be spent on the

purchase of soft drinks. However, the coefficient is not significant (p=0.515).

c) Price of water (Cents Per Bottle)

The model indicates that a unit (cent per bottle) increase in per capita income increases

the demand of the soft drinks by 27.432 units (Million). The above is result is unexpected since

an increase price of good will lead to a decrease in its demand, which will result in increased

demand for the substitute good. However, in this case an increase in price of water led to an

increase in the demand of soft drinks. Consequently, the coefficient is not significant (p=0.271).

d) Population (Millions)

The model indicates that a unit (million) increase in population increases the demand of

the soft drinks by 179.57 units (Million). The above is result is expected since the studies and

reports above indicate a positive relationship between price and population of an areas; besides,

the coefficient is significant (p=1.09e-16)

e) Cost of Living (Index)

The model indicates that a unit (index) increase in cost of living increases the demand of

the soft drinks by 30.191 units (Million). The above is result is unexpected since the increase
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in cost of living decrease the purchasing power hence less money can be spent on the purchase

of soft drinks. However, the coefficient is not significant (p=0.126).

Elasticity

a) Point price Elasticity

𝑃 ΔQ
𝑃𝑃𝐸 = ∗
𝑄 ΔP

𝐷𝑒𝑚𝑎𝑛𝑑 = 147.083 − 19.87 6𝑃𝑎𝑐𝑘 𝑃𝑟𝑖𝑐𝑒

ΔQ
= −19.87
ΔP

Average demand and price are 1156.35 and 226.48

226.48
𝑃𝑃𝐸 = ∗ −19.87 = −3.891
1156.35

As shown, a 1 percent change in price causes a 3.89 percent change in quantity demanded

in the opposite direction. Therefore, companies should decrease the price to increase revenue

from soft drinks.

b) Point income elasticity

𝐼 ΔQ
𝑃𝐼𝐸 = ∗
𝑄 ΔI

𝐷𝑒𝑚𝑎𝑛𝑑 = 147.083 + 7.432 6𝑃𝑎𝑐𝑘 𝑃𝑟𝑖𝑐𝑒

ΔQ
= 7.432
ΔI

Average demand and income are 1156.35 and 60.89

226.48
𝑃𝑃𝐸 = ∗ 7.432 = 0.39891
1156.35

As shown, a 1 percent change in income causes a 0.398 percent change in quantity

demanded in the same direction. Therefore, soft drinks are normal goods, since an

increase in income increases the demand.

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c) Point cross-price elasticity

𝑃N ΔQ P
𝑃𝐶𝑃𝐸 = ∗
𝑄O ΔPQ

𝐷𝑒𝑚𝑎𝑛𝑑 = 147.083 − 19.87 6𝑃𝑎𝑐𝑘 𝑃𝑟𝑖𝑐𝑒

ΔQ
= −19.87
ΔP

Average demand and price of water are 1156.35 and 27.37

27.37
𝑃𝐶𝑃𝐸 = ∗ −19.87 = −0.470
1156.35

As shown, a 1 percent change in price of water causes a 0.47 percent change in quantity

demanded in the opposite direction. Therefore, there is negative relationship between water

and soft drink.

Conclusion

As revealed, the model is not only significant in explaining the changes in demand for

soft drinks but also accounts for 88.27% of the variation in demand for the soft drinks hence

the model is adequate in predicting or explaining the changes in demand. Among the 5 factors,

it is evident that only 2 were significant, which include 6-pack price and population.

However, there are potential problems in the results, for instances, there was a positive

relationship between price of water and demand of the soft drinks, this is unlikely since an

increase price of good will lead to a decrease in its demand, which will result in increased

demand for the substitute good. Consequently, the results showed a positive relationship

between cost of living and demand, which is unexpected since the increase in cost of living

decrease the purchasing power hence less money can be spent on the purchase of soft drinks.

The above results need further research to test the hypothesis.

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References

Colchero, M., Salgado, J., Unar-Munguia, M., & Hernandez, M. (2015). Price elasticity of the

demand for sugar sweetened beverages and soft drinks in Mexico. eCONOMICS AND

hUMAN bIOLOGY, 129-137.

Hanks, G. (2017, September 26). Three Factors That Impact the Demand for Soft Drinks.

Retrieved from BIZ Fluent: https://bizfluent.com/list-7313913-three-impact-demand-

soft-drinks.html

Kuczmarski, M., Mason, M., Schwenk, E., Evans, M., & Zonderman, A. (2010). Beverage

Consumption Patterns of a Low-Income Population. Topics in Clinical Nutrition, 191-

201.

Technavio. (2021). Soft Drinks Market by Product and Geography - Forecast and Analysis

2021-2025. London: Technavio.