Decisions Have An Opportunity Cost That Require Tradeoffs

Developing a Soda Habit

Jul 26, 2012 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Households, International Trade and Finance, Macroeconomic Measurement, Uncategorized • 219 Views    No Comments

Why do Brazilians drink Coca-Cola?

Our story starts during 1990. Trying to cope with an 80% monthly inflation rate, Brazilian shoppers rushed to supermarkets early in the morning before higher price stickers replaced the old ones. In just one month, a $1 carton of eggs would cost $1.80.

You can imagine what a difference it made when Brazil got its staggering price increases under control. Purchasing power soared, the middle class grew and people bought more soda.

In a paper called, “Grab Them Before They Go Generic,” 2 researchers looked at Brazil’s new spenders. Curious about multinational consumer goods, they wondered whether demand would soar for a famous, heavily advertised brand like Coke as wealth grew in an emerging economy.

The researchers concluded that when the newly affluent started shopping, they had not yet formed a soda buying habit. If they initially bought a generic brand, they stayed with it, even when they could afford more. To get people to form a “premium habit” rather than a “frugal habit,” Coke cut its prices by 20% and according to the researchers, stopped the growth of Brazilian generics.

The paper from these 2 professors, one from Hebrew University and the other from Northwestern, applies far beyond Brazil to China, India, Turkey and Indonesia–to all emerging markets where the middle class is growing. Multinationals, they believe, should recognize the importance of shaping people’s buying habits as they develop.

If you want to listen to more about Brazil’s hyperinflation and how it was controlled, NPR’s Planet Money has a wonderful podcast. And here, The Economist quantifies the growth of the middle class in emerging economies. Finally, econlife looked at how Coca-Cola might have been too late in India for the newly affluent to form a premium habit when they selected Thums Up.

 

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