The Analysis of Demand for Non-Alcoholic Beverages in the US - Case Study Example

The Analysis of Demand for Non-alcoholic Beverages in the US

Nowadays, the world has experienced the rapid development and constant increase in population. These trends are directly interrelated with each other. In addition, they provide a significant effect on demand for various products as the more people live, the more products and services are needed for people’s well-being. Therefore, demand for different products always changes. In turn, the US non-alcoholic beverage market is one of the most complicated and well-established markets in the world. In general, during the period from 1996 to 2013, the market had experienced the record growth and increase in demand for non-alcoholic drinks. Nevertheless, since 2013, the market faced a downturn in growth, as well as slid in sales. Thus, this paper is aimed at an investigation and comprehensive analysis of demand for the non-alcoholic beverage drinks in order to explain what caused these negative trends of the industry.

Primarily, it would be appropriate to determinate the non-alcoholic beverage industry. It is the market of drinks that have less than 0.5% of alcoholic content by volume. The most consumed non-alcoholic beverages in the world are bottled water, coffee, energy drinks, soft drinks and juices. For instance, the products such as Coca-Cola, and Pepsi are the most popular drinks on the market. The major non-alcoholic beverage companies in the United States of America are Coca-Cola Co., PepsiCO, and Dr. Pepper Snapple. In total, these companies have the largest market share. Carbonates, as a segmentation, have the largest share by value on the market. Therefore, it would be appropriate to base an analysis on this segment. According to Meghan Deichert and Meghan Ellenbecker, “market size, growth rate, and overall profitability are three economic indicators that can be used to evaluate the soft drink industry” (2008). Today, the market size of the US beverage market is $47,2 billion and the growth rate is 5%. However, in 2013, the growth rate of the segment was 11.8%. Moreover, the report, featured online by Fortune magazine, showed the total sales volume of carbonated soft drinks slid 0.9 percent from 2013 to 2014 (Kell, 2015). After this year, the sales volume has significantly slowed down. It is obvious that it was caused by the reduction of the demand for the drinks. In turn, it leads to a serious question with regard to what caused a change of demand for carbonates.

It is necessary to use particular microeconomic tools in order to discover the problem. Instrumentation of microeconomics is tools that allow to explore, explain, and predict the development of microeconomic processes. In order to explain this issue, it would be appropriate to use a law of demand, as well as demand determinants. The law of demand says that the higher the price, the lower the quantity demanded, because consumers’ opportunity cost to acquire that good or service increases, and they must make more tradeoffs to acquire the more expensive product (Hubbard, 134). In turn, the determinants of demand cause a shift in the demand curve when a determinants of demand changes. In order to investigate the change of demand properly, it would be appropriate to identify the main factors that affect overall demand for the soft drinks. Primarily, Demand represents the relationship between what goods and services cost and the amount that consumers are willing to purchase at a given price (Hubbard, 134). The five determinants of demand are the price of the good, income of buyers, tastes or preferences of consumers, expectations, prices of related goods or services that are either complementary, which purchased along with, or substitutes that purchased instead of (Hubbard, 221). In terms of the beverage market, this variety of factors should include price, the median income of buyers, quality, and advertising. The reason for such a sample is that price and income of buyers are the essential determinants of demand while advertising forms customers’ expectations and preferences. Furthermore, quality is in direct ratio to the desire of buyers to purchase substitutes.

The first object of the research is a price for soft drinks. The main aim is to investigate the interrelation between changes of demand and prices. To be more specific, it is necessary to analyze a change of average prices for soft drinks during the last four years in order to understand the extent of price influence on the demand. Nowadays, the average price of 2 litters of a soft drink is $2,32. In 2012 and 2013, the price was almost $1.5. In 2014, the price was $1.5-1.75. In 2015, the price range from $1.9-2.3 (Bailey, 2016). It is necessary to notice that the price always depends on the place of purchasing. For instance, in the hotels or restaurants, the prices of the drinks are vastly higher. Thus, as can be seen, the price level has experienced a gradual increase from 2012 to 2015, regardless of the influence of the external factors. In addition, the reduced demand of the market appeared in the end of 2013; however, the average price for soft drinks had not changed over the two years of the slid in sales. Hence, it would be appropriate to assume that the price level has gradually changed due to the county’s inflation. Moreover, the average price for a soft drink has not been able to provide a vast impact on the customer decision as the prices had not changed during the first years of the reduction of the demand for the non-alcoholic beverages, especially, soft drinks segment.

The second object to investigate is income of buyers. Thus, it would be proper to determine the target audience of the market. Subsequently, it is necessary to research the level of the target audience’s income for the last six years in the row. According to the Coca-Cola Co., which is the market leader, the company tries to satisfy the needs of a whole line of different people. They have drinks that target different, age groups, ethnic groups, sexes, lifestyles, and the like (Coca-Cola Co., 2016). Thus, the core market of the industry includes individuals of all ages, lifestyles, ethnic groups, and sexes. Drawing on Tami Luhby, the typical American family income was $53,657 in 2014, barely changed from $54,462 a year earlier, the U.S. Census Bureau reported Wednesday. In 2012, the average family income was $55,032. Similarly, in 2015, the median household income was $53,332 (Department of Numbers, 2016). Hence, there is a noticeable gradual reduction of median income of buyers in the United States of America. Clearly, the improving economy and falling unemployment have yet to adequately lift the living standards of middle- and low-incomes. Median income remains lower than it was in 2007. Taking into consideration the data, it can be concluded that the median income of the US population has reduced by almost 1% each year from 2012 to 2015.

The third determinant of the soft drinks segment demand to analyze is the quality of the products. According to the fact that the main players on the market are PepsiCo and Coca-Cola Co., it would be appropriate to investigate their approach to product quality and standards. The Coca-Cola has a specific strategy to quality as it is one of the company’s competitive advantages. “The organization measures key product and package quality attributes by focusing on ingredients and materials and regulating manufacturing, bottling and distribution, of The Coca-Cola Company products to ensure those products meet Company requirements and consumer expectations in the marketplace” (Staff, 2015). PepsiCo is a company, which has the second largest market share of the US beverage market. Drawing on the official website of the company, “PepsiCo is dedicated to producing the safest, highest-quality and best-tasting beverages and foods in every part of the world. Developing and maintaining robust food safety programs is how we assure safety for every package, every day in every market” (PepsiCo, 2016). The reason is that in order to successfully compete with Coca-Cola on the market experiencing fierce competition and the high power of buyers, the organization certainly has to represent a perfect performance with regard to the quality and ethos. Therefore, taking into consideration the analysis, it can be assumed that the quality of the products on the beverage market has not worsened. In turn, it has been enhanced due to a generous amount of innovations and new approaches to quality standards. In addition, it is obvious that in the market of such a size, the companies are forced to represent products of the highest quality as the customers have a large selection of substitutes.

The last object to investigate is advertising. It would be appropriate to analyze both negative publicity of different institutions and marketing activity of the companies aimed at the increase in sales and brand awareness in order to understand the degree of impact of this factor on the demand for soft drinks. Nowadays, Coca-Cola is the most recognizable brand in the world. In addition, the company's advertising spending was almost $4 billion, in 2015 (Nedobour, 2016). The company has a specific approach to the marketing as it promotes not only products but also the lifestyle of people. The main idea is to stimulate the customers to purchase their products in order to feel as a part of the enormous community. Besides, the company has a great number of partners around the world. For instance, McDonald's is one of the largest partners of the company. In turn, PepsiCo shows an outstanding and specific approach to marketing in order to compete with Coca-Cola Co. efficiently. Nevertheless, the company is forced to adapt to the conditions established by Coca-Cola. Hence, the organization focuses on the promotion of the lifestyle, as well. Nevertheless, the main feature of PepsiCo’s approach is to make a usage of public endorsement. For instance, David Beckham and Lionel Messi are the representatives of the brand.

On the contrary, negative publicity with respect to the harm of soft drinks to the health has made a significant contribution to the reduction of the products’ popularity. Today, the American population is more likely to avoid fat, sugar, carbohydrates and the like; thereby, giving up consummation of the soft drinks. The main contribution to the reduction of the products’ popularity are the anti-soft drinks campaigns launched by the institutions, such as the American Diabetes Association, that spotlighting harm of soft drinks to the people's health. Furthermore, there is a purposeful propaganda of healthy lifestyle aimed at preventing obesity. As a result, “Calorie-counting Americans have been backing away from sugary soda for years. But more lately they have been fleeing diet soda, concerned about the healthiness of artificial zero-calorie sweeteners such as aspartame” (Esterl, 2015). Besides, the policy makers have provided a negative effect on the products' popularity by means of the announcement of new taxation on products with a high sugar content. The tax is set to launch in April 2018 and will put up the price of drinks which contain at least 5g of sugar per 100ml such as Fanta, Sprite, and Schweppes tonic. Nevertheless, according to the conducted analysis of the advertising, it can be concluded that negative publicity had made a significant contribution to the reduced demand due to it credibility and considerable support of the government.

In conclusion, the paper represented the investigation and detailed analysis of demand for the soft drinks as the dominant products of the US non-alcoholic beverage market. There were applied the law of demand and examination of demand determinants, as tools of microeconomic analysis, in order to research the reasons for the US beverage market slowdown and reduction of sales over the period from 2012 to 2015. According to the investigation, there was discovered that the prices and quality of soft drinks have not affected the demand over the investigate period as they had not experienced significant changes. Nevertheless, the median income of buyers and advertising have contributed a lot to the reduced demand. The reason is that the median income of the US population has reduced by almost 1% each year from 2012 to 2015. Meanwhile, various institutions and policy makers have facilitated negative publicity of the products by means of promoting healthy lifestyle. In addition, there has been conducted anti-obesity campaign that directly provides a negative effect on the demand, the market’s growth rate and sales volume.