Soft Drink Industry Analysis - Essay Example

Soft Drink Industry Analysis Introduction For every industry analysis, to make an impact on the proceedings of the central thought process is very important. We need a good strategy and idea to understand the position of the firm. Strategies can help us to understand the external environment and look for the changes to be required in order make an impact. So analysis of the situations is quite important in greater functioning of the firm. This is can be supplemented with idea of profitability of the business venture. To understand the functioning of the firm with respect to market trends and analysis, industry analysis is very important and critical. The important factors which we need to consider are rival competitors, threats to the present players from the new entrants and finally the suppliers and consumers in general as a whole market share competition. The reason we are considering Industry analysis for the soft drink industry is that we can understand the overall landscape of the industry and thus can identify the growing trends, opportunities and possible threats. Whenever we consider the industry, one thing to be noted is that supplier and buyer are powerful entities in the whole process schema. Now that we have realized the need and importance of industry analysis in any industry, let's go further by listing the main features to be included while reasoning the industry analysis. The first step in industry analysis is to define the industry or the sector which will be analyzed. In our case this will be soft drink industry or we can say the market of non alcoholic beverages. The second step in the process is to identify the key players and competitors in the market and also identify the customer target base. After identifying the players we need to judge the strengths, weakness and other factors. We also need to understand and identify the market trends in the industry. The main purpose of industry analysis is to identify the threats and counter them so as to improve the whole structure of the industry External Analysis This is done by using the more successful analysis procedures of SWOT and PEST It is also to be noted that Soft drink industry is affected socio-economic environmental factors firstly the concept of globalization. With the growing use of the internet and other electronic technologies, global communication is rapidly increasing. This is allowing firms to collaborate within the country market and expand into world markets. It has driven competition greatly as companies strive to be first-movers. The second change factor is innovation. In today's globalizing society, being ordinary or plain is not good enough. Differentiation from other rivals has become a norm to make a niche in the market. Thus these all analysis gives us a broader outlook of the whole industry and gives us a perspective of the how the industry is shaping up. We conclude by list out the SWOT and PESTLE Analysis of the whole industry. SWOT Analysis Strengths 1. Competitive Industry among the beverage section 2. Spread around the globe- market share 3. Global Brand of the players Weakness 1. Too many big players. 2. Difficult for small players to make an impact 3. Emergence of Substitute product Opportunities 1. Emerging markets 2. Innovation in products 3. Globalization .Better chances to increase customers Threats 1. Substitute products 2. Alcoholic beverages 3. Stagnant economy in big economic sections PEST Political 1. Stable Political Situation in big share places 2. Administration showing importance to business value Economic 1. Stable and emerging economies in countries like Europe and Asia 2. Large number of Buyers available in countries 3. Prominent presence of giants in economic areas Social 1. Brand value among consumers 2. Competitive industry among all others 3. Maximum in Europe and emerging in Asia Technological 1. Product innovation using technology 2. Usage of modern techniques to produce better quality drinks Internal Analysis (including market trends) Let's now look at soft drink industry in detail. It is explained (Barbara Murray, 2006) that the soft drink industry for years has been on the battle storm between the soft drink giants Coke and Pepsi but as time passed the industry's giants have begun relying on new product flavors and started looking to noncarbonated beverages for growth. In order to fully understand the soft drink industry, the following should be considered: the dominant economic factors, five competitive sources, industry trends, and the industry's key factors. The three key factors which can be used a preset in evaluating soft drink industry are market size, growth rate and overall profitability rate. An industry analysis through Porter's Five Forces reveals that market forces are favorable for profitability. Both concentrate producers (CP) and bottlers are profitable. These two parts of the industry are extremely interdependent, sharing costs in procurement, production, marketing and distribution. Many of their functions overlap; for instance, CPs does some bottling, and bottlers conduct many promotional activities. The industry is already vertically integrated to some extent. They also deal with similar suppliers and buyers. Entry into the industry would involve developing operations in either or both disciplines. Beverage substitutes would threaten both CPs and their associated bottlers. Because of operational overlap and similarities in their market environment, we can include both CPs and bottlers in our definition of the soft drink industry. In 1993, CPs earned 29% pretax profits on their sales, while bottlers earned 9% profits on their Sales, for a total industry profitability of 14%. This industry as a whole generates positive economic profits. It is understood by statistics and numbers that soft drink consumption has a market share of almost fifty percent when we consider the group of non alcoholic beverages. It is also found out (Datamonitor, 2005) that the total market value of soft drinks reached $307.2 billion in 2004 with a market value forecast of $367.1 billion in 2009. Further, the 2004 soft drink volume was 325,367.2 million liters. Clearly, the soft drink industry is lucrative with a potential for high profits, but there also exits some problems which needs to be looked into. The growth rate has been recently criticized due to the U.S. market saturation of soft drinks. Also other factors which are causing problems are the other growing sectors of the non-alcoholic industry which includes beverages like tea and coffee (11.8%) and bottled water (9.3%). Sports drinks and energy drinks are also expected to increase in growth as competitors start adopting new product lines. Profitability in the soft drink industry will remain rather solid, but market saturation especially in the U.S. has caused analysts to suspect a slight decrease of growth in the industry and hence, soft drink giants are establishing themselves in alternative markets such as the snack, confections, bottled water, and sports drinks industries (Barbara Murray, 2006).Also the point we need to understand is that in order for soft drink companies to continue to grow and increase profits they will need to diversify their product offerings. Apart from the normal economic factors geographical factors also plays key role in analysis. It also explains some of the economic features found in the soft drink industry. We can understand from the present day soft drink market that there are two biggest competitors when it comes to market size and soft drink consumption statistics. It is no wonder that these two brands have become as one of the most celebrated brands when it comes to the concept of branding and leading brand brands in the world. They are Coca-Cola and PepsiCo. Apart from these the other most favorite and widely known brand is Cadbury Schweppes. Apart from these three brands the other players who feature in this race of Soft drink wars are Hansen Natural Corp, Nestle SA and Danone. Bear in mind that we are considering as the overall global market share and scenario and not just relegated to any particular country. We can understand from the following table the countries which have big share when it comes to this industry's market size. We can also present a clear picture bring the big three companies market sales so as to understand the situation more clearly. Here we show the sales of Coca Cola in the year 2004 which us an idea that coca cola has been a dominant player in both Europe and Asia Coca Cola 2004 Sales $ mil & % share Europe/Eurasia/Middle East 7,195 33 North America 6,643 30 Asia 4,691 21 Latin America 2,123 10 Africa 1,067 5 Corporate 243 1 Total 21,962 100 Source (Murray, Barbara. 2006a) the Coca-Cola Company. Hoovers. Retrieved March 07, 2007, from http://premium.hoovers.com/subscribe/co/factsheet.x htmlID=10359) Now we present the sales statistics of PepsiCo which from numbers can said that it a very big player in North America Pepsi Co. 2004 Sales $ mil. % of total US 18,329 63 Mexico 2,724 9 UK 1,692 6 Canada 1,309 4 Other countries 5,207 18 Total 29,261 100 Source: Murray, Barbara. (2006b). Pepsi Co. Hoovers. Retrieved February 13, 2006, From http://premium.hoovers.com/subscribe/co/profile.xhtmlID=11166 Business level and corporate level analysis One thing to be noted is that the ease of entry and exit does not cause competitive pressure on the major soft drink companies. It would be very difficult for a new company to enter this industry because they would not be able to compete with the established brand names, distribution channels, and high capital investment. Likewise, leaving this industry would be difficult with the significant loss of money from the fixed costs, binding contracts with distribution channels, and advertisements used to create the strong brand images. This industry is well established already, and it would be difficult for any company to enter or exit successfully. Few information statistics of three big giants gives out the whole story. According to the Coca-Cola annual report (2004), it has the most soft drink sales with $22 billion. The Coca-Cola product line has several popular soft drinks including Coca-Cola, Diet Coke, Fanta, Barq's, and Sprite, selling over 400 drink brands in about 200 nations (Murray 2006a). PepsiCo is the next top competitor with soft drink sales grossing $18 billion for the two beverage subsidiaries, PepsiCo Beverages North America and PepsiCo International (PepsiCo Inc., 2004). PepsiCo's soft drink product line includes Pepsi, Mountain Dew, and Slice which make up more than one quarter of its sales. Cadbury Schweppes had soft drink sales of $6 billion with a product line consisting of soft drinks such as A&W Root Beer, Canada Dry, and Dr. Pepper (Cadbury Schweppes, 2004). Power of suppliers (supplier bargaining power) Another thing to be noted is the power of suppliers when it comes to production of these soft drinks. If we look at the scenario of coke and Pepsi we can understand the power of supplier. The inputs for Coke and Pepsi's products were primarily sugar and packaging. Sugar could be purchased from many sources on the open market, and if sugar became too expensive, the firms could easily switch to corn syrup, as they did in the early 1980s. So, suppliers of nutritive sweeteners did not have much bargaining power against Coke, Pepsi, or their bottlers. NutraSweet, meanwhile, had recently come off patent in 1992, and the soft drink industry gained another supplier, Holland Sweetener, which reduced Searle's bargaining power and lowering the price of aspartame. With an abundant supply of inexpensive aluminum in the early 1990s and several can companies competing for contracts with bottlers, can suppliers had very little supplier power. Furthermore, Coke and Pepsi effectively further reduced the supplier of can makers by negotiating on behalf of their bottlers, thereby reducing the number of major contracts available to two. With more than two companies vying for these contracts, Coke and Pepsi were able to negotiate extremely favorable agreements. In the plastic bottle business, again there were more suppliers than major contracts, so direct negotiation by the CPs was again effective at reducing supplier power. Another way to look at the whole scenario is to look it from supplier scenario. Suppliers to Coca-Cola are bottling equipment manufacturers and secondary packaging suppliers. Although Coca-Cola does not do any bottling, the company owns about 36% of Coca-Cola Enterprises which is the largest Coke bottler in the world (Murray, 2006a). Since Coca-Cola owns the majority of the bottler, that particular supplier does not hold much bargaining power. In terms of equipment manufacturers, the suppliers are generally providing the same products. The number of equipment suppliers is not in short supply, so it is fairly easy for a company to switch suppliers. This takes away much of suppliers' bargaining power. The buyers of the Coca-Cola and other soft drinks are mainly large grocers, discount stores, and restaurants. The soft drink companies distribute the beverages to these stores, for resale to the consumer. The bargaining power of the buyers is very evident and strong. Large grocers and discount stores buy large volumes of the soft drinks, allowing them to buy at lower prices. Restaurants have less bargaining power because they do not order a large volume. However, with the number of people are drinking less soft drinks, the bargaining power of buyers could start increasing due to decreasing buyer demand (Murray, 2006a). The fundamental difference between CPs and bottlers is added value. The biggest source of added value for CPs is their proprietary, branded products. Coke has protected its recipe for over a hundred years as a trade secret, and has gone to great lengths to prevent others from learning its cola formula. The company even left a billion-person market (India) to avoid revealing this information. As a result of extended histories and successful advertising efforts, Coke and Pepsi are respected household names, giving their products an aura of value that cannot be easily replicated. Also hard to replicate are Coke and Pepsi's sophisticated strategic and operational management practices, another source of added value. Bottlers have significantly less added value. Unlike their CP counterparts, they do not have branded products or unique formulas. Their added value stems from their relationships with CPs and with their customers. They have repeatedly negotiated contracts with their customers, with whom they work on an ongoing basis, and whose idiosyncratic needs are familiar to them. Through long-term, in depth relationships with their customers, they are able to serve customers effectively. In this way, bottlers are able to grow the pie of the soft drink market. Their other source of profitability is their contract relationships with CPs, which grant them exclusive territories and share some cost savings. Exclusive territories prevent intra-brand competition, creating oligopolies at the bottler level, which reduce rivalry and allow profits. Between 1986 and 1993, the differences in added value between CPs and bottlers resulted in a major shift in profitability within the industry. Exhibit 1 demonstrates these dramatic changes. While industry profitability increased by 11%, CP profits was raised by 130% on a per case basis, from $0.10 to $0.23. During this period, bottler profits actually dropped on a per case basis by 23%, from $0.35 to 0.27. Power of Buyers The soft drink industry sold to consumers through five principal channels. They are food stores, convenience and gas, fountain, vending, and mass merchandisers. Supermarkets, the principal customer for soft drink makers, are a highly fragmented industry. The stores counted on soft drinks to generate consumer traffic, so they needed Coke and Pepsi products. But due to their tremendous degree of fragmentation (the biggest chain made up 6% of food retail sales, and the largest chains controlled up to 25% of a region), these stores did not have much bargaining power. Their only power was control over premium shelf space, which could be allocated to Coke or Pepsi products. This power did give them some control over soft drink profitability. Furthermore, consumers expected to pay less through this channel, so prices were lower, resulting in somewhat lower profitability. National mass merchandising chains such as Wal-Mart, on the other hand, had much more bargaining power. While these stores did carry both Coke and Pepsi products, they could negotiate more effectively due to their scale and the magnitude of their contracts. For this reason, the mass merchandiser channel was relatively less profitable for soft drink makers. The least profitable channel for soft drinks, however, was fountain sales. Profitability at these locations was so abysmal for Coke and Pepsi and other soft drink players that they considered this channel "paid sampling." This was because buyers at major fast food chains only needed to stock the products of one manufacturer, so they could negotiate for optimal pricing. Coke and Pepsi found these channels important, however, as an avenue to build brand recognition and loyalty, so they invested in the fountain equipment and cups that were used to serve their products at these outlets. As a result, while Coke and Pepsi gained only 5% margins, fast food chains made 75% gross margin on fountain drinks. Vending, meanwhile, was the most profitable channel for the soft drink industry. Essentially there were no buyers to bargain with at these locations, where Coke and Pepsi bottlers could sell directly to consumers through machines owned by bottlers. Property owners were paid a sales commission on Coke and Pepsi products sold through machines on their property, so their incentives were properly aligned with those of the soft drink makers, and prices remained high. The customer in this case was the consumer, who was generally limited on thirst quenching alternatives. The final channel to consider is convenience stores and gas stations. If Mobil or Seven Eleven were to negotiate on behalf of its stations, it would be able to exert significant buyer power in transactions with Coke and Pepsi. Apparently, though, this was not the nature of the relationship between soft drink producers and this channel, where bottlers' profits were relatively high, at $0.40 per case, in 1993. With this high profitability, it seems likely that Coke and Pepsi bottlers negotiated directly with convenience store and gas station owners. So the only buyers with dominant power were fast food outlets. Although these outlets captured most of the soft drink profitability in their channel, they accounted for less than 20% of total soft drink sales. Through other markets, however, the industry enjoyed substantial profitability because of limited buyer power. Substitutes to soft drinks Through the early 1960s, soft drinks were synonymous with "colas" in the mind of consumers. Over time, however, other beverages, from bottled water to teas, became more popular, especially in the 1980s and 1990s. Coke and Pepsi responded by expanding their offerings, through alliances (e.g. Coke and Nestea), acquisitions (e.g. Coke and Minute Maid), and internal product innovation (e.g. Pepsi creating Orange Slice), capturing the value of increasingly popular substitutes internally. Proliferation in the number of brands did threaten the profitability of bottlers through 1986, as they more frequent line set-ups, increased capital investment, and development of special management skills for more complex manufacturing operations and distribution. Bottlers were able to overcome these operational challenges through consolidation to achieve economies of scale. Overall, because of the CPs efforts in diversification, however, substitutes became less of a threat. It is known that this industry is one of the most competitive industries present. All soft drink companies have to think about the pressures; that from rival sellers within the industry, new entrants to the industry, substitute products, suppliers, and buyers. One thing is that pressure from rival players in the market is the greatest competition among these players Coca-Cola, Pepsi Co., and Cadbury Schweppes are the largest competitors in this industry, and they are all globally established which creates a great amount of competition. Another thing is Brand loyalty, which adds as one element as another competitive pressure. The Brand Keys' Customer Loyalty Leaders Survey shows the brands with the greatest customer loyalty in all industries. Diet Pepsi ranked 17th and Diet Coke ranked 36th as having the most loyal customers to their brands. One change we see from the past is introduction of new products to stir up the sales and increase the customer base in the market. New entrants are not a strong competitive pressure for the soft drink industry. In addition, the soft-drink industry is fully saturated and growth is small. This makes it very difficult for new, unknown entrants to start competing against the existing firms. Another barrier to entry is the high fixed costs for warehouses, trucks, and labor, and economies of scale. Another idea to be considered while evaluating the industry is the usage of substitute products. Substitute products are those competitors that are not in the soft drink industry. Such substitutes for Coca-Cola products are bottled water, sports drinks, coffee, and tea. Bottled water and sports drinks are increasingly popular with the trend to be a more health conscious consumer. It is also very cheap for consumers to switch to these substitutes making the threat of substitute products very strong (Datamonitor, 2005). Other forces include suppliers and buyers which again is heavily favored to the big giants. The recognition of the strength of these forces helps to see where these players stand in the industry. Recommendations Looking towards the future, the most important recommendation to Soft drink manufactures is continuing product innovation and expansion of their product line. The soft-drinks industry is fully saturated with competitors. Also, the industry is no longer expanding, and market share is actually decreasing as more consumers are looking to healthier options. By continually introducing new products, soft drink industry players like Coca Cola and Pepsi will be able to increase their profits and allow the company to continue to grow. Also, having a diverse product line will make the corporation very stable, which is appealing to investors and creditors. Another recommendation would be to sustain or increase the global market share. For example Coca-Cola is very well-established globally, and is the global soft-drinks leader. This is very important to sustain because it is the source of the majority of their profits. If they lose global market share, their profits will decline dramatically. A final recommendation for Soft drink players is to maintain and try to increase their brand loyalty. For instance Diet Coke has the second highest brand loyalty of all the soft-drink competitors' brands, and solid advertising campaigns will help maintain the brand loyalty. They can also strive to obtain higher brand loyalty in all other brands, not solely Diet Coke. The brand loyalty is important because it will allow these players to sustain profits and maintain their market share. References: 1. American Beverage Association (2005). Soft Drink Facts. Retrieved March 09, 2006 from http://www.ameribev.org/variety/facts.asp 2. Cadbury Schweppes. (2004). Annual Report. Retrieved march 10, 2006 from http://www.cadburyschweppes.com 3. Datamonitor. (2005, May). Global Soft Drinks: Industry Profile. New York. 4. Hein, Kenneth. (2004). Brand Loyalty 2004. Retrieved March 10, 2007 from http://www.brandkeys.com/news/press/102504Brandweek.Loyalty.pdf 5. Murray, Barbara. (2006a). The Coca-Cola Company. Hoovers. Retrieved from http://premium.hoovers.com/subscribe/co/factsheet.xhtmlID=10359 6. Murray, Barbara. (2006b). Pepsi Co. Hoovers. Retrieved March 10, 2007, from http://premium.hoovers.com/subscribe/co/profile.xhtmlID=11166 7. Sicher, J. D. (2005). Beverage Digest/Maxwell ranks U.S. soft drink industry for 2004. Retrieved March 08, 2007 from http://www.beverage-digest.com/pdf/top-10_2005.pdf 8. The Coca-Cola Company. (2004). Annual Report. Retrieved March 07, 2007 from http://www.cocacola.com 9. PepsiCo Inc. (2004). Annual Report. Retrieved March07, 2006 from http://www.pepsico.com 10. Murray, Barbara. (2006e). Comparison Data. Hoovers. Retrieved February 13, 2006,from http://premium.hoovers.com/subscribe/co/fin/comparison.xhtmlID=10359 Read More