Soft Drink Industry: Competition and Structure

This work aims to study the way the soft drink industry, a major part of the global beverage industry. The research will provide an introduction of the soft drink industry. Using Porter’s “5 Forces” framework, the research seeks to map the structure of the industry. The research will further analyze the macro-environment of the industry using the PESTEL framework to identify changes in the industry. In addition, the research seeks to identify the structural drivers of change within the industry. The study undertaken intends to focus also on learning about the current stage of industry life cycle and what are the driving traits that make this industry worthwhile.

From the above scenarios, the research will identify the most likely scenario for the future of the industry

INTRODUCTION

The Soft Drink Industry consists of establishments primarily engaged in manufacturing non-alcoholic, carbonated beverages, mineral waters and concentrates and syrups for the manufacture of carbonated beverages.

Principal activities and products:

• Aerated waters;
• Carbonated beverages;
• Mineral and spring waters;
• Soft drink concentrates and syrup; and
• Soft drink preparation carbonating. (Hrsdc, 2005)

The soft-drink battleground has now turned toward new overseas markets. While once the United States, Australia, Japan, and Western Europe were the dominant soft-drink markets, the growth has slowed down dramatically, but they are still important markets for Coca-Cola and Pepsi. However, Eastern Europe, Mexico, China, Saudi Arabia, and India have become the new “hot spots.” Both Coca-Cola and Pepsi are forming joint bottling ventures in these nations and in other areas where they see growth potential. (Fargos, 2005)

Soft drinks are the largest beverage market segment in the global market and are forecasted to reach approximately $550bn in 2013 (business insights, n.d).

The key players in this industry are:

• Coca -Cola Company
• Pepsi Co
• Cadbury
• Nestle

Porter’s Five Forces

Bargaining Power of Buyers

Different level of bargaining power exist among the group of buyers

Vending machine – no buyer bargaining power

Fast food chain- more bargaining power

Bargaining Power of Suppliers

Bargaining power of suppliers is weak. The ingredients are easily available and there are many suppliers, reducing company’s switching cost. Many substitutes for sugar can be used like corn syrup ,sweetener.

Threat of Substitutes

The threat of substitutes can be reduced by expanding the products such as non carbonated drinks like juice ,tea, coffee and plain water. Alcohol is a threat too esp. as these companies don’t manufacture alcoholic beverage. But due to social, time and health constraints it’s moderated.

Rivalry among Competing Firms

one could characterize the soft drink market as a duopoly between Coke and Pepsi, resulting in positive economic profits. There is intense rivalry between coca-cola and Pepsi. there is no price differentiation and consumer has no brand loyalty.

Threat of New Entrants

It would be nearly impossible for a new bottler to enter the industry because of the tremendous market presence of Coke, Pepsi, and a few others .Soft drink industry require substantial capital investment, which would deter entry. Further existing bottlers had

exclusive territories in which to distribute their products

PESTEL ANALYSIS

(P)olitical Factors

Non-alcoholic beverages fall within the food category under the FDA. The government plays a role within the operation of manufacturing these products in terms of regulations. There are severe penalties set by the government on companies if they try to violate the laws. (Pbawa, n.d.)

(E)conomic Factors

There is a deep impact of Recession on Soft drink industry. If cost of raw material rises than production costs will increase. The companies are vulnerable to exchange rate fluctuations, resulting in a drop in profits through foreign currency earned versus production investment.

(S)ocial Factors

Many people are concerned about their healthier lifestyles. They are switching to bottled water and diet colas instead of beer and other alcoholic beverages. Consumers from the ages of 37 to 55 are also increasingly concerned with nutrition. They are becoming more concerned with increasing their longevity

(T)echnological Factors

The new technology of internet and television which use special effects make some products look attractive. This helps in selling of the products. Introduction of cans and plastic bottles have increased sales for Coca-Cola as these are easier to carry .As the new technology in packaging system rise the production higher.

(E)nvironmental Factors

Soft drink industry degrade the environment by transport and fuel wastage ,industries production and waste process. They are required to have more eco friendly products and practices now. While coca cola and pepsi both are emphasizing on recycling of cans.

(L)egal Factors

Legal restrictions are put in place so that companies’ products do not fool and harm the consumer. Companies are required to aware the consumer about negative health impact of soft drink and also mention the ingredients and warning on product.

Structural Drivers of change

Social/demographic

The consumer has slowly become more health conscious. . Changing consumer demographics resulting in changing consumer tastes and increased demand for healthier products. There is a increased in competition from other non-alcoholic beverages, such as energy drinks and sports drinks.

Packaging and distribution

The majority of soft drinks are sold in aluminium cans and PET plastic bottles. They are also sold in bulk through soda fountains. Bottles, most of which comprise PET plastic, Only a very small portion of soft drinks are still packaged in glass bottles .Companies are trying to make packaging more eco friendly such as many companies have introduced re-sealable packs which can be resealed after drinking.

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The industry distributes its products through supermarkets and grocery stores, drug stores, convenience stores and gas outlets, mass merchandisers and warehouse outlets. The foodservice and hospitality industry, in particular fast food outlets, is another method of distribution. Vending machines also provide a distribution channel for these products. Now the companies can directly sell to the consumer, reducing their dependence on distributors, decreasing costs and increases direct contact with the consumers. (Hrsdc, 2005)

Industry Life Cycle

The soft drinks market is now in the matured stage of the life cycle. Growth in the industry has remained stagnant. It is natural for product to go in decline stage but coca cola and Pepsi

Delay this decline by constantly developing the product or brand in order to extend the cycle.

Coca Cola has maintained its leadership for several years. The reason behind is that it constantly developing its brand image and reinforcing the core product benefit of taste and refreshment to ensure that brand remain in maturity stage. . As in a mature industry, it is characterised by high competition, price wars and competitive advantage through economies of scale. As in their domestic market is saturated so many companies are now turned towards overseas markets. Another way to extend the product in a life cycle is to adapt it as consumer ‘s needs change. For example when consumer’s attitude towards health and diet is changing than coca cola has introduced diet coke. Also these companies have aggressive and high advertising spends in order to maintain a reminder of their products in the minds of the consumers. (Irish Times, 2000)

Future Scenario

The soft drink industry can have 3 possible scenarios in its long term future which are as follows:-

Health conscious

Now days consumer are more concerned about their health. Consumers are also aware of the negative health impact of soft drinks (esp. carbonated), like lowering bone density, obesity etc. So consumers are looking to the healthier options. So may be the soft drink industry will decline or will be rooted out of the market. Due to the negative image of the soft drink industry ,there may be some restriction or limitation on supply just like hard drink industry. There may be age or quantity restriction like in alcohol or tobacco. This may lead to drop of sales for soft drink industry. Or it could carry on at the same rate as now with steady and predictable growths. There already is a growing demand for healthy juices, fruit drinks, cereals etc. thus the industries should continue product innovation and expansion of their product line.

Diversification and Market share

As saturation is taking place in soft drink industry , companies will start diversifying into new product categories and markets. Also, having a diverse product line will make the industry very stable, which is appealing to investors and creditors.

Soft drink industry could diversify into many segment. .. So they should diversify according to the consumer needs. Kids segment will be another market that companies will directly begin to target because this is the market where soft drink industry get most of it sales. So there may be low calorie drinks that will do good for the kids and will be the trend in all households. Soft drink industry also diversify on alcoholic beverages. They will make the combination of little percent of alcohol with soft drink which is already popular to attract the hard drink customers. As alcohol is a substitute threat for soft drink this would minimize their risk.

Another Possible future is, to expand their global market share. 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. So soft drink should take over the local drinks in different countries. Each country has its own local product based on traditional flavours and tastes. The soft drink companies could expand into this new market too. So soft drink industry should acquire local companies and manufacturing these drinks on a mass scale.

Special drinks

By continually introducing new products, soft drink industry will be able to increase their profits and allow the company to continue to grow. They should introduced special drinks to attract the customer . The global soft drinks market is estimated to reach a value of around $ 49.9 billion by the end of 2014. As with all functional soft drinks (FSDs), the original target segment who initially bought this concept – 16 to 30 year olds – are growing older and entering a different lifecycle that requires less energy stimulation.

Maintaining interest in the sports drinks sector will be vital in order for steady growth to continue. Sports drinks glucose enhancing drinks and all others that specifically boost certain needs of the body Along with new and innovative flavours, which also require a level of familiarity and recognition is important for competing in the saturated soft drinks industry. Consumers also want to see that the product is naturally good for them . The more portions of fruit or vegetables a drink contains so that it tastes good over a normal soft drink

Most Likely Scenario

The most likely scenario will be the diversification and expansion for the future of the industry. As this industry is already in saturated stage so this scenario will be very helpful. There will be some stage when people get bored with the soft drinks. . Diversification and expansion will create more scope for innovation, profits and new market in these sectors individually by sharing of customers and resources and also enhance performance of the core industry.

If the industry wants to keep moving and doesn’t want to slipped in decline stage than industry have to adopt the diverse and expand strategy in other segments to keep profit going.