The purpose of this report is to analyze the carbonated soft drinks industry and PepsiCo strategy. First the report starts with analyzing the industry by focusing on PepsiCo’s market share in the market. Then, it discusses the relevant industry trends, such as the regulations that are followed by the carbonated soft drinks industry, and the new technologies that have been adapted by the carbonated soft drinks firms. Additionally, the firm’s position with the competitors has been analyzed by using the strategic group model. This report also measures the attractiveness of the industry using The Porter’s 5 Forces model. Furthermore, it discusses the key success factors in the carbonated drinks industry such as the size of the firm, and brand name. External and internal scanning have been included and recommendations have been provided based on the scanning. The second part of the report analyzes PepsiCo’s Strategy; it starts by mentioning the vision and mission of PepsiCo which basically state the future goals as well as describes their current operations with a brief critique. PepsiCo’s Generic business strategy have been discussed, it has been concluded to be Cost leadership. What comes next is PepsiCo’s Competitive advantages, and how it is doing through comparing its competitors such as the Coca-Cola. Then the report lists some of the challenges that are faced by PepsiCo. The report is concluded with a list of recommendations for PepsiCo in order to be able to maintain its competitive position in the market.
1. Industry Analysis
The chart below shows the dominant players in the carbonated soft drinks (CSD) industry according to Beverage Digest report issued on March 30, 2009. The results of this report are for the year 2008 (Sicher, 2009, p.2).
Coca Cola has the largest market share accounting for 43%, followed by PepsiCo with 31% and Dr.Pepper Snapple Group Inc. (formerly Cadbury Schweppes) with 15% of the market. The remaining 11% is distributed amongst other CSD companies such as Cott Corp, National Beverage, Red Bull, Big Red, Rockstar, Private label and others.
Moreover, the top 10 CSD brands in the U.S for the year 2008 were ranked by market share as follows (Sicher, 2009, p.2).
Brands
Company
Market Share
Coke
Coca-Cola
17.3%
Pepsi-Cola
PepsiCo
10.3%
Diet Coke
Coca-Cola
10%
Mountain Dew
PepsiCo
6.8%
Dr.Pepper
Dr.Pepper Snapple Group(DPS)
6.1%
Diet Pepsi
PepsiCo
5.7%
Sprite
Coca-Cola
5.6%
Fanta
Coca-Cola
1.8%
Diet Mountain Dew
PepsiCo
1.8%
Diet Dr.Pepper
Dr.Pepper Snapple Group(DPS)
1.6%
With regard to individual brands, Coke was ranked first with 17.3% market share and Pepsi-cola was in second place with a lower market share of 10.3%. Additionally, the total market share of all Coca-cola brands adds up to (34.7%) which still surpasses those of PepsiCo (24.6%).
To be able to give an in-depth analysis and evaluation of the Soft Drink industry, the following factors should be considered:
The relevant industry trends and the most noticeable changes in the industry.
The strategic group map.
The industry attractiveness using Michael Porter five forces model.
A. Relevant industry trends
Industry Growth
The graph below shows the performance of the CSD market from 1990 up to 2008. It is observed that the industry faced a sharp decline in growth starting from 2005, where the percent volume change fell below zero. This was followed by a further decline in growth rates: -0.6% in 2006, then -2.3% in 2007 and -3% in 2008 (Sicher, 2009, p.1).
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Conversely, the energy drink companies were experiencing a positive growth. Hansen Natural, which has both soft drinks and energy drinks in its portfolio of products, witnessed a +3.3% CSD growth. Additionally, Red Bull’s volume also increased +5.2%. Although Hansen Natural and Red Bull make up a small portion of the total market share pie, the increase in their growth rates indicates that PepsiCo has to pay attention to them.
Political Factors:
There are several political factors that influence the soft drinks industry:
Obey food, Drug and cosmetic acts: the process of producing and distributing the soft drinks in the market is subjects to many federal laws such as the food, drug and cosmetics acts. It is also subject to American with disabilities acts. The presence of these laws helps create a healthy environment for the consumers. This will limit the potentials of new entrants in this industry.
Environmental laws & regulations: these laws enforce packaging, recycling, water and energy policies to make sure the CSD industry operates in a healthy environment. This leads to making the soft drink industry more attractive for consumers.
Double Taxation: Another political factor is that companies operating in the industry are obligated to tax payments for the products they offer and distribute in each country they operate within. Hence, this leads to making the industry less attractive because operating firms are subject to double taxation policies.
Economical Factors:
Inflation in diesel prices: it is an important factor affecting the CSD industry. Since, the CSD relies on trucks to distribute its diverse end line products; trucks are subject to inflation in fuel prices. Since the consumption of fuel is the core activity, diesel prices are subject to inflation depending on the market conditions. Yet, the possibility of a market crisis rises.
Foreign exchange rates fluctuations: Carbonated soft drinks firm’s revenues are affected by exchange rates fluctuations as well as profits and the cost of raw materials. Due to the weak economic growth the industry will suffer heavily by changes in exchange rates. Thus, profits and cost are going to be lower and higher respectively.
Socio cultural Factors:
Obesity: Dr. Gabe Mirkin says: “A study from Harvard shows that of soft drinks may be responsible for the doubling of obesity in children over the last 15 years.” (Gabe Mirkin, 2004)
Recently, as the people are becoming more and more educated, the level of their health awareness is increasing. Obesity is becoming more and more apparent, leading to people taking good care of their health. Soft drinks are full with empty calories which cause obesity. The trend of obesity in children is rising since the soft drinks consumers are young and between the range of 14 and 30. In fact, studies done by the UCLA Center for Health Policy Research shows that “Adults who do drink one or more sodas or other sugar-sweetened beverages each day are 27% more likely to be overweight or obese.” (16 Facts About Soft Drinks and Obesity, 2009)
Change in life style & consumer tastes: Nowadays the consumer of the carbonated soft drink industry are shifting their tastes toward drinking more healthier drinks such as water and fresh juices instead of carbonated soft drink full with sugar that will have a negative effect on the consumer health in the long run.
People have become more health conscious for instance they are moving toward the consumption of healthier beverages such as water and fresh juices. It’s estimated that the consumption of juices will increase up to 20 % within the coming three years. (Health Conscious Chileans Switching to Non-carbonated Drinks, 2009)
Technological Factors:
Introducing new technologies in the soft drink industry has helped in developing the process of manufacturing. For example:
PDX technology:
It is a shockwave technology that helps in mixing the ingredients in an efficient way. Pursuit Dynamics, the supplier, said that this technology is most useful for the soft drinks industry. This technology is believed to help in cutting the cleaning time up to 80%. Also, it will also increase the processing speed and save power. (New technology targets diet soft drinks makers, 2009)
Other Noticeable trends:
Merger and acquisition:
It is very common in the soft drinks industry, it causes many firm to exit and then re-enter the industry. Many leaders in the soft drinks industry use acquisition in order to grow and increase their market share. For example, what PepsiCo did to expand into the energy drink sector, it acquired Quaker Oat, who already bought Gatorade. Hence, the competition on the products diversifications for a firm will increase.
Using glass bottles instead of plastic bottles:
Many soft drinks companies are moving toward using glass bottles because these bottles are more environmental friendly. According to G Karthikeyan, the manger of sales in Jabal Ali Container Glass, the demand for glass bottles has increased recently because some of the chemicals in the soft drinks can react with the plastic and caused serious diseases. Using glass bottles help that the soft drink bottle taste better and last for long time. (Sathish, 2010)
Banning soft drinks in schools:
The American beverage association has announced the removal of soft drinks from schools. It asked for the removal of full calorie drinks and the replacement will be the healthy, low calorie beverages. That decision has been made because the child obesity is increasing rapidly. The announcement said that in elementary schools, children can only have 100% fresh juices, low fat milk and water, while in high schools the students can have all types of diet beverages and sport drinks as well as the drinks available for the elementary schools.(FBD,2010)
B. Strategic Group Map
The strategic group map above shows the competitive positions of different competitors in the CSD industry. It consists of the five largest competitors in the industry. The axes represent two competitive characteristics: the product categories offered by each competitor and geographic coverage in terms of the number of countries. The size of the circles is proportional to the relative market share of the company. PepsiCo has offers the largest variety of product categories amounting to 10 categories, followed by Coca-cola which offers 7 categories. Dr.Pepper Snapple Group, Cott Corp and National beverage all offer 5 product categories, however these categories are differ slightly. Also, their geographic locations vary which explains why they are located on different points on the strategic group map.
The strategic group map was constructed using the information in the table below:
Geographic coverage
Product Categories offered
Coca cola
200 +
(“The coca-cola system”, n.d.)
1.Soft drinks
2.Energy drinks
3.Juices / Juice Drinks
4.Sports drinks
5.Tea and coffee
6.water
7.other [1]
Pepsi
150
(“Our history”, n.d.)
1.Soft drinks
2.Energy drinks
3.Juices / Juice Drinks
4.Sports drinks
5.Ready to drink tea
6.Ready to drink coffee
7.water
8.Dairy based drinks
9.Fruit flavored beverages
10.Frozen beverages [2]
Dr.Pepper Snapple Group
81
(“The best history on earth”, n.d)
1.CSD
2.Juices
3.Ready to drink tea
4.Mixers
5.Other Premium beverages [3]
Cott Corp
60
(“About us”, n.d.)
1.CSD
2.Energy Drinks
3.Juice Drinks
4.Tea
5.Water [4]
National Beverage
13
(“Overview”, n.d.)
1.CSD
2.Energy Drinks
3.Water
4.Fortified powders and supplements
5.Functionally enhanced juices and waters [5]
C. Michael Porter five forces model
Industry is classified as the Carbonated Soft Drinks Industry
Rivalry – HIGH
Rivalry in this market is very intense due to a number of factors such as the number of competitors, growth of the industry, product differentiation, switching costs and change in consumer tastes.
There are a few large competitors that are roughly equal in size. These competitors are Coca-cola with a market share of 43% and Pepsi with 31%. The market shares of Coca-cola and PepsiCo combined makes up more than 70% of the whole market. Thus, it allows these major competitors to watch each other closely. However, there are many other competitors that compete with these two giants and intensify rivalry. These include other soft drink companies (e.g. Dr.Pepper Snapple Group and National Beverage) and energy drink companies (e.g. Red bull and Rockstar).
As mentioned earlier, the CSD industry faced a 3% decline in growth in 2008. A declining growth rate indicated that the many competitors in the market will have to share the shrinking pie. Also, in an industry such as CSD, there is little opportunity for differentiation relative to other products (e.g. cars) which lowers switching costs for consumers.
The change in lifestyles which caused consumers to shift away from carbonated to non-carbonated soft drinks increased the level of competition. As a result, companies such as PepsiCo and Coco-cola had to adapt to these changes in demand by focusing on marketing and innovation (“Human sustainability”, n.d.).
Bargaining power of Buyers – MODERATE to HIGH
The buyers in this industry can be classified into two categories:
Those that buy in large quantities (Matthews & Knaus, 2006, p.2):
Supermarkets (31%)
Fountain outlets: e.g. restaurants (23%)
Vending machines (14%)
Mass merchandisers (6%)
Convenience stores/ Gas stations (5%)
Small grocers (4%)
Other: gas stations, drug chains, gas stations/minimarts, airlines and other channels of distribution (17%)
Those that buy in small quantities:
Final consumer
The first category of buyers has high bargaining power. Generally, in industries characterized with many suppliers and a few large buyers, the buyers capture a greater share of the profits. This is because they buy in bulk and they can easily switch between suppliers since the product is standard, lacks differentiation and is easily available in the market. Additionally, these buyers have the power to demand higher quality or more service because they buy in large quantities. An example of a buyer that buys in bulk is the large retail store, Walmart.
The second category of buyers is the end consumers. The fragmented nature of the buyer group and the low quantities purchased by them lowers their bargaining power. However, the bargaining power is increased due to the presence of substitutes, low switching costs. Thus, the bargaining power of end consumers is considered to be moderate overall.
Bargaining power of Suppliers- MODEATE to LOW
Before looking at the supplier group, it is important to first consider the types of input or raw materials that are used in this industry. These are: sugar, bottles, cans, water, ink and plastic. The inputs used are homogeneous and not differentiated which makes them readily available in the market.
The supplier group in this industry is not powerful and does not possess a high bargaining power. There are many suppliers which make the supplier group more fragmented than the industry it sells to. Also, the product or input is neither unique nor differentiated and the suppliers do not represent a high percentage of total costs in the industry.
One factor that may increase the bargaining power of suppliers is that consumers are more becoming more health conscious. This gives suppliers that offer healthier ingredients more bargaining power since they are smaller in number. Nevertheless, this bargaining power can be mitigated by having a long term agreement with the suppliers.
Threat of Substitutes: HIGH
Again, substitutes are classified into two categories: (1) Substitutes that come from distant industries, and (2) substitutes that come from within the industry- internal substitution.
Since we classified the industry as that of carbonated soft drinks, then the substitutes from distant industries will be non-carbonated soft drinks. These include juice, water, milk, tea, coffee and the like. On the other hand, substitutes from within the industry include CSD such as sodas and energy drinks.
Both types of substitutes pose a high threat because consumers’ switching costs between substitutes are low. Additionally, since people are more health conscious, they are more willing to substitute CSD with healthier alternatives.
Threat of New Entrants: Moderate to LOW
The entry barriers in the CSD industry are of different types, each having a significant effect on the threat of potential new entrants, these include:
Technical barriers: For instance, PepsiCo has an absolute cost advantage enabling it to achieve lower average costs. That is, even if an individual or company was able to discover Pepsi’s recipe, they will not be able to achieve the low costs of PepsiCo. This is because PepsiCo is a large company that has economies of scale.
Commercial Barriers: these barriers include brand name, reputation, access to distribution etc. In an industry like CSD, it is very difficult for a new entrant to compete effectively with the existing competitors that already have a large and loyal customer base. New entrants will have to put in a lot of marketing efforts and resources in order to convince customers to switch to their products. This will be time consuming and will also require a large amount of capital. Additionally, it is very difficult for new entrant to gain access to extensive distribution channels like those of Coca cola and PepsiCo.
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Financial Barriers: these barriers include capital requirement, access to financing etc. The bottling process requires a higher amount of capital than concentrate manufacturing since it is associated with higher fixed assets. For concentrate manufacturing, one plant which has the potential to serve a country as large as the United States costs $25 million. On the other hand, the bottling process needs 80 to 85 plants, each costing $30-50 million, to provide efficient distribution for a country the size of the US. Moreover, the bottling process is highly specific to both the type packaging and the bottling process. This, in return, makes it difficult to exit the market. (“Cola wars”, n.d., p.3)
Retaliation: the more retaliation new entrants expect from existing competitors, the higher the entry barrier. In this industry, new entrants should expect sharp retaliation.
The aforementioned barriers to entry lower the threat of new entrants. However, there is another factor that should be taken into consideration: private label brands. Cott Corp. holds the majority of private label brands in addition to few other smaller companies. Since private label brands are cheaper, retailers would find it more attractive to sell them, instead of Coca-cola or Pepsi, taking into consideration the higher profit associated with them. Thus, the threat of these private brands slightly increase the threat posed by new entrants. This makes the overall threat of new entrants moderate to low. (“Pepsi”, n.d., p.6)
Conclusion
The “spider web” below summarized the five forces (the 6th force is excluded). The more intense the forces are, the less attractive the market is. Most of the forces in the CSD industry are moderate to high which indicates that this industry is not attractive for new entrants. However, for those companies that are already in the industry, it is attractive.
2. Key Success Factors of Carbonated Soft Drinks industry
1. Size of Company (distribution and market share)
The companies’ size is an important factor in such an industry. E.g. PepsiCo is the second leader in the industry as well as one with the largest market share.
2. Location (Convenience and Availability)
Convenience for customers is also essential in a soft drink industry. Such that a company must make sure the soft drink is readily available everywhere in supermarket, grocery stores, vending machines, and restaurants.
Brand Loyalty
Due to the diverse soft drinks and the intense competition in the industry, brand loyalty plays an important success factor for a company. E.g. PepsiCo’s regular customers are devoted to Pepsi and they rarely switch to other brands. Loyalty creates inelastic price change. PepsiCo successfully adapts to customer taste.
International market
International presence is essential for the success of Soft Drinks industry. Going global is important for it helps the company enhance growth. E.g. the majority of PepsiCo’s profits come from US yet population growth in markets like India and china could lead to potential market growth.
SWOT Analysis
Strengths:
Strong Brand Reputation
Strong market Position
PepsiCo is an early entrant which helped build market share. Its market share accounts for 31% of the market share of the carbonated soft drinks industry.
Availability of large Free Cash Flow ( and Strong Revenue Growth)
Solid revenue results in the second quarter of 2009 reflecting PepsiCo’s Product innovation, strong effective net pricing, and cost discipline showing a 5.5 percent increase in net revenue and an 8 percent increase in core EPS. PepsiCo Chairman and Chief Executive Officer, Indra Nooyi said “Our results this quarter reinforce the advantages of our balanced portfolio, as our food and international businesses delivered solid performance while we continued the transformation of our North American beverage business.”(Nooyi, 2009)
PepsiCo has large amount of free cash flow and lack of capital constraint creating strength for the company to improve its innovative capabilities, and create a strong distribution thus further strengthening its brand.
Strong and creative advertisement
Besides PepsiCo’s strong advertisement, it uses creative techniques. Such that PepsiCo created an add through a football field with most well known players (Kaka-Brazilian, Henry-France, Drogba-Godivoi, Messi-Argentine, Lumoard-England) .
Extensive product list
Pepsi offers various products besides the Pepsi cola. It offers beverages and snacks. It’s also the number one maker of snacks (potato chips and corn chips).
Weaknesses:
Many Large existing Competitors
Large existing competitors in the market create significant weakness for PepsiCo and thus create a need for stronger advertising, consequently requiring higher capital.
Following are the strong competitors sharing a high market share in comparison to PepsiCo with 31% market share:
Coca Cola has a market share of ƒ 43%
Dr.Pepper Snapple Group Inc. ƒ 15% of the market
Concentration
PepsiCo is concentrated in North America (US, Canada, Mexico), where almost 70% of its revenues comes from.
Opportunities:
Acquisitions and Alliances:
Due to the increased threat of rivalry and competition in the carbonated soft drink industry, acquisitions and alliances create an opportunity that reduces such threats. Through acquisition the market share rises and the revenue rises, though the high cost of doing it is a drawback to such a strategy.
Acquisitions of rivals (e.g. RedBull)
Increase Market Share
Increase Advertisements
Advertisements play a major role in Carbonated Industries. For example, for one to see Pepsi’s add on road while very thirsty would likely to stop by a petrol station or any convenient store who offers Pepsi to purchase it.
Strengthen Brand names of N.A portfolio:
Since coke dominates Western Europe and Latin America, PEPSI dominates Middle East and Southeast Asia.
Threats:
Change in customer’s taste: weakening demand in USA ƒ new federal nutrition guidelines identified regular CSD as largest source of obesity-causing sugars in American diet (Pinto, 2006)
Health care awareness
Increased awareness of health campaigns cut down revenues of soft drink industries. Customers move to substitutes such as water, non-carbonated drinks and juices. These challenges are PepsiCo’s target to overcome, such as the figure below shows the peoples negative perception of PepsiCo.
High Rivalry
As Explained earlier, threat of rivalry is very intense due to the following factors:
Large number of competitors,
Decline in growth of the industry,
Lack of differentiation in products,
and low switching costs.
Therefore there exists an intense competition for shelf space due to expanding array of products and packaging options
Large company size, will demand a varied marketing program;
Social, cultural, economic, political and governmental constrains. As a result, the company will incur more expenses and resources.
Threat of substitutes is very high. People can easily substitute Pepsi with other drinks.
Strategic recommendations to the firm based on your SWOT analysis
Since PepsiCo has availability of high free cash flow (strength), I would recommend that PepsiCo opts for Acquisition and Alliance (Opportunity) to increase its market share thus to take over its rivalry (threat)
Due to the threat of health campaigns (threat), PepsiCo should increase its product line (opportunity)
I would recommend that PepsiCo increases its EPS and increase PepsiCo’s stock price, by:
Increasing Income
Decrease amount of outstanding stock
B. Company strategy analysis
1. Mission Statement/Strategic intent/Vision
Mission statement:
“Our mission is to be the world’s premier consumer products company focused on convenient foods and beverages. We seek to produce financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate. And in everything we do, we strive for honesty, fairness and integrity” (PepsiCo Inc., 2009)
Reproduced Mission statement:
PepsiCo aims to be the world’s number one foods and beverages producer. It mainly focuses on providing money for its investors as well as enhancing the market with jobs and opportunities for growth. PepsiCo try their best to be honest, fair and truthful in all of their operations.
Critique:
The mission statement relatively reflects the core values of PepsiCo. It specifically describes its goals and objectives. It also sets guidelines for the activities and operations that need to be accomplished in order to meet the company prospects & aims.
Vision:
“PepsiCo’s responsibility is to continually improve all aspects of the world in which we operate – environment, social, economic – creating a better tomorrow than today. Our vision is put into action through programs and a focus on environmental stewardship, activities to benefit society, and a commitment to build shareholder value by making PepsiCo a truly sustainable company.” (PepsiCo Inc., 2009)
Reproduced Vision:
Operate by creating a better future sustainable environment.
Critique:
A vision is a statement that states what the firm will be in the future. Pepsi’s vision aims toward creating a future healthier, sustainable friendly environment. PepsiCo vision should be more specific to its goals and objectives in order for PepsiCo to be more productive in the future. It should be more creative and easy to adapt to new trends. The vision can help PepsiCo in controlling the future market.
PepsiCo Generic Strategy:
According to Michael Porter, there are two types of competitive advantages a firm an posses:
A firm can either make the same products that its competitors do, but with a lower cost. ƒ Cost Strategy
OR
A firm can differentiate its products from those offered by its competitors, either by offering better and more expensive products or by offering lower quality cheaper products ƒ Differentiation Strategy.
To gain a competitive advantage in the market, PepsiCo looked in its position in the industry. It engaged in cost leadership competitive strategy:
Since PepsiCo is a large corporation, it can keep the prices of its products low through the massive production and economies of scale. They also can buy from suppliers in bulk at a discount and make use of the technology to lower the prices of the final products. Not to forget that the extensive distribution channels and the global existence of the firm are considered as important factors to reduce the price. Allocating the cost among the brands carried by PepsiCo, the proficiency in the development and production help PepsiCo achieving its cost leadership strategy. PepsiCo also vertically integrated. It has merged with Pepsi bottling group in order to reduce the cost of distribution. Additionally, the types of input or raw materials that are used in this industry are: sugar, bottles, cans, water, ink and plastic. Since these raw materials are not differentiated and are easily available in the market, PepsiCo can achieve economies of scale.
By looking at the graph above we can learn that by achieving economies of scale the firm will reduce its costs which will lead to lower prices of the final products. Although lower prices will result in having price war, which had already existed between PepsiCo and Coca-Cola and other firms in the CSD industry, it will still help the company in increasing its market share and to compete in the industry. Adapting the Cost leadership strategy had raised strong barriers for any new entrants to enter the market since it will be very hard to compete with a well-known brand that offers low prices.
PepsiCo’s key resources that could lead to long term competitive:
In order to stay ahead of the future and present competition, Pepsi has developed many attributes. It has constructed a business strategy that will allow it to outperform its competitors. Therefore PepsiCo has concentrated on few main resources that it believes will turn out as competitive advantages for the firm which will help it to goal superior performance in its industry. These competitive advantages are believed to be:
Strong Brand Name
Advertising:
PepsiCo has the luxury to spend around 200 million dollars in this field, which allows it to reinforce the products.
The strong advertising helps PepsiCo to introduce new pr
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