An Analysis of the Main Forces Driving the Carbonated Drinks Industry in the United Kingdom - Case Study Example

 An Analysis of the Main Forces Driving the Carbonated Drinks Industry in the United Kingdom Coca-Cola Classic and the Carbonated Drinks Industry in the UK Coca-Cola Classic is one of the best known beverages in the world. It is sold in more than 200 countries and deemed as the market leader in the carbonated drinks segment in most nations, including the United Kingdom (UK). (Wikipedia) Although Coke traces its origins in the United States, the product has been promoted pervasively such that the brand has gained worldwide acceptance (Wikipedia). Despite the presence of formidable competitors like Pepsi, Coke remains the leading softdrink hitherto. This market leadership is attributed to how Coke is aggressively promoted. The success of this product is highly dependent on the marketing scheme employed to advertise Coke on a global scale. It is in this aspect that Coke is differentiated. Unlike other products intended for a specific market niche, Coke targets a wide market range – from the mass market to the high end segment. This is in line with the vision of former company president Robert W. Woodruff, that everyone on Earth consumed Coke. To limit the scope, this paper Assesses Coke In The Context Of The Carbonated Drinks Segment In The UK. It evaluates the supply conditions given the prevailing market structure and competition among softdrink suppliers. Furthermore, this paper discusses the barriers to entry and political or social factors impacting the industry. It also considers the factors that drive demand, prospects in the carbonated drinks segment given changing demand trends and potential entry of new players. Industry Overview Supply Condition and Market Structure The ₤5-billion UK carbonated drinks market has more than adequate supply of carbonated drinks (The UK Softdrinks Market 2004). Notable colas include Coke; Pepsi Cola, Coke’s major rival; Zamzam Cola, which is named after Mecca’s holy spring; Virgin Cola, which is marketed under Sir Richard Branson’s company; and Mecca Cola, which is promoted as Muslim people’s alternative to US-made softdrinks. (McCaffrey 2005) In terms of market structure, the UK carbonated drinks sector may be characterised as a monopolistic competitive market. Although there are numerous players in the industry, the cola drinks offered are differentiated depending on the preference of the market niche targeted (Gans, King, Stonecash & Mankiw pp.76-8). For instance, Mecca Cola is differentiated as it is advertised as the cola for Muslims. Bearing the catchphrase “No more drinking stupid, drink with commitment,” (McCaffrey 2005) supplier creates a different brand that appeals to Muslim communities and their sentiments on Western culture. On the contrary, the UK carbonated drinks market may be classified as oligopolistic since it is dominated by few major suppliers. Quantitatively, oligopoly is derived by using the four-firm concentration ratio, measuring the percentage market share of the four largest firms in an industry (Samuelson & Nordhaus 2001 pp. 89-93). A ratio of beyond 40% generally renders the market as oligopolistic (Tirole 1988). According to Canadean, Coca-Cola Company alone has captured 45.3% of the market share of the UK carbonated softdrinks category in 2004. This indicates that the total market share of the two giant suppliers have gone above the threshold, thus, the industry may be deemed oligopolistic. Competition Unlike other oligopolistic industries wherein collusion of firms to raise prices is observed (Samuelson & Nordhaus 2001 pp. 89-93), Coca-Cola and Pepsi continue to battle each other in the marketing arena. Albeit their rivalry has spanned for almost a century, non-price competition has prevailed. These firms utilise extensive media mileage to compete with each other and foster brand loyalty. This is evidenced by the substantial allocation of firms for advertising cost. Instead of pricing, though the retail prices of Coke and Pepsi Cola do not substantially vary, they are observed to compete in terms of the consumer appeal of the attributes of colas such as taste. (Wikipedia) Given that the market launch of Coke in the UK dates back from the 1900’s, it continues to enjoy the first mover advantage and get the better end of the marketing competition. This first mover advantage plays a key role in the market dominance of Coke (Sutton 1991). Barriers to Entry In view of the imperfect competition in the UK carbonated drinks market, barriers to entry are deemed high. This primarily stems from product differentiation and economies-of-scale. Product differentiation results in the fragmentation of demand for differentiated products (Samuelson & Nordhaus 2001 pp. 89-93). In the case of the UK carbonated drinks segment, cola differentiation led to greater market concentration. Major suppliers take advantage of the economies-of-scale in order to dominate the industry. For example, as the supplier of Coke increases units of production, given a fixed capital investment, its unit cost of production decreases. It is able to augment its production capacity without substantial addition to operational cost. With these, the firm can produce more units of cola with wider distribution network relative to its competitors, thus, capture greater market share. Government Intervention Due to the high degree of concentration in the carbonated drinks segment in the European Union member states, the Commission implemented a ruling to promote fair competition in the industry. This ruling is specifically intended for Coca-Cola and its practice of offering rebates to retailers who agree to reserve shelf space exclusively for Coke and its other lesser known brands. (EU curbs Coca-Cola market dominance 2005) According to this ruling, retailers across the bloc must remain free to sell carbonated softdrinks of their choice. As such, Coca-Cola is prohibited from offering discounts and engaging in undertakings with retailers that require exclusive selling of the Coca-Cola product line (EU curbs Coca-Cola market dominance 2005). This would limit the market power of Coca-Cola and promote competition for the benefit of smaller players and consumers who may enjoy more cola brands. Demand Drivers Given that the vision for Coke is to be the choice beverage such that everyone in the world drinks (Wikipedia), the primary factor which fuels demand is consumer preference. Although cola is not an essential good nor is it a critical component of a well-balanced meal, Coke has been marketed as a product which forms a significant part of everybody’s lifestyle and culture. In most countries, including the UK, this branded consumer good is promoted as a leisure drink or thirst quencher that is often consumed with chips and other snacks. Furthermore, it is advertised as a vital beverage for parties and gatherings. With aggressive marketing, the product has targeted all consumers throughout the world, regardless of age, race, gender or social status. The promotional scheme and advertisements are creatively designed such that the product would appeal to all market types. In this regard, Coke has become embedded in the modern culture of over 200 countries. It has built up a consumer base consisting of millions of patrons, who perceive that Coke is an important component of a sumptuous meal. To drive demand, the pricing scheme is reflective of the firm’s marketing strategy as Coke is often positioned as a higher priced cola. It is typical for consumers to associate higher priced products with superior quality. Due to perception of quality, consumers opt for Coke instead of the cheaper colas. In relation to this, drinking Coke has also become a type of status symbol. This is because most people, especially the youth, consider drinking Coke, rather than the lower priced colas, as hip. Changing Trends Despite being the market leader, demand for Coke and other colas are gradually dwindling. This is evidenced by the reduction in sales of Coke Classic by about ₤4 million, 3% of total revenues as at March 2005 (Sweney 2005). This cutback in demand is attributed to consumers preferring healthier options. Demand for non-alcoholic beverage in the UK is shifting to health-friendly products such as bottled water and fruit juices (Health concerns see UK softdrinks consumption fall 2005). With this, analysts expect sales from non-carbonated products to surpass that of carbonated products in the near term (Still waters run deep 2003). Due to the media attention and governmental pressures on the rising levels of obesity in the country, softdrinks industry players are currently confronted with a contracting market. (Health concerns see UK softdrinks consumption fall 2005) Coke, being the leader, has become the focus of the obesity issue and the adverse effect of fizzy drinks on health, particularly of the youth. Given this scenario, an increasing number of schools across the UK are banning Coke and other carbonated drinks from campus vending machines. Officials from the Education Ministry have also declared support for this initiative and plan to impose a nationwide ban on softdrinks in schools (Petrie 2005). These trends pose a great threat not only to the market dominance of Coke but also to the profitability of the carbonated drinks sector. Indicative Income and Price Elasticity of Demand As in any monopolistic competitive market, demand for Coke tends to be price inelastic. This means consumers are not price-sensitive due to brand loyalty (Gans, King, Stonecash & Mankiw pp.76-8). Coke is the highest priced cola sold in Tesco and Sainsbury’s as exhibited below. Retail Price Comparison of Carbonated Products Sold in UK Supermarkets (01 Dec 2005) Coke Pepsi Cola Tesco Cola Virgin Cola 330-ml can ₤0.39 ₤0.37 ₤0.17 ₤0.28 500-ml bottle 0.85 0.79 0.44 - 2-liter bottle 1.32 1.32 - - In spite of the relatively higher price, Coke remains to be the top selling cola in the UK market implying that price is not the consumers’ primary consideration. Coke suppliers exert an influence over the softdrink segment. As such, they may raise the price of Coke without having to lose consumers (Gans, King, Stonecash & Mankiw pp.76-8). Furthermore, Coke has already an established customer base. In this regard, it is reasonable to infer that these loyal patrons’ demand for Coke is relatively income inelastic. Sustaining Demand In view of the growing health awareness, Coke manufacturer should find ways to substitute the ingredients with more healthy alternatives without sacrificing quality or taste that the consumers have come to love. Moreover, as asserted by marketing guru Philip Kotler (2005), Coca-Cola should continuously enhance its public relations scheme as this is becoming a vital part of today’s marketing mix. This is critical in addressing the negative publicity currently hounding the company. In line with this, the company is continuously supporting worthy causes like the Olympics, Special Olympics and other high profile events. (Coca-Cola Great Britain 2005) Potential for Industry Growth In light of the above discussion, albeit carbonated drinks continues to a substantial chunk of the UK softdrinks industry, growth in the market is limited by current demand trends. Due to consumers’ changing lifestyle, they are now opting for healthier alternatives. Some perceive the consumption of Coke and other colas as a form of “health crime” since the caffeine and carbonates have negative health effects in the long run (Health concerns see UK softdrinks consumption fall 2005). Industry giants Coca-Cola and Pepsi have recognised the changing market. Both firms have diversified into healthier products and attempt to establish a firm foothold on the booming juice and bottled water markets to preserve their profit margin (Petrie 2005). On the contrary, this upcoming market evolution opens up opportunity for new firms to launch new products in this segment that can target the growing market niche for the health conscious. Potential entrants may leverage on health concepts such as “added functionality” or “no sugar added,” which focus on the trend of health and well-being. These concepts are considered as the major factors impacting the diversification of the UK softdrinks market (Health concerns see UK softdrinks consumption fall 2005). As the brands Coca-Cola and Pepsi Cola have been closely associated with their current cola line, new firms intending to penetrate the UK carbonated drinks segment may create an entirely new brand that would be marketed as the “healthy cola,” an alternative that even health experts would prefer. Existing firms should undertake brand innovation to secure market share and sustain industry growth. They may opt to reinvent their current product line to modify consumers’ perception. To foster growth in this maturing industry, suppliers like Coca-Cola should advocate that obesity should not only be attributed to cola consumption. This should be reiterated in their marketing programs to address the health problems ascribed to drinking carbonated products. 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