The Soft-Beverage Industry - Essay Example

 Background Information Soft- Beverage Industries are those companies that manufacture drinks that are free from alcoholic contents. Soft drinks are considered to contain carbonated or non-carbonated water, artificial or natural flavor and a sweetener. In other very remote cases, the soft drinks can contain 0.5% of the alcoholic content (Diamantopoulos 2012, p. 35). They are also referred to as liquid refreshment beverages as they have a soothing feeling. The sweetener in soft drinks varies from fruit juice, sugar, and high-fructose or sugar substitutes. In other instances, the soft drinks contain caffeine and other preservatives to make them stay long before going bad. The drinks are normally served chilled, at room temperature or over ice cubes, however, in some cases soft drinks such as Dr. Pepper can be served warm (Jeannet & Hennessey 2014, p. 47). The formats of soft drinks vary widely from glass bottles, plastic bottles or cans, and they are available in different quantities and sizes such as one and two liters and other smaller bottles. These drinks are available in several food restaurants where they are used as refreshments, casual dining restaurants, movie theaters, and bars. The manufacturing of soft drinks originated from the development of fruit-flavored drinks. This commenced in Tudor England where ‘water imperial’ was widely used after it was sweetened with lemon flavor (Crowther 2012, p. 377). Additionally, the other widely ancient soft drink was the lemonade. This was made of lemon and water then sweetened with honey, however, it lacked carbonated water. By the year 1676, Companies of Paris obtained the monopoly of manufacturing lemonade on a large scale (Hooley & Saunders 2004, p. 51). The market for soft drinks expanded rapidly in the early centuries because it was widely consumed by average masses in the society. Hooley and Saunders (2004, p. 33) notes that by early 1840s, there were already over fifty manufacturers of soft drinks, and this has been on the rise ever since. Soft drink industries as have been noted are those firms that develop, manufacture, and market the carbonated and non-carbonated beverages. The main industries in the current market are the Coca-Cola Company and PepsiCo (Hooley and Saunders (2004, p. 36). These two occupies the largest share of the market then they are followed by Dr. Pepper, who holds a moderate amount of market share. These companies operate on a global scale and have markets in more than 200 countries globally (Hussey & Jenster 2000, p. 71). The soft-beverage has a very wide scope of operation and in the United States; the industry generates revenue amounting to approximately $28 billion annually according to the report by IBIS World (Ellson 2004, p. 74). Despite the continued success in the soft drink industries, the companies is also being faced with challenges that have led to a heavy decline in their sales, especially among the United States consumers. It is noted that the volumes of soft drinks being sold in the United States markets have been on the decline since 1998 due to the fall in its consumption in the country. The fall has been from its peak in 1998 at 864 eight-ounce servings to 675 servings in the year 2013, and this represented a general drop in the sales volume of about 22%. Crowther (2012, p. 370) notes that the huge drop has been attributed by the sudden change in the consumer tastes and preferences in the country. Most consumers in the country have shifted their consumption from the consumption of soft beverages to coffee and other energy drinks, and this has led to the fall in the sale volume. The trend is as follows; 2010 2011 2012 2013 U.S. per capita Consumption (8 oz servings) 726 714 701 675 ((Zhang & Suslick 2007, p. 238) Despite the huge fall in the sales volume from the beverage industry in the United States, the effect was not greatly felt since the companies had a wide range of market globally and therefore, through the diversification of their supply chains and global logistics, they still recorded higher sale from their foreign markets. The soft-drink industry has diversified its production and sales to help mitigate risks of fluctuations in the markets and consumer preferences. These diversifications are in the forms of distributors and bottlers which help in the packaging and delivery to final consumers (Diamantopoulos 2012, p. 39). The total global market for the soft beverage industry is considered to be about nine times the market in the United States and it generally generates total revenue approximated to be about $247 billion (Crowther 2012, p. 373). Analysis of the soft beverage industry has been for a long time the baseline for investors since it has remained the top selling industry in the global market for a long time, hence it appears to be much rewarding (Jeannet & Hennessey 2014, p. 47). However, the industry has complexities that require a critical evaluation of every segment that is involved in the production process and the entire value chain so as to determine the ever changing customer preferences. The value chain is mostly in the form of a distribution channel as shown;(Dekker 2003, p. 22) It is noted that the main player in the soft drinks industry is considered to take great control of most of the products in the industry’s value chain. This form of total product control is often referred to as "vertical integration." Market Analysis Market share enjoyed by the firms From the above pie chart, it is quite evident that the soft-drink industry is majorly controlled by Coca-Cola at 42% and PepsiCo at 30%. The two companies are considered to be the main contributors to the industry due to their wide range of brands and market scope. Dr. Pepper Company enjoys 15% of the total market share in the global market after Coca-Cola and PepsiCo. The company has moderately wide range of brands, and its market share is quite large as compared to the other smaller soft-drinks industries and Cott Corporation (Hooley & Saunders 2004, p. 51). Generally as noted, The Coca-Cola Company (KO) and PepsiCo, Inc. (PEP) have heavily dominated the soft beverage industry for several years since they became operational. Coca-Cola is the largest with over 500 brands of products which include 17 brands that generate approximately over a billion dollars annually (Mace & Stretcher 2003, p. 71). PepsiCo follows and leads in brands ranging from beverages, having 22 brands that generate over a billion dollar annually. Both companies shares about 70% of the US soft-drink market and the rivalry wars between them is often referred to as cola wars, and it is legendary (Mariotti & Glackin 2010, p. 68). (Ellson 2004, p.45) Market share of the Major Carbonated Brands in the Industry From the above Pie Chart, it is observed that the Soft-Drinks industry is majorly occupied by brands such as Coke that are the leading brand of Coca-Cola Company at 26%, and it is followed by diet coke also from the Coca-Cola Company at 15%. The other major competitor brand in the market is Pepsi at 15% from PepsiCo. The other remaining brands are Mountain Dew at 10%, Dr. Pepper at 9%, Diet Pepsi at 8%, Sprite at 8%, Diet Mountain Dew at 3%, Diet Dr. Pepper at 3% and then the least Rand is Fanta also at 3% (Mariotti & Glackin 2010, p. 78). The brands have been fluctuating in the market depending on the changes in consumer tastes and preferences that affect their sales volume. The larger market share occupied by the Coke brands contributes largely to the high rating that the Coca-Cola Company has in the soft-drinks industry (Zhang & Suslick 2007, p. 238). Porter's Five Forces Analysis – Soft Drink Industry Porter’s Five Forces framework of analysis was developed by Michael Porter (1979), and it epitomizes five different forces that shape the overall extent of competition in a particular industry, the diagram represents the forces; Figure 1: Summary of Porter’s Five Forces Model [Source: Micheal E. Porter, Competitive Strategy, 1980] Bargaining Power of Buyers The soft beverage market is the largest in the entire beverage industry globally, and its worth is approximate $60 billion. The three major players; Coca-Cola, PepsiCo, and Dr. Pepper have control of about 89% of the United States sales (Porter 2008, p. 34). The industry has a wide scope of customers with average American consuming about 56 gallons of the drinks annually, and the cost is relatively affordable. The industry is very competitive, hence switching suppliers is relatively simple depending on the geographical location and the differences in the prices are minimal. The buyers have authority on the prices and are very sensitive to the changes, thereby can easily switch to competitor products. However, the products are unique, and hence most consumers tend to be loyal to their brands (Porter 2008, p. 34). Bargaining Power of Suppliers  Every firm in the industry is competing to produce the best brand in the market, and hence most of the inputs are very much differentiated. The products vary from their color, formulae of combination and the flavor all geared towards satisfying the customer needs and demands. For quality materials, the companies often switch between suppliers much easier because the suppliers do not have much competitive pressure as the companies (Porter 2008, p. 34). The suppliers to the industry often supply bottling equipment and packaging materials. It is however noted that the suppliers are numerous; hence they have less bargaining power in the industry. The firms, therefore, have the power to choose the suppliers of the best materials at an affordable price (Zhang & Suslick 2007, p. 239). Threat of New Entrants The indigenous firms in the industry enjoy cost and performance advantages in the industry due to economies of scale and purchase of large capital expenditures. Moreover, these firms mostly possess direct supply and distribution channels that are well defined thereby giving them the proprietorship on the patented flavors and brands preventing others from producing their products (Porter 2008, p. 35). For new firms, entering into the soft beverage industry requires large capital outlay due to the huge costs of production, bottling, warehousing and distribution to customers. Additionally, new entrants will face challenges in penetrating the distribution channels since the major players have greater control of the channels through low costs, strong business relationships and competitive pricing and their brands have gained the larger market share (Ellson 2004, p.87). Threat of Substitutes The substitute’s products in the industry do not have performance limitations that will make them be competitive in the industry. The substitutes are not highly priced in the market and, therefore, customers will incur very minimal or no switching costs. However, there are varieties of substitutes in the market for carbonated drinks, and these are such as tea, water, sports drinks among others. Most esteem customers are not likely to switch to substitutes because of their loyalty to the brands (Porter 2008, p. 35). Porter’s value chain Analysis of the Soft-Drinks Industry This analytical framework helps in identifying organization’s activities that create value and competitive advantage in the market (Dekker 2008, p. 14). Primary Activities The Value Chain Support Activities Inbound logistics. The main ingredient for soft drinks products is water and in most occasions, the companies face a challenge in acquiring the raw materials. Other materials such as High Fructose Corn Syrup, the firms obtain from US-based suppliers majorly (Dekker 2008, p. 15). The inbound logistics for international purchases is mostly carried out by trucks or ships. Operations: All the firms in the industry do not operate as single entities but possess numerous bottlers worldwide. It produces and sells syrups, concentrates and other beverages to the bottling partners. The companies maintain the brand and apply their marketing strategies while the bottlers carry out the packaging and merchandising for various firms (Dekker 2008, p. 16). Outbound logistics: The major two players; Coca-Cola and Pepsi; operate in over 200 countries and controls the distribution systems globally. Their distribution channels consist of various company operations, independent bottlers, distributors, wholesalers and retailers (Dekker 2008, p. 16) Marketing and sales: The industry’s current sales volume amounts to about $247 billion with a greater percentage of about 70% in the United States and the remaining 30% internationally (Dekker 2008, p. 16). The firms employ the use of integrated marketing that is comprised of sales promotions, public relations, and advertising. Service: Customer service is maintained through continuous online communication, and the firms’ websites contain comprehensive FAQ, which tend to highlights variety of the companies’ products. Conclusion Marketing and promotion are essential components for a particular product to remain competitive in the dynamic market space. The marketing department in any industry has a critical role in positioning the industry strategically to establish its products and services. For efficient sail in a competitive market, it is of great importance to developing a well-structured marketing plan that will include all the necessary strategies to remain competitive, the budgetary allocation as well as the contingency plans for any eventualities during the marketing operation. References Crowther, P 2012, Marketing space: A conceptual framework for marketing events. The Marketing Review, 369-383. Dekker, H. C 2003, Value chain analysis in inter-firm relationships: a field study. Management accounting research, Vol.14 (1), pp.1-23. Diamantopoulos, A., 2012. Quantitative marketing and marketing management marketing models and methods in theory and practice, Wiesbaden: Springer Gabler. 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Entrepreneurship: Starting and operating a small business 2nd ed., Upper Saddle River, N.J.: Pearson Prentice Hall. Porter, M. E 2008, The five competitive forces that shape strategy, Cambridge University Press, Cambridge Zhang, C., & Suslick, K. S 2007, a Colorimetric sensor array for soft drink analysis. Journal of agricultural and food chemistry, 55(2), 237-242 Read More