The Carbonated Soft Drink Industry Essay Example for Free

The Carbonated Soft Drink Industry Essay The first drinkable â€Å"man-made† carbonated water was created by â€Å"British chemist, Dr. Joseph Priestley, in 1767. † â€Å"German-Swiss jeweler, Jacob Schweppe, was the first large-scale commercial producer of carbonated waters, and is often referred to as the father of the soft drink industry. The first known US manufacturer of soda water, as it was then known, was Yale University chemist Benjamin Silliman in 1807, though Joseph Hawkins of Baltimore secured the first US patent for the equipment to produce the drink two years later. † Pharmacies nationwide around the 1820s provided the beverage as â€Å"a remedy for the various ailments, especially digestive. †1 As sugar and flavorings were added customers increasingly consumed them for refreshments, although they were still being sold for their therapeutic value. In the late 1800s, several brands emerged that are still popular to this day. â€Å"Pharmacists experimenting at local soda fountains invented Hires Root Beer in Philadelphia in 1876, Dr. Pepper in Waco, Texas, in 1885, Coca-Cola in Atlanta, Georgia, in 1886, and Pepsi-Cola in New Bern, North Carolina, in 1893, among others. † Analysis of the Soft Drink Industry. â€Å"The carbonated soft drinks market includes standard and diet colas, fruit-flavored carbonates, mixers, energy drinks, and other carbonated soft drinks. † The global carbonated soft drinks â€Å"market grew by 0. 4% and generated total revenues of $146. 4 billion in 2006. Market consumption volumes increased with compound annual growth of 1. 3% to reach a total of 155. 4 billion liters in 2006. The performance of the market is forecast to accelerate slightly, with an anticipated compound annual growth of 0. 7% for the five-year period 2006-2011 expected to drive the market to a value of $151. 4 billion by the end of 2011. †4 â€Å"The global carbonated soft drinks market was close to stagnation during the 2002-2006 period, as poor revenue performance in lucrative but mature markets, such as the US and Japan, were only partially outweighed by dynamic growth in markets such as China. Similar behavior is expected going forward to 2011. †4 Of all the various carbonated drinks offered in the market today, â€Å"the standard cola segment was the largest in 2006, with total sales of 67. 6 billion liters, equivalent to 43. 5% of the market’s overall volume. The fruit flavored carbonates segment contributed to a further 34 billion liters in 2006, equating to 21.9% of the market’s aggregate volume. Brazil Canada, Mexico and the US form the most lucrative market for carbonated soft drinks, generating 58. 5% of the global revenues; Europe accounts for 31% of the global market value. †4 â€Å"Players in this market may opt for an integrated business, in which they sell ready-to-consume drinks to retailers, or they may adopt a business model in which they sell raw materials, syrups, to a network of bottling companies, which may be independent or owned to some extent by the players. †4 A Five-Forces Analysis of the Soft Drinks Industry Revenues are extremely concentrated in this industry. The main players in this industry are the Coca-Cola Co. , PepsiCo Inc. and Cadbury-Schweppes. â€Å"The Coca-Cola Company is the global market leader, with sales equating 47. 1% of the market volume. PepsiCo. Inc. is a significant competitor, with a 22% market share by volume [and Cadbury-Schweppes accounts for 8. 8% of the total market share by volume. ]†4 There is a tough competition between the existing companies in the industry and a moderate degree of rivalry. The inputs for the soft drink industry are primarily sugar and packaging. These can be purchased from many sources on the open market. Aspartame, an important ingredient, â€Å"[is] available from only one or two viable companies upstream. † However, there are substitutes, like saccharine, available in case the price for aspartame goes high. In case sugar becomes too expensive, the firms could easily switch to corn syrup, as they did in the early 1980s. Hence, supplier power is moderate. For more than a decade the soft drink industry has sold their products to their consumers through five principal channels: supermarkets/hypermarkets, mass merchandiser, fountain, vending machines and convenient stores/gas stations. Supermarkets/Hypermarkets are principal customers for the soft drink industry. They do not have much bargaining power due to their tremendous degree of fragmentation. Their only power is control over shelf space that can be allocated to the various products; this power does give them some control over profitability. However, consumers expect to pay less through this channel, as a result of which prices are usually lower, resulting in a somewhat lower profitability. National mass merchandising chains such as Wal Mart have a higher bargaining power. Due to their scale and the magnitude of their contracts they can negotiate more effectively. As a result of which they are not very profitable for the players of the soft drink industry. The least profitable channel for soft drinks is fountain sales. Profitability at these locations are so abysmal that they are considered to be â€Å"paid sampling† by the soft drinks industry. However, these channels are considered to be important as an avenue to build brand recognition and loyalty. â€Å"While fast food chains make 75% gross margin on fountain drinks, the soft drink industry only makes 5% margin. † Vending machines are considered to be the most profitable channel for the soft drink industry. There are no buyers to bargain with at these locations, players of the soft drink industry directly sell their products to consumers through machines owned by bottlers. Prices at vending machines are usually high. The final channel to consider is convenience stores/gas stations. The players of the soft drink industry directly negotiate with the owners of these channels. Profitability for players is relatively high and the â€Å"retailers at these channels vary proportionately. Consumers are likely to be strongly influenced by brand, and this weakens buyer power: retailers need to stock brands popular with consumers, even if these are more expensive. †6 The only buyers with dominant power are fast food outlets. Despite this, they only account for about 20% of the total soft drink sales. Overall, the buyer power is moderate. Through the early 1960s, soft drinks were synonymous with â€Å"colas† in the mind of consumers. Over time, however, other beverages, from bottled water to teas, have become more popular. There are also other substitutes for soft drinks, like alcoholic beverages, fruit juices, energy drinks, vitamin waters and coffee. Leading players like Coca-Cola and PepsiCo have responded by expanding their product offerings through alliances (e. g. Coca-Cola and Nestea), acquisitions (e. g. Coca-Cola and Minute Maid), and internal product innovation (e. g. PepsiCo created Orange Slice), thus capturing the value of increasingly popular substitutes internally. Despite all this, â€Å"in several countries consumer health concerns over the high-sugar content of many soft drinks is causing a decline in sale. † In order to tackle this problem, â€Å"leading manufacturers are developing their product ranges accordingly. † For example, Coca-Cola responded by introducing Coke Zero, which is â€Å"sugar-free. † The demand for the product has grown steadily since it was introduced in 2005. Overall, the threat from substitutes is moderate. It is possible for a new player to enter the soft drink industry as â€Å"an entirely new start-up, or as an existing company diversifying into carbonated soft drinks manufacturing. However, the new player would have to overcome the tremendous marketing muscle and market presence†4 of leading players like Coca-Cola, PepsiCo and few others who have established brand names that are as much as a century old. These players have maintained strong relationships with their retail channels and would be able to defend their positions effectively through discounting or other tactics. Overall, there is a weak likelihood of new entrants. The Coca-Cola Company There are few companies, if any, across the world with more recognizable brand names than Coca Cola. The name in itself is likely worth far more than the total assets held by Coca Cola, Inc. Coca-Cola Company is involved in marketing, manufacturing, and distributing nonalcoholic beverages as well as their syrups and concentrates across the world. They offer a vast array of bottled and canned beverages. The company is mainly involved in carbonated beverages, known as soda as well as a myriad of other names, but also produces noncarbonated beverages such as juice, energy drinks, ready-to-drink coffee and tea, water, and flavored water. Completed beverage products are sold mainly to distributors, while their concentrates and syrups may be sold to bottling and canning operations, and fountain wholesalers and retailers as well as distributors. Coca-Cola Company, which is headquartered in Atlanta, GA, was founded in 1886. They have 90,500 employees world-wide. Coca-Cola’s Business Strategies Ever since its advent, Coca-Cola’s strategies have been winning ones. The history of Coca-Cola reveals how national markets in soft-drink brands developed. â€Å"Asa Candler, [founder of Coca-Cola,] underestimated the importance of the bottling side of the business and in 1899 sold the national rights to bottle Coke for a fairly small sum to Benjamin F. Thomas and Joseph B. Whitehead, who then started a national network of bottlers, creating the basic franchising format by which the industry is still run. †3 One of the main reasons Coca-Cola licensed bottlers to mix the product, package, and distribute it within a specific territory, was to limit the cost of transportation. Today, this model of selling syrups to bottlers who then mix the product, package, and distribute it, is widely used by almost every soft drink industry in the world. In the long run, this complete alignment of Coca Cola and its bottlers has proved to be a winning strategy. Coca-Cola is a brand name that’s known widely throughout the globe. The company has a competitive advantage based on differentiation over other soft drink industries. They are able to set prices at the industry average and gain market share since their customers are willing to choose their products over their competitors. Coca-Cola has been successful at retaining their differentiation position by satisfying their customers’ needs, although this resulted in some higher costs in some of their value chain activities. For example, when Coca-Cola realized that their customers were looking for drinks other than just â€Å"cola† they responded by expanding their product offerings by introducing several different types of carbonated drinks, fruit juices, energy drinks and bottled water, tea and coffee. Some of these were organically started while others were started via acquisitions and alliances. Today, Coca-Cola sells more than 400 brands in 200 countries. The strategy has greatly improved Coke’s competitive position. The other factors that help them retain their differentiation position are: their premium brand image, their products are considered to be of high quality and they are easily accessible. In the 1980s and early 1990s, then CEO Roberto Goizueta built an international expansion strategy around the central brand—Coca-Cola. Today the company is well positioned in key emerging markets such as China, Brazil, Russia, Turkey and Argentina. In 2007, these emerging markets recorded strong double digit growth in volumes. It looks like Coca-Cola will continue to benefit from the underlying growth in the consumption of soft drinks in these markets. Coca-Cola’s strategies have definitely helped them achieve their goals in being the leading beverage company in the world. They were ranked number 1 in the â€Å"Ranking for the Food Beverage Industry categories of Best EthicalQuote Progress and Best Reported Performance in Geneva-based Covalence’s Ethical Ranking 2007. † They also ranked number one in sparkling beverages, juices and juice drinks, and ready-to-drink coffees and teas. Coca-Colas strategies, besides helping them achieve the number 1 rank in the beverage industry has also helped them achieve their financial goals, despite cut-throat rivalry with other beverage companies, as we can see from the table below. Their most competitive competitor is Pepsico, Inc. Pepsico, Inc. ’s beverage division is involved in more or less the same activities as Coca-Cola Company—manufacturing, marketing, and selling beverage concentrates, syrups, and finished products including carbonated beverages, energy drinks, water, and juices. The major difference between Coca-Cola and Pepsico is that Pepsico also has a huge snack division. Despite Pepsi’s strong portfolio, Business-Week and Interbrand, a bran ding consultancy, recognizes Coca-Cola as the leading brands in their top 100 global brands ranking in 2006. They valued Coca-Cola at $67,000 which was well ahead of Pepsi which has a ranking of 22 having a brand value of $12,690 million. Coca-Cola’s strategies have helped the company hold the title as the leading beverage company in the world and also maintain a very strong financial portfolio. According to the 2007 annual report for Coca-Cola, obtained from their website, the company’s earnings per share growth for the year alone was 19%. Other impressive growth rates include their net operating income and revenue growth of 20% and 15%. Source: www. coca-cola. com From the above table we can see that Coca-Cola’s revenues, net income and assets have grown over the years. Their profit margin for 2007 however is lower than that of 2006. A profit margin of 20. 7% means that, Coca-Cola has a net income of $0. 207 for each dollar of sales. This also means that Coca-Cola has increased its net income in 2007 by diminishing profit margins. Although the difference in profit margins for 2006 and 2007 may appear to be small, it affects the company’s financial portfolio significantly. So, why is the leading company in the beverage industry, despite having a stellar performance facing a decrease in their profit margin? To help us answer this we will look closely at the company’s various resources and capabilities with the help of a SWOT Analysis. SWOT Analysis Although Coca-Cola’s â€Å"strong band value facilitates customer recall and allows Coca-Cola to penetrate markets, the company is threatened by intense competition which could have an adverse impact on the company’s market share. †8 SWOT analysis is a strategic planning tool that helps in evaluating the Strengths, Weaknesses, Opportunities and Threats of a company. The SWOT analysis deals with the firm’s internal characteristics: strengths and weaknesses, and the opportunities and threats presented by the external environment. StrengthsWeaknesses Leading brand in the beverage industry Increase in revenueNegative performance in North America Decline in profit margin OpportunitiesThreats Room to grow Aging of baby boomersFierce competition Slow growth of carbonated beverages Strengths. Leading brand in the beverage industry Coca-cola is the world’s leading brand in the beverage industry. There are not many products that have a recognizable brand name as Coca-Cola. â€Å"The company has a leading brand value and a strong brand portfolio. †8 They have been recognized as the leading industry by many national magazines and have been honored with awards in different categories. â€Å"Furthermore, Coca-Cola owns a large portfolio of product brand. The company owns four of the top five soft drink brands in the world: Coca-Cola, Diet Coke, Sprite and Fanta. †8 Coca-Cola’s brand name is their key differentiator from that of the company’s competitors; this has helped the company beat their competitors in the market place. Their strong brand image has helped them introduce new products in the market like, Vanilla Coke, Cherry Coke, etc. The company has also been able to â€Å"make large investments in brand promotions. The company’s strong brand value facilitates customer recall and allows Coca-Cola to penetrate new markets and consolidate existing ones. † 8 Increase in revenue In 2007, Coca-Cola recorded total revenues of $28. 86 billion, an increase of 20% from 2006. Three segments (Latin America, Eurasia and Bottling Investments) of the company experienced double digit growths in their revenues from 2006. Both Latin American and Eurasia grew by 24% each during fiscal 2007, over 2006. During the same period, revenues for bottling investments grew by 53%. Together, the three segments of Latin America, Eurasia and bottling investments, accounted for more than 35% of the total revenues during fiscal 2007. â€Å"Revenues growth in [these three sections] contributed to top-line growth for Coca-Cola during 2007. † 8 Weaknesses Negative performance in North America While Coca-Cola had robust revenue growth in some of their business sections they had a negative 1% unit case volume growth in one of their business section—North America. The performance overall in this section was not as expected, they had a 1% increase in their operating income and a moderate 11% increase in their revenues. North America is one of Coca-Cola’s core markets generating 25% of total revenues during fiscal 2007. Hence, â€Å"a strong performance in North America is important for the company. † 8 This slow and negative performance in North America can â€Å"impact the company’s future growth prospects and prevent Coca-Cola from recording a more robust top-line growth. † 8 Decline in profit margin Despite having an overall increase in revenue of 20% for fiscal 2007, from 2006, Coca-Cola’s profit margin for the period was 20. 7%, a decrease of 3. 4% from 2006. We can tell from this that looking at the earnings of a company often doesnt tell the entire story. Increased earnings are good, but an increase does not necessarily mean that the profit margin of a company is improving. We can see in this case, that Coca-Cola had a lower profit margin from 2006 despite having higher revenues and income for 2007. This only means that Coca-Cola had costs that have increased at a greater rate than their sales; thus leading to a lower profit margin. This is an indication that costs need to be under better control. Opportunities Room to grow According to Muhtar Kent, President and Chief Operating Officer of the Coca-Cola Company, â€Å"Consumer spending for nonalcoholic ready-to-drink beverages is growing at 6-plus percent per year—the highest among consumer packaged goods. †7 Coca-Cola’s international market is thriving, led by double digit growth in developed markets like Brazil, Russia, India and China. Latin America was the second most profitable operating group for Coca-Cola in 2007. The company is looking forward â€Å"to the Beijing 2008 Olympic Games; [they] are strategically investing in [their] infrastructure and route to market to connect [their] brands with consumers in the Pacific operating group. [The company’s] balanced portfolio, geographic diversity and changing global demographics position [them] well to continue growing [their] business. †7 Aging of baby boomers The aging of the baby boomers, which includes US citizens born between 1946 and 1964, began crossing the 60-years mark in 2007. â€Å"Most of the 78. 2 million strong baby boomer generations will turn 60 in the next two decades. †9 This is likely to increase the sales of â€Å"health-related goods and services on a US-wide basis. †7 This generation of baby boomers will provide Coca-Cola the opportunity to market its Minute Maid rage of fruit juices and juice drinks, particularly those rich in vitamins.