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Carbonated Soft Drink Analysis

Categories Caffeine, Car, Coffee, Food

Analysis, Pages 6 (1435 words)

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Analysis, Pages 6 (1435 words)

1.? A profitable industry based in: -? -? -? A solid business model. Potential and relatively easy to diversify: space for complementary products (leverage brand equity) Good financial muscle. The soft drink industry is facing new challenges. The carbonated drink market has lost pace but there are several opportunities to overcome the situation. 2. Concentrate producers and Bottlers are extremely interdependent. Although having very different sources of profitability they ultimately rely on the same customers. The fundamental difference between CPs and bottlers is added value.

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The biggest source of added value for CPs is their proprietary, branded products whereas for bottlers it steems from their relationships with CPs and their customers/retailers. 3. Future profitability sustainment to be found in: a) International markets b) Diversified portfolios: health-conscious consumption, noncarbonated beverages and snack foods. c) Key strategic relationships’ improvement: strategy alignment 1 1. Overview of the market: a market that has topped out and is searching new opportunities Share of Carbonated Soft Drink Consumption as total beverage consumption 35% 30% 25% 20% 15% 10% 5% 0%.

•? Market of carbonated soft drink has tripled its volume since 1970 but its share of total beverage consumption is slighty decreasing. Changements in the market: •? iversification within the markets: diet and flavored D varieties. •? rowing of the share of non carbonated drinks: bottled G water, juices, sport drinks… •? n internationalizing process in progress aiming A Europe, Latin America, Middle East and Southeast Asia. 1970 1981 2002 1985 2000 2003 1990 1975 From exhibit 1 Category Carbonated Bottled water % share 46,80% 18,40% 14,90% 8,50% 7,60% 3,90% 100%.

Thanks to arrangement, alliances and acquisitions Geography Europe US Asia-Pacific Rest of the world Total % Share 37,10% 30,90% 19,80% 12. 30% 100% Juices Tea & coffee Functional drink Concentrates Total Datamonitor (2005, May).

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Global Soft Drinks: Industry Profile. New York 2004 1996 1994 1998 2 Porter’s five forces analysis: a quite favorable scenario for positive economic profitability Barriers to Entry: •? Marketing muscle and market presence of Coke and Pepsi ? very powerful brand name (loyalty). •? Access to distribution channels: Soft Drink Interbrand Competition Act. •?

Production costs which are substantial: bottlers‘ high capital investment ? economies of scale required Threat of New Entrants ? 0 Competitive Rivalry: •? Extremely concentrated revenues: Pepsi + Coke 75% market (duopoly), followed by Cadbury at 14,5% (Exhibit 2). •? Increased rivalry due to declining consumer demand for CSDs- innovation and marketing. •? Market saturation: competition is fierce and reduces profitability. However, it also enhances innovation/creativity. Power of Suppliers + Power of Suppliers: •? Few inputs are required by both CPs and bottlers: concentrate’s ingredients; sweetener and packaging.

•? owever, plastic prices is increasing (42% H plastic bottles) •? ow-moderate power because a lot of suppliers L (easy to substitute) and only 3 big companies ? interest of the former in building long-term relationships. Competitive Rivalry Power of Buyers ++ Power of Buyers: •? 5 principal channels: -? Supermarkets (31%) and Mass Merchandisers (13%) need Coke and Pepsi but control over premium shelf space ? low price + visibility competition = lower profitability .

-? Fountain (23,4%): exclusivity to one manufacturer = strong bargaining power -? ending (14.5%): no bargain power, most V profitable channel -? onvenience-and-gas (15%): high-margin C channel (20-oz PET bottle). ++++ Threat of Substitutes: •? Other beverages (Non-carbs): bottled water, juices, tea, coffee, energy drinks. •? Can be handled via acquisitions (Minute Maid), alliances (Coke-Danone) or diversification (Pepsi’s aquafina). Threat of Substitutes +++ 3 2. Concentrate producers and bottlers, inextricably linked but… Concentrate producers Inputs Process Output Few ingredients: caramel coloring, flavors, caffeine… Little capital investment Concentrate.

Bottlers Concentrate, sweeteners and packaging Capital-intensive and high speed production lines Product ready to be sold to customers On one hand CPs support bottlers by: •? Investing in advertising, promotion, market research •? Negotiating on behalf of bottlers suppliers to achieve a reliable, faster and cheaper delivery On the other •? Bottlers buy concentrate from CPs using a formula that determine a price linked to the consumer price index. •? They are allowed to handle concentrates produced by others brands but who are not directly competing brands.

They are ultimately dependent on the same customers 4 …different in terms of profitability Different sources of value: •? oncentrate producers get value from their C secret recipe. Thanks to this un-replicable proprietary they can leverage on the price of the concentrate. •? ottlers must handle both with: B -the concentrate producers which grant them exclusive territories (to reduce rivalry) and share some cost savings but asks high price for their product. -their customers, to create strong relations that will ensure higher sells and shelf space, but want to pay less for not switching to other brands.

(Direct store door agreements) Net sales Cost of sales Gross profit Conc. producer Bottlers $ per case 0,97 0,16 0,81 % of sales 100% 17% 83% 200 4 $ 9,68 $ 1,45 $ per case 4,70 2,82 1,88 % of sales 100% 60% 40% From exhibit 4 1988 Retail price per case Concentrate d price per case $ 8,78 $ 0,79 + 10,25% + 83,54% ? Bottlers have to pursue a low price strategy whilst the price of the concentrate raises. 5 3. Powerful position in traditional sources of strengths can be leveraged to face 21st century’s new demands COKE C O M M O N PEPSI Strengths •? Brand value •?

Customer responsiveness •? Ability to adapt to changing consumer demands. •? Strong distribution channel •? Good financial muscle: High return on sales, high ROE. •? Constant Product Innovation. •? Product diversification (“Total beverage company”) •? Well aligned strategy between CPs and bottlers (PBG). •? Efficient marketing campaigns. •? 47% of global volume sales in carbs. •? International presence (First mover advantage abroad). •? Ability to differentiate from the competition. Weaknesses The existing distribution system is not so efficient for non-carbonates. •?

Excessive reliance on its traditional CDS-oriented model. •? Complex relationship with bottlers in USA (risk of lack of alignment in strategies). •? Focused on the US market •? Little presence abroad 6 Consumption changing patterns leading to substitution and forcing the industry to adapt Demand for its core product has leveled off: Americans still drink more CSDs than any other beverage but its growth rate was less than 1% on average between 1998 and 2004. CAUSES •? Health conscience: pressure from scientific community to research the effects of caffeine consumption and obesity concerns.

•? New federal nutrition guidelines. RESPONSIVE STRATEGIES •? So, future of carbs? DIET products: “treating Diet Pepsi as the flagship brand”; new lines (e. g. Coke Zero) •? Need for alternative beverages: PepsiCo better positioned than Coke as a “total beverage brand” (Exhibit 2) •? Organic growth, acquisitions or/and alliances. •? New markets: Coke’s higher international presence (Exhibit 10) US Liquid Consumption Trends 60 50 Gallons/capita 40 downward trend Carbs 30 Bottled water upward trend 20 Coffee Juice Tea Sports drinks 10 0 Years Source: Exhibit 1.

7 3. a) Cola war in international markets can be beneficial to both companies •? opulation growth in developing countries P •? Globalization has provided a boost to the people from the emerging economies to move up the economic ladder •? Per capita consumption in the emerging economies is very small compared to the US market ? huge potential for growth •? Real growth in demand of beverage products •? Improved access to markets in Asia and Eastern Europe DIFFICULTIES •? Cultural differences •? Weak economic environment •? Legal constraints •?

Foreign exchange controls: revenue from international sales is exposed to currency fluctuations, which are particularly adverse with stronger U. S. dollar INTERNATIONAL strategy Main emerging markets: China, India and Russia. Highest population and expected market growth rates Already established markets •? Coke: Western Europe and Latin America •? Pepsi: Middle East and Southeast Asia 8 3. b) There is potential growth in healthier choices. Further diversification could be pursued… 9 … by leveraging their distribution prowess COKE Diversify portfolio in US market •? •? PEPSI Strengthen brand names in US market •? •?

Purchasing new companies Further development of their own non-carbonated drinks and snack foods Innovate new products •? Already owning Gatorade, Frito Lay, Quaker and Tropicana Lower cost structure to be more price competitive in the US 10 a&b) Coke and Pepsi could achieve sustained profitability by seeking growth in international markets and diversifying their portfolio, while maintaining their traditional market as well DOMESTIC market INTERNATIONAL market Noncarbonated and healthy drinks, snack food Main products Noncarbonated and healthy drinks, snack food Main products Long-term objective 11 THANK YOU FOR YOUR ATTENTION.

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Carbonated Soft Drink Analysis. (2017, Mar 15). Retrieved from https://studymoose.com/carbonated-soft-drink-analysis-essay

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