The Soft Drink Industry Essay Example for Free

The Soft Drink Industry EssayIndiana University-South Bendhe average U.S. consumer draws more than than mild drinks per capita (2.3 eight ounce servings a day) than any other potable, including milk. Table 1 shows the per capita enjoyment of various beverages in the U.S. for 1991-1995. In terms of 1995 retail sales, cushiony drinks in the U.S. atomic number 18 a $52 billion dollar industry (Standard Poors Corp., 9611). The U.S. market growth for flaccid drinks, however, has slowed to single digits since the end of 1980s (Sawinski, 95550). Fifty-four percent of the worlds subdued drink hoi polloi is sold outside nitrogen America, and in 1995, the per capita aspiration of subdued drinks in continental markets outside North America ranged from a low of 2.02 gallons in Africa to a mettlesome of 13.86 gallons in South America.INDUSTRY PRODUCTS AND VALUE CHAINThe industry, erstwhile synonymous with the Cola, has instantaneously self-aggrandising into one with a wid e range of products. Additional flavors such as orange, cherry, lime, lemon, pepper, and ginger ales agree appeared in the market, and caffeine-free and diet versions of almost all of the industrys products arrive at been introduced. In 1996, Cola brands occupied the top two marketshare positions in the U.S., while non-cola brands such as Mountain Dew, Sprite, and 7UP were overly among the top ten best-selling soft drinks. Also, in 1996, sales volume for the top two Colas, Coca-Cola Classic and Pepsi-Cola, grew 3.2% and 3% respectively, while sales volume for Mountain Dew and Sprite grew 5.7% and 17.6% respectively. Table 2 shows the list of 10 best selling soft drinks in the U.S. market.Soft drinks are made by mixing syrup (which is made from raw materials such as sugar, sweeteners, and seasoner additives) with carbonated water. speckle some of the soft drinks are sold at typefaces, others are packaged in bottles or atomic number 50s.A large portion of the soft drink indust rys sales is in the packaged form (Sawinski, 95549 estimates that 75% of all soft drinks sold in the U.S. were in the packaged form). Coca-Cola Co. and PepsiCo have historically maintained control over bottling and dispersal through part or full featureership of some of their bottling plants. Cadbury Schweppes, on the other hand, has chosen to outsource its bottling unravel in the U.S. market. Cadbury Schweppes relies on independent bottlers and the bottling operations owned by Coca-Cola Co. and PepsiCo to bottle its products. Recently, Coca-Cola Co. and PepsiCo decided to drop some of Cadburys brands from their bottling operations to make room for their own brands. As a result,Cadbury estimates that it has lost about 20 gazillion cases in sales (Theodore, 97a40). In another recent razet, PepsiCo lost a significant part of its Latin American business when its Venezuelan bottler defected to Coca-Cola Co. (Sellers, 9674-78).Bottling operations and syrup production differ in their capital intensity and lucrativeness. For example, in 1995, Coca-Cola Enterprisesa company engaged chiefly in bottling and distributionhad revenues of $0.75 for e really dollar invested in assets, while Coca-Cola Co., which is primarily engaged in syrup production, enjoyed revenues of $1.25 for every dollar invested in assets. Also, while Coca-Cola Co. earned a 17% return on sales in 1995, an average company engaged primarily in bottling and distribution of soft drinks would earn between 2 to 5% (Standard Poors Corp., 9622).INDUSTRY STRUCTUREIndustry Players and CompetitionThe U.S. and ball-shaped soft drink industries are quite concent arranged. Long dominated by two companies, Coca-Cola Co. and PepsiCo, the industry saw the emergence of a third significant player when Cadbury Schweppes acquired the Dr. Pepper and 7UP brands in 1995. Table 3 shows that the top three firms accounted for 90% of the U.S. soft drink market in 1996, and Table 4 shows that the same three firms contro lled 77% of the world soft drink market in 1995. Appendix 1 provides a list of product lines and their performance for each of the three firms, and Appendix 2 provides selected financial data for the three companies.Soft drink sales volume in the U.S. has grown at an average annual rate of 3.28% over the last five years, reaching 14,199.5 one thousand million gallons in 1996. Soft drink sales outside North America represented 54% of the world sales volume in 1995 and have grown at an average annual rate of 6.52% between 1990 and 1995. Table 5 shows worldwide soft drink sales volume by continent, and Table 6 shows worldwide per capita soft drink consumption by continent.New Entry Into the IndustryThe production technologies required for manufacturing soft drinks is widely available for potential entrants. Competing on a theme or global scale, however, requires the ability to manufacture and distribute a well-recognized brand. Soft drinks are among the most advertised products, and soft drink commercials are a regular feature in most high-profile advertising events. In 1996, for example, Coca-Cola Co. had an unprecedented one hundred commercial spots during the Summer Olympics, and PepsiCo had anumber of commercials during the super-bowl. Coca-Cola Co., PepsiCo, and Cadbury Schweppes spent a total of $469.1 million on media advertising in the U.S. market between January and September 1996, up from the $370.7 million spent during the corresponding period in 1995 (Beverage Industry, 3/97 40-41). channel of DistributionAs mentioned earlier, there are two main channel categories in this industrypackaged product channels and springtime channels. The packaged product channels accommodate supermarkets, mass merchandisers, drug stores, and vending machines. Fountain channels accept fast-food eating houses, sports arenas, convenience stores, and gas stations. While supermarkets are, at present, the largest channel in the U.S., the fountain channel has been ontoge ny fast. According to Bill Perely, Senior Vice hot seat/General Manager of fountain/foodservice for Dr. Pepper/7UP, fountain sales in the U.S. grew at an average annual rate of about 5% in the last five years, while overall soft drink sales in the U.S. grew at an average annual rate of about 3% during the same period (Sfiligoj, 9754). Bill Perely attributes the growth in fountain sales to the increased popularity of fast foodsin particular the carry-out member of fast foods.Soft drink companies have stepped up their efforts to capture a larger share of the fountain business by introducing more of their brands at the fountain, by aggressively competing for service contracts with high-profile customers, and by working with fountain outlets on joint promotion and dispensing technologies. Jeff Dunn, Vice President of field sales and marketing at Coca-Cola Co., notes that fountain customers are becoming increasingly brand conscious. He says, For years, consumers have basically asked fo r a generic kind of soft drink from the fountain dispenser at the restaurant they were in, but thats changing. Now consumers actually ask for a soft drink by its namelike Sprite instead of 7UP, for instanceand wont substitute one for the other (Sfiligoj, 9760).To fountain outlets like fast-food restaurants or convenience stores, increased brand consciousness means that they can attract more customers by carrying manysoft drink brands instead of just a some. Signs of fountain outlets seeking to diversify the brands that they carry emerged in early 1996 when Circle K corporation took Coca-Cola Co. to court seeking to fuel its fountain contract which precluded Circle K from selling other company brands at its fountains (Sfiligoj, 9756). Circle K prevailed in its efforts, and its stores now have a range of non-Coke brands along with Cokes products. It remains to be seen if Circle Ks court battle signals a new era in the fountain business, one where fast-food restaurants and other foun tain outlets no longer carry the brands of just one soft drink company.In international markets, soft drink companies face a number of distribution challenges. In many of the emerging country markets such as India, China, and Indonesia, for example, poor road conditions and other infrastructure problems render efficient distribution by trucks very difficult. Physical distribution in these markets often involves using an army of people on tricycles and bicycles to haul the products through narrow and winding streets. At the retail end, problems include lack of refrigerators in retail outlets and even lack of power lines in some places. Overcoming these distribution problems has required and may continue to require sizable investments in infrastructure development and giving away or loaning coolers.SuppliesSupplies for soft drinks include various ingredients use in the production of soft drinks and packaging materials used for the finished product. Soft drink production involves mixin g a number of ingredients including water, preservatives, sugar/sweeteners, flavors, coloring agents, and carbon dioxide. Appendix 3 provides an example of a soft drink production batch sheet.Table 7 shows the worldwide soft drink ingredients consumption for 1996 and consumption estimates for 2001. Bulk sweetener refers to sugar manufactured from rustic produce such as cane and beat. According to the sparing research unit of the U.S. department of agriculture, the world spot price for sugar has been trending down and averaged 12.10 cents a pound in thelast quarter of 1995. Looking ahead, the economic research unit forecasts the world sugar production for 1996/97 (October 1996 to September 1997) at 125.1 million metric tons and the global consumption of sugar for the same period at 123.0 million metric tons (Beverage Industry, 5/9743).High-intensity sweeteners, in tune to sugar, are compounds that result from extensive research and development by food product companies. These swee teners are subject to very close scrutiny by the U.S. nutrient and Drug Administration before being approved for use in soft drinks and other food products. Currently used primarily in low-calorie and sugar-free beverages, the consumption of these high-intensity sweeteners remains low. A beverage industry report points out that the consumption of high intensity sweeteners in soft drinks is expected to rise as more companies producing these products gain FDA approval.In the 1960s, aluminum cans began to make inroads into the beverage container business. Working diligently to capture a larger share of the container market, aluminum can companies had reduced the woo of using their products by minimizing the aluminum content in cans and by helping their customers develop equipment to produce cans at machine-gun speed and fill them at very high rates (2,000 cans per minute). These innovations enabled aluminum can makers to capture just over a quarter of the soft drink container market by 1985. In the last few years, however, aluminum can companies have faced intense competition from plastic bottle makers. As soft drink companies began to realize that customers valued the way a product looked and felt, and were willing to pay more to get these attributes, they increased their utilization of the more profitable single serve plastic bottles.Brian W. Sturgell, Executive Vice President of the aluminum can maker Alcan, observes that the soft drink companies sell 20 ounces in plastic bottles for a buck, while you can buy a 12-pack of cans for $2.39 . . . Its an amazing profitability gap (Baker Harris, 97108). In wake of these developments, aluminum can makers are attempting to stay competitive and grow their market shares by rethinking their plain looking cans. They are experimenting with new shapes, new feel, and reclosable lids for their cans. Redesigning the cans along these lines will not be easy, however, because the can makers have to invest in research and devel opment to overcome the technicalchallenges involved, even as competition forces them to hold or lower their prices. See Table 8 for soft drink container marketshares.Table 8 Soft Drink Container commercialize Shares (%) (Gallons of SoftSubstitute ProductsHealth and fitness concerns, as well as an increasing appetite for something new and different, have resulted in a flurry of alternate(a) beverage product introductions in the U.S. market. For example, 3524 new products were introduced in 1996 compared to 1540 new products introduced in 1986 (Beverage Industry, 3/9753). The range of new products introduced include cold coffees, caffeinated and flavored water, carbonated flavored milk, result and vegetable juice blends, caffeinated orange juice, micro-brewed root beer, and alternative lifestyle products such as anise-based drinks blended with vanilla and other extracts and cinnamon-based beverages flavored with garlic and cayenne pepper. Table 9 shows the sales volume for new beve rages between 1990 and 1996, and Table 10 compares the sales of new beverages with soft drink sales. Although some soft drink companies have their own alternative beverage operations, the rapid growth of alternative beverages brings forth many new companiesincluding Starbucks, Campbell Soups, Tropicana, and Quaker Oatsthat soft drink makers need to contend with.TRENDSGeneral economyThe annual GDP growth in the U.S. averaged 2.32% between 1991 and 1995. During the same 1991-95 period, inflation in the U.S., measured by the consumer price index, averaged 3.19%, and the lending engagement rate aerated by U.S. banks on loans to prime customers averaged 7.34%. Table 13 summarizes these numbers and excessively provides corresponding numbers for two earlier five-year periods. Table 14 provides key economic indicators for twenty other countries of the world.TechnologyAdvances in technology have improved all aspects of the soft drink industry. For example, advances in additives such as s ugarless sweeteners, caffeine free products, and new flavorings have enabled the industry to provide products that meet changing customer tastes and preferences. Computerized manufacturing technologies have contributed to higher efficiency and quality in bottling operations. Computerized systems can now be used to measure key aspects of beverage production such as syrup usage, Brix count (per cent sugar), and beverage carbonation (Sawinski, 1995552-553). Advances in logistics and information technology are helping companies enjoy better inventory control, faster truck check-in and check-out, better stock rotation at the warehouse, and eliminate truckload errors (Sawinski, 1995552-553).Technological advances have also helped the sales end of the business. The so-called smart vending machines use electronic components to track sales patterns, stocks, and equipment breakdowns. When equipped with wirelesscommunications software, these machines can also automatically reorder stock, elimi nating the need for manual stock checks. Faster fountain dispensers are also being developed to better serve customers on the go. other innovation that could revolutionize the business is the self-chilling can developed by The Joseph Company (Dawson, 9774-78). The technology for this product involves mounting a small aerosol can filled with pressurized liquid refrigerant upside down in a 500-ml beverage can, leaving room for 330 ml of beverage.The aerosol valve head and the activator button is set at the bottom of the can. When the activator button is pushed, the liquid refrigerant draws heat from the warm beverage and escapes out as gas through the valve in the cans base. In the process, the temperature of the beverage drops by 30F in 120 seconds. This product would eliminate the need for refrigeration and is slated for commercial introduction in the last quarter of 1997. ab initio targeted to the high-convenience sector of the U.S. market, the self-chilling can could eventually help soft drink companies overcome refrigeration problems faced in emerging country markets.PoliticalMany countries that were once inaccessible to foreign companies are opening up their markets. Countries that have opened their markets in recent times include China, India, and Indonesia, which together account for nearly half(a) of the worlds population. These countries also have among the lowest per capita soft drink consumption levels in the world. While the mere opening of these markets does not assure success for multinational soft drink companies, they do provide an opportunity previously unavailable to them. Success in such new markets will depend on learning to conk in dissimilar cultures, managing political and currency risks, and overcoming infrastructural problems.Regulative EnvironmentThe soft drink industry is subject to a range of government regulations. In particular, regulations in two areas are noteworthy. First, as a foodproduct, soft drinks come under the purvie w of the Food and Drug Administration in the U.S. and corresponding restrictive bodies overseas. The FDA, for example, tests and certifies new ingredients such as high-intensity sweeteners before they are allowed to be used in soft drink production. The second area of regulation that is of particular interest to the soft drink industry relates to the natural environment. The impact of soft drink packaging materials on the natural environment has been one of the most important issues in this respect.In the U.S., in response to public concerns, there has been a series of legislative activity at both the federal and state levels (Beverage World DataBank, 1997213-226). While individual proposals may differ in some respects, most federal legislative proposals address one or more of the following objectives (1) Minimize the amount of money of packaging material entering the nations solid photocopy system (2) minimize the consumption of scarce natural resources (3) maximize the recyclin g and reuse of packaging materials and (4) cheer human health and the natural environment from adverse effects associated with the disposal of packaging materials. In addition to the federal efforts in this regard, many states have select laws to govern packaging materials.Fifty-one states enforce laws dealing with litter control and prevention and administer recycling and public awareness programs. Nine states have adopted deposit laws for beverage containers, and twenty-seven states place restrictions on multi-pack carrier materials. The multi-pack carrier restrictions require that the plastic ring carriers be made of degradable material that decomposes when discarded. Also, thirty-eight states have laws that regulate the sale of beverage containers with detachable metal pull tabs. In most of these thirty-eight states, it is unlawful to sell a beverage in a container designed with a detachable metal opening device.In a demonstration of social responsibility, the major players i n the soft drink industry and the national soft drink association have joined the Environmental Protection Agencys voluntary program WasteWi$e (Beverage Industry, 9/9739-41). The program requires members to commit to implementing/expanding their waste reduction programs in three areaswasteprevention, recycling, and purchasing or manufacturing recycled products. A charter member of the program, Coca-Cola Co. recycled more than 1.2 million pounds of turn up paper and other recyclables in 1995. Coca-Cola Co. also purchased $2 million in recycled content materials. PepsiCo has made modifications to its soda cans and the containers that transport them. For example, PepsiCo has replaced single-use corrugated transport containers with reusable plastic cases for its 1-liter and 20 ounce packages, eliminating 196 million pounds of corrugated material in the process.