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Soft Drink Industry Analysis Report

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Question :

What is the Analysis Report of soft Drink ?
 
 

Answer :

Introduction

Soft drink industry enjoys profitability particularly for concentrate producers compared to bottler. The Michael’s Porter’s Five Forces has remained the de facto framework for analysis of industry since its inception.  The Five Forces gives the measure of how the market derives its attractiveness. In this analysis, the conclusion drawn from Five Forces scrutiny is applied by analysts in the determination of risk of the Coca-Cola Company in soft drink industry.

Bottlers

The bottlers buy concentrate and then combine it with carbonated water alongside fructose corn syrup, bottle which is the resultant CSD produce and subsequently supply it to the accounts of customer. The procedure of bottling remains a capital intensive and requires high hustle production line which remain substitutable solely for merchandises of comparable kind and packages of analogous size. Firms like Pepsi and Coke enjoy franchisee contracts with the available bottler’s that hinder them from partaking new rivaling brands for comparable commodities (Hamer, 2011).

Bottler’s engaged in bottling a commodity of a firm can never back any other firm, therefore, rendering it hard for a new contestant.  Moreover, with backward integration, whereby Pepsi and Coke purchase substantial percent of bottling firms, it remains hard for a company making entry to get bottler’s eager to dispense its produce (Gasmi, Laffont & Vuong, 2014). To attempt to establish its individual bottling plant, a new competitor would be extremely capital intensive and a hard chore.

Retailers

The CSDS distribution occurs via Supermarkets, vending machines, fountain outlets, convenience stores, mass merchandisers, gas stations and drug chains alongside other outlets. Supermarkets remains the major distribution channel whereby bottlers battler for shelf space to make sure visibility for products. There will be strong rivalry for a new-fangled entrant in this ever-enlarging range of commodities given by current firms.  The mass merchandisers include discount retailers and warehouse such as Walmart. Such firms sell widespread alongside prominent commodities such as Pepsi alongside Coke, hence for a new participant to penetrate, a merchandiser remains a hard mission.

Concentrate Producers

Concentrate producers also play a key role in the soft drink industry value chain. It is these producers that starts the process of soft drink production. They produce Syrup which is then used by bottler through the distributor to merchant and finally to consumer. They produce these beverage concentrates alongside syrups to ratified bottling associates, that make ultimate item through the combination of concentrates with sweeteners and carbonated or still water alongside additional ingredients.  The bottler’s will subsequently package concentrate producers’ products in bottles thereby selling them indirectly to distributors or directly to retailers. 

Suppliers

These can be looked at in terms of commodity ingredients.  Most of raw materials required for the production of concentrate remain basic merchandises including flavor, color, packaging, additives, and sugar. Such commodities essentially remain basic. Accordingly, producers of such commodities lack power over pricing and, therefore, suppliers in the industry remain feeble (Zhang & Suslick, 2013).

Buyers

Food stores, vending, convenience stores, fast food fountain alongside others remain major channels for soft drink industry. The profitability of individual segment precisely indicate the power of buyers and the how dissimilar buyers make payment for diverse prices on the basis of their negotiating power.  

For food stores sector, the buyers are consolidate somewhat with many chain stores and scarce domestic supermarkets.  They can avail space for premium shelf thereby giving them ability to command lesser prices. Their concentrate producers’ NOPBT is 0.23 dollars per case.

For convenience stores sector of the buyer’s remains disjointed exceptionally and, therefore, buyers have to make payment at greater prices. The NOPBT in this subdivision is 0.59 dollars a case.

For Fountain sector of buyers’ remain least profitable since there are large amount of purchasers they make. It permits them to enjoy liberty of negotiating. Coke mainly regard fountain sector ‘paid sampling’ with low margins.  The NOBTB of fountain is $0.09 a case.

For vending segment which serves customers straight with unconditionally no power with purchaser. It has NOBT of $0.97 a case.

 

Substitutes

There is a big number of alternatives including beer, coffee, water, and juices among others to final customers. However, this contradicted by concentrates benefactors by enormous brand equity, advertising as well as making products available effortlessly for customers that most alternatives can never match (Porter, 2008). Moreover, soft drink firms like Coca-Cola engage in business diversification by providing substitutes individually thereby shielding their products from competition (Porter, 2011).

How Formidable Are Barriers

Various factors make it hard for competition to enter soft drink industry. For example, with respect to Bottling Networks, Coke and Pepsi enjoy franchisee contracts with prevailing bottler’s that further enjoy privileges in given geographical regions perpetually. Such contracts hinder bottler’s from supporting new-fangled rival brands for comparable commodities.

The latest bottler’s alliance alongside backward integration whereby Pepsi and Coke purchase substantial percentage of bottling firms has made it further problematic for a company incoming to get bottler’s enthusiastic to undertake distribution of their products (Barney, 2015). Therefore, new entrants trying and building bottling plants will mean capital intensive effort with newfangled well-organized plant capital needs which locks them out.

The huge advertising cost further makes it awfully hard for a new entrant to contend with existing firms and advance visibility. The Coca-Cola enjoys an extended advertising history thereby earning enormous quantity of brand equity alongside loyal customers worldwide. This virtually makes it incredible for any new entrant to cope such a scale in industry (Yoffie, 2012).

Retailer further puts barriers as they enjoy substantial margins of fifteen to twenty percent on such drinks for the offered shelf space.  Such margins remain fairly substantial for bottom line. They thus make it hard for new contestants to persuade retailers to substitute or carry new commodities for Pepsi and Coke.

Fear of reprisal also puts formidable barrier as new entrants fear already entrenched Coco-Cola which is a rival behemoth. Coca-Cola can use price wars that effect new entrant.      

How Intense is Rivalry     

Coke has remained increasingly dominant controlling 53 percent of share of market in the year 1999 in global marketplace in comparison to 21 percent of Pepsi. This is because Coke took advantage of Pepsi making entry into the market a bit late. Accordingly, Coke has established own bottler’s alongside networks for distribution particularly in advanced economies (Yoffie, 2012). This puts Pepsi at substantial drawbacks contrasted to United States marketplace. However, Pepsi is attempting to pawn Coke by aggressively competing in evolving markets whereby supremacy of Coke is never as entrenched (McKelvey, 2011). The rivalry globally is headed for a more entrenchment with expectation that emerging markets growth will substantially surpass developed markets’ growth.

Conclusion

The profitability of concentrate business is high than bottling business. There is a need for vertical integration to ensure attractiveness in packaging to final user and hence forestall new rivalry from making entry into business where they have bottling control. Coca-Cola should increase diversification into drinks that are non-carbonated. This will pawn the crushing carbonated drinks’ demand hence sustaining its profitability in wake of flattening demand as well as rising attractiveness of non-carbonated drinks.

 

References

Barney, J. B. (2015). Looking inside for competitive advantage. The Academy of Management Executive, 9(4), 49-61.

Gasmi, F., Laffont, J. J., & Vuong, Q. (2014). Econometric Analysisof Collusive Behaviorin a Soft?Drink Market. Journal of Economics & Management Strategy, 1(2), 277-311.

Hamer, L. O. (2011). Us versus them: oppositional brand loyalty and the cola wars. NA-Advances in Consumer Research Volume 28.

McKelvey, S. M. (2011). Coca-Cola vs. PepsiCo-A" Super" Battleground for the Cola Wars?. Sport Marketing Quarterly, 15(2), 114.

Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard business review, 86(1), 25-40.

Porter, M. E. (2011). How competitive forces shape strategy. Strategic Planning: Readings, 102-117.

Yoffie, D. B. (2012). Cola wars continue: Coke and Pepsi in the twenty-first century. Harvard Business School Publishing Corporation.

Zhang, C., & Suslick, K. S. (2013). Colorimetric sensor array for soft drink analysis. Journal of agricultural and food chemistry, 55(2), 237-242.

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