Global Carbonated Soft Drink Industry - Case Study Example

Global Carbonated Soft Drink Industry 0 Introduction The global carbonated soft drinks industry, which consists of standard cola, diet cola, fruit-flavored carbonates and mixers generated revenue of $204 billion in 2012 (MarketLine, 2013). The industry has registered a compounded annual growth rate (CAGR) of merely 1.7 percent between 2008 through 2012. The Asia-Pacific region registered the highest CAGR of 3.9 percent during this period. The global carbonated soft drink market is expected to grow at a CAGR of 2.2 percent in the coming years and is likely to become a $227 billion industry by 2017 (MarketLine, 2013). The standard cola segment remained the most popular type of carbonated drink in 2012 with market share of 41.3 percent. The fruit-flavored carbonates segment stood a distant second with 31.7 percent of the carbonated soft drink market share. In terms of geographic segmentation Americas accounted for 47.8 percent of carbonated soft drinks consumption followed by Europe (33.9 percent) and Asia-Pacific (16.3 percent) (MarketLine, 2013). 2.0 Major Competitors The Coca-Cola Company, PepsiCo Inc., and Dr Pepper Snapple Group, Inc. are the leading players in the global carbonated drinks industry. The market share of these companies is shown in Figure 1. Source: MarketLine, 2013 2.1 Corporate Level Strategies 2.1.1 Corporate Level Strategy of Coca-Cola The Coca-Cola Company, based in Atlanta, United States, is the world’s biggest beverage company. The company has been in existence for 128 years and has become a household name in more than 200 countries where its products are sold (Us.coca-cola.com, 2014). While North America and Latin America put together account for 50 percent of the company’s unit sales, Europe accounts for 14 percent of such sales. The company generates rest of its revenue equally from Eurasia & Africa and the Pacific region. The sales figures suggest that Coca-Cola is not dependent on any particular geographical region of the world for generating revenue. Coca-Cola’s mission is to ‘refresh the world, inspire moments of optimism and happiness, to create value and make a difference’ (Us.coca-cola.com, 2014). The Coca-Cola Company has formulated the ‘2020 Vision’ to guide its strategic actions. The strategy focuses on 6Ps; profit, people, portfolio, partners, planet and productivity. The company aims to double its system revenues by implementing this strategy. The beverage behemoth plans to invest heavily in sales and market execution and thereby achieve economies of scale and scope. Coca-Cola recognizes the fact that human resources are the most valuable assets. Hence as a part of its 2020 Vision strategy, it strives to attract and retain the best talent. The Coca-Cola Company’s endeavor is to develop premium yet scalable brands in the future to enable it double its daily servings to more than 3 billion. Coca-Cola understands that its growth is dependent on its business partners and therefore the company intends to align its franchise structure and operate as an integrated global enterprise. As a part of its strategy, the company will take into consideration the interest of the communities in which it does business and adopt a sustainable business model wherein due care is taken to preserve the environment. Last but not the least, Coca-Cola plans to increase operational efficiency, minimize energy use and simplify its business processes with the help of IT systems (The Coca-Cola Company, 2014). 2.1.2 Corporate Level Strategy of PepsiCo PepsiCo is a leading food and beverage company in the world. The company has adopted growth as a corporate level strategy and intends to become a profitable, sustainable corporation that is geared to meet the challenges of the 21st century. The company conducts its business through four global business units (GBUs) to effectively manage its humungous portfolio and vast geographies where its products are sold. These GBUs; PepsiCo Americas Beverages, PepsiCo Americas Foods, PepsiCo Europe, and PepsiCo Asia, Middle East & Africa have played a pivotal role in the company’s expansion plans (Pepsico, 2013) PepsiCo’s mission is to become a leading company that is ‘focused on convenient foods and beverages’ (Pepsico.com, 2014). The company is committed to providing growth to its shareholders, employees and business partners. PepsiCo has signed agreements with other companies to fuel its growth objectives. Its strategic alliance with Tingyi Holding Corp., a leading instant noodles and beverages manufacturer in China is a case in point. The strong distribution network of Tingyni gave PepsiCo an immediate access to the Chinese market (Ho, 2013). Likewise, PepsiCo acquired the Quaker Oats Company and made foray in the healthful foods business (PR Newswire, 2000). 2.1.3 Corporate Level Strategy of Dr Pepper Snapple Group Dr Pepper Snapple Group, headquartered in Texas, United States is a flavored carbonated soft drink company in the country. The company is well known for developing and marketing functional non carbonated beverages (Drpeppersnapplegroup.com). The beverage major is famous for its originality, distinct and bold flavors and consumerist spirit. Dr Pepper Snapple Group, known as DPS, has adopted an integrated business model wherein it has become a vertically integrated company that manages the entire value chain on its own. Dr Pepper Snapple Group’s mission is to ‘Be the Best Beverage Business in the Americas’ (Dr Pepper Snapple Group, 2013). As a strategy, DPS has grown through the organic as well as inorganic route. The company’s history is marked with numerous mergers and acquisitions as well as several in-house innovations. Dr Pepper Snapple Group is assiduously working to fortify the route-to-market for its products by acquiring regional bottling plants. The company’s focus area remains high growth and high margin categories where the company is consolidating its position through new product launches and brand extensions (Drpeppersnapplegroup.com, 2014). 2.2 Business Level Strategies Michael Porter opined that a company could achieve competitive advantage by adopting one of these three strategies; cost leadership, differentiation or focus. Differentiation is a key business level strategy used by companies to provide unique or superior value to the customers. The essence of this strategy is to make the company’s market offering different from that of the competitors. This distinctiveness in the market offering can be achieved through the size, shape, and ingredients of the product, service quality or distribution channels (Allen & Helms, 2006). Coca-Cola, PepsiCo and DPS use the plank of differentiation to attain competitive advantage. All the three companies use innovative tactics in product development, distribution channels or promotional campaigns to stand apart (Coleman, 2009). Given the volumes and scale of operations, especially those of Coca-Cola and PepsiCo, one would expect that they become cost leaders and compete on the basis of price. However, in reality, the plank of price has become a source of ‘competitive parity’ for these firms. If one company reduces the price of its products, the rival company follows suit immediately (Valipour et al, 2012). Competing on the price plank alone can lead to price wars and erode the profitability of these companies. These companies thus use the differentiation strategy to make their market offering unique and valued. Coca-Cola, PepsiCo and DPS use their non-price attributes to develop and maintain loyal customers and gain market share. The constituents of the drink, flavors, varieties, bottle shape, size, and advertisements prove as valid differentiators. The Coca-Cola Company launched the Freestyle machine that enabled customers to make their own beverage flavor and offered as many as 106 choices (Lud, 2013). PepsiCo developed snacks and beverages that specifically appealed to people in Asia; one of the fastest growing markets for such products (Wehring, 2013). PepsiCo has also given a lot of importance to marketing research which enables it to understand consumer tastes and preferences. The overhauling of the Gatorade line of drinks and use of natural zero-calorie sweeteners underscores the innovative intent of PepsiCo (Beverage Industry, 2010). DPS also keeps a close check on customer needs and requirements. In response to consumer demand, DPS launched its light, all-natural tea with real sugar that did not taste too sweet (Morton, 2012). 2.3 Portfolio Analysis 2.3.1 Major Brands of Coca-Cola The Coca-Cola Company has more than 3500 products in its repertoire (Us.coca-cola.com, 2014). The company owns 17 billion-dollar brands. These include Coca-Cola, Powerade, Aquarius, Dasani, Fanta, Georgia, Minute Maid and Sprite (The Coca-Cola Company, 2014). 2.3.2 Major Brands of PepsiCo PepsiCo has a vast array of food and beverage brands that have the potency to satiate the taste buds of millions of people all over the world. The company has divided its product assortment into four distinct categories; Global Brands, Good For You Brands, Better For You Brand and Fun For You Brands (Pepsico.com, 2014). There are 22 iconic brands of PepsiCo that generate more than a billion dollars of annual revenue apiece. These include Pepsi, Lays, Gatorade, Tropicana, Doritos, Quaker Oats, Cheetos, Aquafina, Brisk, Tostitos, Mist and Ruffles (Pepsico.com, 2014). PepsiCo’s has continued its strategy of tapping into the ever increasing consumer interest in health and wellness (Christina, 2006). The Better For You brands are healthful snacks and beverages that have a lower fat and sugar content and fewer or zero calories. Baked Lays, Grain Waves, Alvalle, Propel Zero, Pepsi Kick and So Be Lifewater are some of the popular brands in this category. The Good For You Brands are nutritious products that improve the physical and mental faculties of the consumer. Quaker Stila, Tropicana Farmstand, Muller, Oatmeal Squares, Naked Juice, and Sunbites fall in this category. PepsiCo’s Fun For You Brands include Cheetos, Kurkure, Sabritas, and Fritos (Pepsico.com, 2014). 2.3.3 Major Brands of Dr Pepper Snapple Group DPS markets more than 50 brands that are well known for their distinct flavors and refreshment value. Of the top 10 non-cola soft drinks marketed in the United States, six belong to DPS’s portfolio. Thirteen of the company’s leading brands occupy the first or the second position in terms of market share in their respective flavor categories (Drpeppersnapplegroup.com, 2014). The company boasts of having the best-tasting, low-calorie drinks in its portfolio (Health & Beauty Close - Up, 2012). Dr Pepper and Snapple are the company’s flagship brands. DPS’s other popular brands are 7UP, A&W, Canada Dry, Clamato, Crush, Hawaiian Punch, Motts, Roses, Schweppes, Squirt, Sunkist soda and Yoohoo (Drpeppersnapplegroup.com, 2014). 2.4 Performance Analysis The strategies adopted by Coca-Cola, PepsiCo and DPS have an impact on their financial performance. The performance of these companies on select parameters is depicted in Figure 2 (a) and Figure 2 (b). The revenue of Coca-Cola, PepsiCo and Dr Pepper Snapple Group from 2008 through 2012 is depicted in Figure 2(a). Source: MarketLine, 2013 The revenue of PepsiCo remained higher than that of Coca-Cola from 2008 through 2012 primarily because of its presence in the beverages as well as snacks business. Meanwhile, the revenue of DPS has been more or less consistent and has ranged between $5.5 billion to $ 5.99 billion (MarketLine, 2013). The reason for the huge disparity between the revenue of DPS on one side and Coca-Cola and PepsiCo on the other is not too far to seek. While both Coca-Cola and PepsiCo market their products in more than 200 countries, the sales of DPS’s products are more or less restricted to the Americas region. Figure 2(b) depicts the percentage growth in the revenue of these three companies. Source: MarketLine, 2013 2008-2009 was a dismal period for all the three soft drink companies. Thereafter, Coca-Cola and PepsiCo followed a similar trajectory and witnessed a sharp increase in revenue. PepsiCo’s revenue zoomed 33.8 percent in 2010 as a large chunk (72 percent) of this revenue was generated in United States, the company’s home market (Vannucci, 2010). Coca-Cola had a great time in 2011with a 32.5 percent increase in revenue. The company attributed the increase in revenue to the robust growth in international markets (Williams, 2012). 3.0 Michael Porter’s Five Forces Framework 3.1 Intensity of Rivalry amongst Existing Players The global carbonated drinks industry is highly concentrated with two players; Coca-Cola and PepsiCo accounting for close to 70 percent of the market share (MarketLine, 2013). These companies incur high costs because of state-of-the-art production facilities and aggressive marketing campaigns. The players in the carbonated soft drink industry need to achieve economies of scale in order to keep operating costs under control. There is cut throat competition even during periods of low demand. Coca-Cola and Pepsi try to increase market share by offering differentiated products and heavy promotional spends (Coleman, 2009). Overall, the intensity of competition in the industry is high (MarketLine, 2013). 3.2 Threat of New Entrants Entering the carbonated drinks industry entails high fixed costs. Furthermore, the new player will have to contend with the brand strength, distribution prowess and financial muscle of existing incumbents. The dominance of Coca-Cola and PepsiCo can thwart any new player from entering the industry. The carbonated soft drink industry has registered lukewarm growth in the last few years which may also prove to be a deterrent for an aspiring entrant. Overall, the threat of new entrants in the global carbonated soft drink industry is low (MarketLine, 2013). 3.3 Threat of Substitutes There are numerous substitutes for carbonated soft drinks. Tea, coffee, juice, squash, and water have the potency to satisfy the same need of the consumers as carbonated soft drinks do. World over, there is growing awareness of the harmful health effects of ingesting carbonated soft drinks. As such, consumers are slowly but surely shifting to healthier options and giving the carbonated soft drinks a cold shoulder. All these substitutes are available at, more or less, comparable prices. Moreover there are no switching costs for the consumers. Overall, the threat of substitutes is pretty high (MarketLine, 2013). 3.4 Bargaining Power of Buyers The manufacturers of carbonated soft drinks have a huge target market. Most of these companies earn money by selling the concentrate to the franchised bottlers (McKay, 2010). The other buyers include food & beverage retailers, supermarkets, hypermarkets, and other small retailers. While a plethora of brands are available in the market, the channel members generally keep stocks of all brands. Thus the bargaining power of buyers is moderate (MarketLine, 2013). 3.5 Bargaining Power of Suppliers The main ingredients in a carbonated soft drink are sweeteners, refined sugar, aspartame and water. The cause of concern is the fluctuations in the market price of these commodities. A couple of years back PepsiCo had to spend $1.5 billion more than expected due to a spike in commodity costs (Esterl & Ziobro, 2012). Most of the ingredients used in carbonated drinks are freely available. The availability of water may pose problems to manufacturers especially in countries where potable water is in short supply. Overall, the supplier power is moderate (MarketLine, 2013). The Michael Porters’ Five Forces Model with respect to the global carbonated industry has been depicted in Figure 3. Source: Adapted From MarketLine, 2013 4.0 PESTEL Analysis 4.1 Political Factors The big players in the carbonated soft drinks industry especially Coca-Cola and PepsiCo have world-wide operations. The political scenario in these countries has a bearing on the operations of these companies. The political stability, diplomatic relations, attitude of the government towards multinational companies can have an impact on the beverage companies (Rosendorff, 2001). 4.2 Economic Factors The economic factors include general state of the economy, interest rates, disposable income and unemployment levels. Coca-Cola and PepsiCo are also affected by the currency exchange rates as they have business operations in many countries. Recessionary economic conditions tend to pull down the consumer sentiment and in turn may adversely affect the operations of these companies. The sales of big sized packaged products and premium products may take a severe beating during tough economic conditions. 4.3 Social Factors The demand for carbonated soft drinks is dependent on the consumer’s age and lifestyle. In general, as people grow, they tend to avoid such drinks. A growing trend towards health consciousness does not bode well for the manufacturers of carbonated drinks. These beverages have been accused of contributing to the growing menace of obesity and have therefore earned a bad name in recent years (Jacobson & McBride, 2003). A lot of hue and cry has also been raised regarding the harmful constituents of these drinks (Bhushan, 2003). 4.4 Technological Factors The technological factors have played an important role in the carbonated drinks industry especially in the social media marketing domain. The presence on social networking sites has become a sine qua non for all the beverage companies. Presence on social networking sites like Facebook enables these companies to engage customers, take valuable feedback from them and also get positive word or mouth (Dagher, 2012). The technological factors also play an important role in the production and distribution processes in this industry. 4.5 Environmental Factors The harmful effects of global warming have compelled all companies to adopt green business practices. The trend in the carbonated soft drink industry is to follow a triple bottom line approach which encompasses 3Ps; Profits, People and Planet (Slaper et al, 2011). The importance of environmental factors can be gauged from the fact that Coca-Cola has adopted sustainability as one of the pillars of Vision 2020 strategy (Zegler, 2011). 4.6 Legal Factors The manufacturers of carbonated drinks have to comply with the rules and regulations prevailing in various countries. In the United States, the Food and Drug Administration certifies and approves the launch of a new product in the market after scrutinizing the ingredients of the product (Salisbury, 2013). These companies also have to comply with various other strictures governing the industry. These strictures may pertain to use of energy and water, emission norms, packaging and labeling. 5.0 SWOT Analysis The SWOT (strengths, weaknesses, opportunities and threats) of PepsiCo have been derived from the internal and external environmental analysis carried out in the foregoing sections of this report. While the internal analysis (strategy and portfolio analysis) reveals the strengths and weaknesses, the external environment (PESTEL Analysis) reveals the opportunities and threats. These dimensions have been enumerated below. 5.1 SWOT: PepsiCo Strengths Strong Brand Worldwide Presence Huge Portfolio Weaknesses Low Profit Margin Low Brand Awareness Vis-à-vis Coke Negative Publicity Opportunities Growth in Emerging Economies Focus on Health and Wellness Growth Through Acquisitions Threats Water Scarcity Intense Competition Stringent Regulatory Framework 6.0 Balanced Scorecard The balanced Scorecard is a strategic planning and management control tool put forth by Dr. Robert Kaplan of Harvard Business School and Dr. David Norton, founder and director of the Palladium Group. The tool of Balanced Scorecard is used across industries to improve organizational performance (Christesen, 2008). Indra Nooyi, the CEO of PepsiCo, averred that the PepsiCo will adopt a balanced view of growth in the present day transparent world (The Telegraph, 2010). The Balanced Scorecard parameters namely Financial Perspective, Internal Business Perspective, Learning & Growth Perspective and Customer Perspective for PepsiCo are depicted below. 6.1 Balanced Scorecard: PepsiCo Financial Perspective Organic Revenue Growth Up 4%. EPS Grew 9%. $8.2 Billion Cash Flow. Internal Business Perspective $900 Million Saved Due to Productivity Increase. Top 12 Executives Have Cumulative Experience of 200 Years. Learning & Growth Perspective R&D Expenditure Increased by 25% since 2011. Revamping of PepsiCo University. Alliances with the NFL and Buffalo Wild Wings. Customer Perspective 9 out of top 50 Food & Beverage Product Introductions in U.S. Separate ‘Good For You’ Category Increased Nutritional Profile of Snacks and Beverages. Source: PepsiCo Annual Report, 2013 7.0 Recommendations for PepsiCo 7.1 International Expansion PepsiCo has a diversified portfolio with the help of which it can target people across demographic and psychographic profiles. The company should capitalize on this strength and aggressively develop new markets. The ideal scenario for PepsiCo would be to expand internationally through mergers and acquisitions especially in emerging markets like Brazil, Russia, India, China and South Africa (Dudovskiy, 2013). Srinivasan (2013) avers that China and India, the top two countries in terms of population, should be the prime focus as these regions provide volume growth to all fast moving consumer good (FMCG) companies including Pepsico. 7.2 Increase Customer Retention The differentiation strategy helps in making customers brand loyal (Allen & Helms, 2006). PepsiCo has targeted the younger generation and made them ardent fans of its products. The company will do well to retain its customers through effective trade promotions which have become extremely important these days. Coupon and rebate management are two important tools to push the brand to the ultimate consumers. 7.3 Increase Operational Efficiency PepsiCo’s profit margins are considerably lower than that of arch rival Coca-Cola. In 2012, Coca-Cola recorded a profit margin of 18.8 percent, much higher than 9.5 percent registered by PepsiCo (MarketLine, 2013). PepsiCo should increase its operational efficiency and strive to reduce costs. This will help the company consolidate its financial position even further and achieve superior economic gains. 7.4 Sports and Energy Drinks Carbonated soft drinks have lost market share to bottled water and packed juices in recent years. The increasing health consciousness is going to fuel this trend. Sports and energy drinks are likely to register the maximum growth in coming years as people will change their lifestyle and strive be become healthier (Thomas, 2010). PepsiCo should therefore focus on these categories which have the potential to become cash cows. 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