Soft Drink Industry Case Study

Table of Contents

Introduction 3
Description 3
Segments 3
Caveats 4
Socio-Economic 4
Relevant Governmental or Environmental Factors, etc. 4
Economic Indicators Relevant for this Industry 4
Threat of New Entrants 5
Economies of Scale 5
Capital Requirements 6
Proprietary Product Differences 7
Absolute Cost Advantage 8
Learning Curve 8
Access to Inputs 8
Proprietary Low Cost Production 8
Brand Identity 9
Access to Distribution 9
Expected Retaliation 9
Conclusion 10
Suppliers 10
Supplier concentration 10
Presence of Substitute Inputs 11
Differentiation of Inputs 12
Importance of Volume to Supplier 13
Impact of Input on Cost or Differentiation 13
Threat of Backward or Forward Integration 13
Access to Capital 14
Access to Labor 14
Summary of Suppliers 14
Buyers 15
Buyer Concentration versus Industry Concentration 15
Buyer Volume 15
Buyer Switching Cost 15
Buyer Information 16
Threat of Backward Integration 16
Pull Through 16
Brand Identity of Buyers 17
Price Sensitivity 17
Impact on Quality and Performance 17
Substitute Products 18
Relative price/performance relationship of Substitutes 18
Buyer Propensity to Substitute 18
Rivalry 18
Industry Growth Rate 20
Fixed Costs 21
Product Differentiation 21
Brand Identity 21
Informational Complexity 22
Corporate Stakes 22
Conclusion 23
Critical Success Factors 23
Prognosis 24
Bibliography 26
Appendix 27
Key Industry Ratios 27

Introduction

Description
The soft drink industry is concentrated with the three major players,
Coca-Cola Co., PepsiCo Inc., and Cadbury Schweppes Plc., making up 90 percent of
the $52 billion dollar a year domestic soft drink market (Santa, 1996). The
soft drink market is a relatively mature market with annual growth of 4-5%
causing intense rivalry among brands for market share and growth (Crouch, Steve).
This paper will explore Porter\'s Five Forces to determine whether or not this
is an attractive industry and what barriers to entry (if any) exist. In
addition, we will discuss several critical success factors and the future of the
industry. Segments
The soft drink industry has two major segments, the flavor segment and
the distribution segment. The flavor segment is divided into 6 categories and
is listed in table 1 by market share. The distribution segment is divided in to
7 segments: Supermarkets 31.9%, fountain operators 26.8%, vending machines
11.5%, convenience stores 11.4%, delis and drug stores 7.9%, club stores 7.3%,
and restaurants 3.2%.

Table 1: Market Share
1990 1991 1992 1993 1994 Cola 69.9
69.7 68.3 67 65.9 Lemon-Lime 11.7 11.8 12
12.1 12.3 Pepper 5.6 6.2 6.9 7.3 7.6 Root
2.7 2.8 2.3 2.7 2.7 Orange 2.3 2.3
2.6 2.3 2.3 Other 7.8 7.2 7.9 8.6 9.2
Source: Industry Surveys, 1995

Caveats

The only limitations on access to information were: 1. Financial information has
not yet been made available for 1996. 2. The majority of the information targets
the end consumer and not the sales volume from the major soft drink producers to
local distributors. 3. There was no data available to determine over capacity.

Socio-Economic

Relevant Governmental or Environmental Factors, etc.

The Federal Government regulates the soft drink industry, like any industry
where the public ingests the products. The regulations vary from ensuring clean,
safe products to regulating what those products can contain. For example, the
government has only approved four sweeteners that can be used in the making of a
soft drink (Crouch, Steve). The soft drink industry currently has had very
little impact on the environment. One environmental issue of concern is that
the use of plastics adversely affects the environment due to the unusually long
time it takes for it to degrade. To combat this, the major competitors have
lead in the recycling effort which starting with aluminum and now plastics. The
only other adverse environmental impact is the plastic straps that hold the cans
together in 6-packs. These straps have been blamed for the deaths of fish and
mammals in both fresh and salt water.

Economic Indicators Relevant for this Industry

The general growth of the economy has had a slight positive influence on the
growth of the industry. The general growth in volume for the industry, 4-5
percent, has been barely keeping up with inflation and growths on margins have
been even less, only 2-3 percent (Crouch, Steve).

Threat of New Entrants

Economies of Scale

Size is a crucial factor in reducing operating expenses and being able to make
strategic capital outlays. By consolidating the fragmented bottling side of the
industry, operating expenses may be spread over a larger sales base, which
reduces the per case cost of production. In addition, larger corporate coffers
allow for capital investment in automated high speed bottling lines that
increase efficiency (Industry Surveys, 1995). This trend is supported by the
decline in the number of production workers employed by the industry at higher
wages and fewer hours. This in conjunction with the increased value of
shipments over the period shows