Importance of Volume to Supplier
The soft drink industry buys a large portion of the Nutrasweet market but their
percentage of purchases are falling as other products begin to use it. Sugar is
bought but not in the volume that the grocery store or other industries do. The
aluminum can, plastic bottles and glass bottles (less now) are all pretty much
dependent on the soft drink industry for their livelihood. This makes the
supplier have pretty much no power over the industry.
Impact of Input on Cost or Differentiation
Since the inputs are basic elements there is no differentiation and therefore no
impact on the final product for using different inputs. If the price of the
input changed, it would dramatically change the price of the product as the
aluminum cartel did in 1994. Since the major inputs are commodity items, the
prices can change dramatically due to environmental forces. If the sugar
industry suffers a loss due to weather or because of political unrest (like in
Cuba), then the prices go up and the soft drink industry is usually left
absorbing them. The soft drink industry can not, in all cases, simply pass
along the price increase. Customers and distributors are more price sensitive
than ever. This makes the supplier have a fair amount of bargaining power over
the industry.
Threat of Backward or Forward Integration
With the current climate of “sticking to the core of the company,” there is
little threat of backward integration into the supplier’s industry. This is
after the fact that they already have integrated into the extracts to protect
their secrets. The integration into the extract-producing segment of the
suppliers will be the extent of the backward integration. The suppliers do not
have the capital required to forward integrate into the soft drink industry.
This makes the industry attractive for investment.
Access to Capital
The soft drink industry is very profitable and therefore looked upon favorably
by financial institutions. This includes the stock market, direct investors
(bondholders), and banks. Currently the operating margins for the industry have
grown from 17.9% in 1992 to 19.5% in 1996. The projected operating margins are
projected to grow to 20.5% from 1997 to 2001 (Value Line 1996). The profit
margins and demand are increasing for the soft drink industry (Industry Surveys,
1995). What this means is that capital is available for expansion or upgrading,
if additional capital is required. This is favorable to the industry.
Access to Labor
The industry is not highly technical except for chemical engineering. This
means that the demands for skilled labor are not very high. Which means that
the soft drink industry will not have trouble finding labor. There are no
established labor unions. The average labor cost is no more than in any other
industry. The average hourly wage is $11.85 per hour, which just about the same
as all manufacturing firms of $11.49 (Manufacturing USA).
Summary of Suppliers
When you sum up the different aspects of the suppliers you come to the quick
conclusion that the power is definitely in the hands of the soft drink industry.
This makes the industry very attractive for investment and for the companies
already in the industry from the supply aspect. This means that it is
attractive to new entrants as well.
Buyers
Buyer Concentration versus Industry Concentration
The buyers for the soft drink industry are members of a large network of
bottlers and distributors that represent the major soft drink companies at the
local level. Distributors purchase the finished, packaged product from the soft
drink companies while bottlers purchase the major ingredients. With the
consolidation that has occurred within the industry, there is little difference
between the two. Distributors are assigned to represent a specific geographic
area, for example a town or a county. In turn, these distributors are
responsible for distributing the product to the retailers who sell the products
to the end consumer. In recent years, the national companies have been
purchasing independent bottlers in an effort to consolidate the business and
gain some distribution economies of scale (Thompson and Strickland, 1993).
Buyer Volume
The contractual agreements, which are present in this industry, dictate that the
major soft drink companies will sell their products to the distributors.
Therefore, buyer volume is not a factor for this industry. Buyer Switching Cost
Independent bottlers have contractual agreements to represent that company
within a certain area. Switching costs would include establishing new
relationships with other companies to represent and the legal costs associated
with distributors being released from the contract.
Buyer Information
Distributors are very informed about the product that they are distributing.
Information flows freely between the soft drink Companies and the local
distributors and down to the retailers. There are many co-operative promotions
where distributors and soft drink companies collaborate on price and advertising
campaigns (Crouch, Steve). For example, major soft drink firms will send a
regular report out to its distributors describing upcoming promotional events
where the cost will be shared between the two companies. For promotions that
fall outside of this report, the distributors will have to coordinate that
sponsorship with the soft drink company.
Threat of Backward Integration
It is doubtful that local distributors will move into the actual production
process of soft drinks. Distributors specialize in the transportation and
promotion of the product that they rely on the carbonated beverage companies
produce. However, major retailers; for example Wal-Mart and Harris Teeter have
begun distributing their own private label brands of soft drinks. Wal-Mart now
offers Sam’s Choice and Harris Teeter offers President’s Choice at a
significantly lower price. These private label competitors will not provide the
variety of packaging alternatives, which make the national leaders so successful
(PepsiCo 1995 Annual Report). For example, Pepsi offers 12-ounce cans, 20 ounce
bottles, 1 liter bottles, six packs, twelve packs, cases and “The Cube” 24 can
boxes.
Pull Through
Pull through is not a factor from the independent bottler’s perspective. These
bottlers have a franchise agreement to represent a major carbonated beverage
company on the local level. These distributors are legally bound to represent
these companies and therefore cannot choose not to promote certain types of
beverages.
Brand Identity of Buyers
Brand identity of buyers is not relevant to the distributors because of the
contractual relationship that exists where distributors represent the soft drink
companies. The distributors have an exclusive contractual agreement to
represent that soft drink brand.
Price Sensitivity
Distributors are not highly price sensitive buyers. Independent bottlers are on
a national contract so all distributors pay the same price for the same products.
Price to Total Purchases
Soft drinks are the single product that the distributors are concerned with so
price is very important to them. Soft drink companies rely on these distributors
to represent them on the local level, so it is important to maintain a healthy
relationship.
Impact on Quality and Performance
All three of the leading carbonated beverage producers, Coca-Cola, PepsiCo, and
Cadbury Schweppes believe that their buyers (distributors) are an important step
in taking their products to the end consumer. The service, which their
distributors provide to the retailers, makes a difference to the retailers who
sell the product to the end consumer. The actions of that distributor reflect on
the soft drink company so if the distributor does not provide the level of
service that retailer or restaurant desires, it may harm the company’s image.
Substitute Products
Relative price/performance relationship of Substitutes
The carbonated beverage industry provides a non-alcoholic means of satisfying an
individuals desire to quench their thirst. Traditionally, coffee and tea would
be considered substitute products. In recent years, carbonated beverages have
seen the emergence of many new substitute products that wish to reduce soft
drink’s market share. The soft drink market has been traditionally competitive,
without the added friction from “ready to drink tea, shelf stable juice, sports
drinks and still-water” competitors also. (Gleason, 1996) Leaders in these
emerging segments include Quaker Oats, with their Snapple and Gatorade products,
Perrier, and Arizona Iced Teas. “In other words, Pepsi isn’t Coke’s biggest
competition, Tap water is.” (Gleason, 1996). Generally speaking, soft drinks
are less expensive to the consumer than these substitute products.
Buyer Propensity to Substitute
Buyer propensity to substitute is low due to the contractual relationships
between the soft drink companies and the distributors.
Rivalry
Degree of Concentration and Balance among Competitors
Three main competitors: Pepsico, Coca-Cola, and Dr. Pepper/Cadbury
control the Soft Drink industry. Their combined total sales revenues account
for 90 percent of the entire domestic market. This market dominance makes the
industry a fiercely competitive and dynamic business environment to operate in.
The single market leader is Coca-Cola with a 42 percent market share and over
$18 billion in sales worldwide. PepsiCo maintains a 31 percent market share
with $10.5 billion in sales worldwide. The smallest of the three leaders is Dr.
Pepper/Cadbury, which holds roughly 16 percent of the market. Coke’s consistent
dominance of both Pepsi and Dr. Pepper/Cadbury has caused Coke to become a
household name when referring to soft drinks.
As far as balance among competitors is concerned, PepsiCo is a much
larger company than Coke and Dr. Pepper/Cadbury combined. The reason being that
PepsiCo also owns companies in the snack and food industries (Frito-Lay, Pizza
Hut, Taco Bell, and KFC). With a work force of 480,000 people, PepsiCo is the
world’s third largest employer behind General Motors and Wal-Mart. This has not
lead to a more profitable soft drink business, nor has it helped PepsiCo use its
size to steal market share from Coke or Dr. Pepper/Cadbury.
Diversity among Competitors
Though Coca-Cola dominates the industry in sales volume and market share,
it does not dominate when it comes to innovative marketing and business strategy
efforts. For instance, PepsiCo generates 71 percent of its revenues from the
U.S., while Coca-Cola derives 71 percent of its from international markets.
Similarly, PepsiCo only gets 41 percent of its total revenues from soft drinks.
The remaining 59 percent come from its snack and food business. Coke on the
other hand gets all of its revenues from its soft drinks. Clearly both of the
industry leaders have different strategies as far as revenue generation is
concerned. However, as far as their product lines are concerned they are very
similar and operate parallel to one another. Pepsi and Coca-Cola both have
lemon-lime, citrus, root beer, and cola flavors. Dr. Pepper/Cadbury does not
have as similar a product line to that of Pepsico and Coca-Cola. It
manufactures Dr. Pepper (a unique spicy cola drink), ginger ale, tonic water,
and carbonated water under its Schweppes and Canada Dry brands. Coke does have
an answer to Dr. Pepper in its Mr. Pibb, but only holds a .4 percent market
share compared to Dr. Peppers 6 percent market share. The relatively low level
of diversity makes the soft drink industry unattractive for investment.
Industry Growth Rate
Although new product lines have come into the beverage industry over the
past two to three years, the soft drink segment has held and grown its share
steadily. The onslaught of the sport drink and bottled tea have proven to be a
passing fad that has gained little if no long term market share from soft drinks.
Growth figures for the soft drink industry have been very steady since 1993,
and are projected to continue to be so into the last part of the twentieth
century. As can be seen in Figure 1, volatility was somewhat prevalent in the
1980’s but has since lessened and leveled off (Valueline, 1996). Figure 1
Year’87-’88′88-’89′89-’90′90-’91′91-
‘92′92-’93′93-’94′94-’95 Growth5.7%5.2%2%
3%2.9%4%4.4%4%
Over the past ten years soft drinks have gained 5 percent of total
beverage sales, putting them over the 25 percent share level for all
beverage sales. As for new and emerging markets, both Coke and Pepsi are
attacking the international environment. Coca-Cola generates 80 percent
of its revenues abroad, and Pepsi is attempting but failing to put more
emphasis there as well. “Pepsi is losing customers to Coke in every major
foreign territory. The company has always struggled overseas, but in the past
few months it has lost key strongholds in Russia and Venezuela to Coke” (Sellers,
1996). Because of the consistent growth of both the domestic and foreign
markets, the soft drink industry is attractive for investment.
Fixed Costs
The S&P Industry Survey has shown the soft drink industry profit margin
to be on a steady incline over the past fifteen years. Levels in 1980 were near
14%, while as of year-end 1995 were over 20% and expected to flatten a bit.
This flattening effect may be an indication that fixed costs are on the rise due
to expansion