Soft Drink Industry

The global soft drink industry is currently expanding quite rapidly. This is due to two major factors. First, markets are expanding rapidly in developing countries and second people are turning toward natural, healthy, and low-calorie drinks. This so called “new-age” beverages, such as tea-based beverages, is considerably stimulating the development of the soft drink industry and also creating a major challenge to the carbonated beverage market. In part to address this trend, big soft drink companies, like Pepsi and Coke, are striving to become a “total beverage company” (Seet and Yoffie 95), in which they will serve the comprehensive soft drink market.

Generally speaking, the soft drink off-trade value worldwide is gradually rising ever year, from $231,401 in 2001 to $323,031 in 2006 (Global Market Information Database 2007). The biggest market for soft drinks is still North America and Western Europe, which together consumed 43% of gross soft drink volume worldwide in 2006 (Global Market Information Database �07). However, the general developing trend for the North America and Western European market is now shrinking in terms of the global market while the Asian market is expanding very rapidly in recent years to now account for 22% of the global market (Global Market Information Database �07). The market volumes of Africa, the Middle East, and Australia are comparatively smaller. However, the Middle East, Africa, Eastern Europe, and Asia-pacific markets are “emerging markets” and attract many companies, ranging from multinationals to niche specialists, who continue to see volume growth well in excess of the market average (Robinson �04).

With the growth in volume, the average level of profitability of the soft drink industry remains quite high. First, the concentrate producers (CP’s) have become integrated with bottling companies, thereby reducing production costs. The CP’s and bottlers remain profitable through interdependence, sharing promotional and advertising and marketing costs (Seet and Yoffie 95). For example, Coca-Cola has many bottlers in different regions; therefore, their distribution cost is not as high. Furthermore, the CP’s directly negotiate with the suppliers to efficiently manage qualities for their products.

In addition, their product line and distribution chain is now more systemic and integrated. Big soft drink producers increasingly franchise bottlers or buy a share from them rather than controlling bottling totally by themselves. This has activated and developed the capital-intensive bottling business. In spite of these trends competition remains intense, such as between distributors and also between new local labels and international drink corporations.

Thirdly, the soft drink industry has several channels to sell to consumers such as vending machines, convenience stores, food stores (supermarkets), and national warehouses. For example after a long work-out, one quenches one’s thirst by going to a soft drink vending machine for a Cola. With this distribution channel, soft drinks are sold directly to consumers without bargaining. In 1993, Coca-Cola sold approximately 45% of their soft drinks through vending machine in the Japanese market (Seet and Yoffie 95).

Another reason for the level of profitability of the soft drink industry remaining quite high is because this industry has a nearly 47% market share of the non-alcoholic beverages industry (Deichert �06). It is also to be noted that some of the soft drink vendors like Coca-Cola and Pepsi have gotten their logos printed on cups at fast food restaurants so that customers are readily reminded of their brands. Big name soft drinks also promote their brands by getting them placed in the middle shelves of stores to attract customers.

With the constant expansion of Pepsi products into foreign countries, it may seem challenging for Coca-Cola Enterprises (CCE) to sustain their status in the soft drink industry. The soft drink industry is one of the industries that we consider mild on the degree spectrum of Michael Porter’s five competitive forces.

As we look at the first competitive force, the threats of new entrants, we cannot help but consider the high capital investment in building simply a minimum bottling plant – a good amount of $20 million to $30 million is needed (Seet and Yoffie 95). This means that in the category of the threats of new entrants, bottling plant yields a low to medium degree of intensiveness. Also, a Seet and Yoffie states that in 1980, government policy intervened and established the Soft Drink Inter-brand Competition Act to help preserve the right of CP’s to include certain geographical territories (95). Meanwhile, concentrate businesses, a medium to high intensive business, involve very little capital of machinery, overhead and labor (Seet