Industry Analysis - Soft Drink

Industry Analysis:

Soft Drinks

Meghan Deichert, Meghan Ellenbecker, Emily Klehr,

Leslie Pesarchick, & Kelly Ziegler

Strategic Management in a Global Context

February 22, 2006 1

Industry Analysis: Soft Drinks

Barbara Murray (2006c) explained the soft drink industry by stating, "For years the story

in the nonalcoholic sector centered on the power struggle between...Coke and Pepsi. But as the

pop fight has topped out, the industry's giants have begun relying on new product flavors...and

looking to noncarbonated beverages for growth." In order to fully understand the soft drink

industry, the following should be considered: the dominant economic factors, five competitive

sources, industry trends, and the industry's key factors. Based on the analyses of the industry,

specific recommendations for competitors can then be created.

Dominant Economic Factors

Market size, growth rate and overall profitability are three economic indicators that can

be used to evaluate the soft drink industry. The market size of this industry has been changing.

Soft drink consumption has a market share of 46.8% within the non-alcoholic drink industry,

illustrated in Table 1. Datamonitor (2005) also found that the total market value of soft drinks

reached $307.2 billion in 2004 with a market value forecast of $367.1 billion in 2009. Further,

the 2004 soft drink volume was 325,367.2 million liters (see Table 2). Clearly, the soft drink

industry is lucrative with a potential for high profits, but there are several obstacles to overcome

in order to capture the market share.

The growth rate has been recently criticized due to the U.S. market saturation of soft

drinks. Datamonitor (2005) stated, "Looking ahead, despite solid growth in consumption, the

global soft drinks market is expected to slightly decelerate, reflecting stagnation of market

prices." The change is attributed to the other growing sectors of the non-alcoholic industry

including tea and coffee (11.8%) and bottled water (9.3%). Sports drinks and energy drinks are

also expected to increase in growth as competitors start adopting new product lines. 2

Profitability in the soft drink industry will remain rather solid, but market saturation

especially in the U.S. has caused analysts to suspect a slight deceleration of growth in the

industry (2005). Because of this, soft drink leaders are establishing themselves in alternative

markets such as the snack, confections, bottled water, and sports drinks industries (Barbara

Murray, 2006c). In order for soft drink companies to continue to grow and increase profits they

will need to diversify their product offerings.

The geographic scope of the competitive rivalry explains some of the economic features

found in the soft drink industry. According to Barbara Murray (2006c), "The sector is

dominated by three major players...Coca-Cola is king of the soft drink-empire and boasts a

global market share of around 50%, followed by PepsiCo at about 21%, and Cadbury Schweppes

at 7%." Aside from these major players, smaller companies such as Cott Corporation and

National Beverage Company make up the remaining market share. All five of these companies

make a portion of their profits outside of the United States. Table 3 shows that the US does not

hold the highest percentage of the global market share, therefore companies need to be able to

compete globally in order to be successful.

Table 4 indicates that Coca-Cola has a similar distribution of sales in Europe, North

America, and Asia. On the other hand, the majority of PepsiCo's profits come from the United

States (see Table 5). Compared to PepsiCo, Cadbury Schweppes has a stronger global presence

with their global mix (see Table 7). Smaller companies are also trying to establish a global

presence. Cott Corporation is a good example as indicated in Table 8. The saturation of the US

markets has increased the global expansion by soft drink leaders to increase their profits.

The ease of entry and exit does not cause competitive pressure on the major soft drink

companies. It would be very difficult for a new company to enter this industry because they 3

would not be able to compete with the established brand names, distribution channels, and high

capital investment. Likewise, leaving this industry would be difficult with the significant loss of

money from the fixed costs, binding contracts with distribution channels, and advertisements

used to create the strong brand images. This industry is well established already, and it would be

difficult for any company to enter or exit successfully.

Three leading companies have prominent presence in the soft drink industry. The leaders

include the Coca-Cola Company, PepsiCo, and Cadbury Schweppes. According to the CocaCola annual report (2004),