Case analysis of the Soft Drink Industry 1734 Essay Example

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.

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).

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 the increase in efficiency and the economies gained by consolidation (See table 2).

Further evidence of economies is supported by the increased return on assets from 1992-1995, as shown in table 3. Coke and Pepsi clearly show increased return on assets as the asset base

increases. However, Cadbury/Schweppes does not show conclusive evidence from 95 to 96.

Each firm has brands that are unique in packaging and image, however any of the product differences that may develop are easily duplicated. However, secret formulas do create a difference or good will that cannot be duplicated. The best example of this is the "New Coke" fiasco of 1985. Coke reformulated its product due to test marketing results that showed New Coke beat Pepsi 47% to 43% and New Coke was preferred over old Coke by a 10% margin. However, Coke executives did not take into account the good will created by the old Coke name and formula. The introduction of New Coke as a replacement of Coke was met by outrage and unrelenting protest by the public. Three months from the initial launch of New Coke, management apologized to the public and reissued the old Coke formula. Test marking shows that there is only a small difference in actual product taste (52% Pepsi, 48% Coke), but the good will created by a brand can have significant proprietary differences (Dess, 1993). This is a high barrier to entry.

Brands do have secret formulas, which makes them unique and new entry into the industry difficult. New products must remain outside of patented zones but these differences can be slight. This leads to the conclusion that the absolute cost advantage is a low barrier within this industry.

The shift in the manufacturing of soft drinks is gravitating toward automation due to speed and cost. However, industry technology is low and the manufacturing process is not difficult, therefore the learning curve will be short and will have a low

barrier to entry.

All the inputs within the soft drink industry are commodity items. These include cane, beet, corn syrup, honey, concentrated fruit juice, plastic, glass, and aluminum. Access to these inputs is not a barrier to enter the industry.

The process of manufacturing soft drinks is not a proprietary process. The methods used in the process are relatively standard within the industry and the knowledge needed to begin production can easily be acquired. This is not a barrier to entry.

This is a very strong force within the industry. It takes a long time to develop a brand that has recognition and customer loyalty. "Brand loyalty is indeed the HOLY GRAIL to American consumer product companies." (Industry Surveys, 1995) A well recognized brand will foster customer loyalty and creates the opportunity for real market share growth, price flexibility, and above average profitability (Industry Surveys, 1995). Therefore this is a high barrier to entry.

Distribution is a critical success factor within the industry. Without the network, the product cannot get to the final consumer. The most successful soft drink producers are aggressively expanding their distribution channels and consolidating the independent bottling and distribution centers. From 1978 to the present, the number of Coca-Cola bottlers decreased from 370 to 120 (Industry Surveys, 1995). In addition, 31.9% of the soft drink business is in supermarkets, where acquiring shelf space is very difficult (Santa, 1996). This is a high barrier to entry.

Market share within the industry is critical; therefore any attempt to take market share from the leaders will result in significant retaliation. The soft drink industry is a moderately mature market with slow single digit growth (Industry Surveys, 1995). Projected growth

rates are 4-5% in sales volume and 2-3% in margin (Crouch, Steve). Therefore, growth in market share is obtained by stealing share from rivals causing retaliation to be high in defense of current market position. This is a high barrier to entry.

Conclusion

To be successful on a large scale, the high capital requirements for manufacturing, distribution, and marketing are high barriers to entry. Therefore the threat of new entrants is low making this an attractive industry. Supplier concentration is low due to the fact that the main ingredients are sugar (cane and beet), water, various chemicals, and aluminum cans, plastic and glass bottles. There are many places to get sugar and ingredients for soft drinks because they are commodity items. The containers (aluminum cans, bottles etc.) make up 36 percent of all the inputs that the industry uses. Other supplies like sugars, syrups and extracts account for 23 percent of the inputs (Manufacturing USA).

There are five major suppliers of glass bottles. Altrista Corp., Anchor Glass Container, Glassware of Chile, Owens Illinois, and Vistro Sa are the major makers of glass bottles (Compact Disclosure). This is a fair amount of suppliers considering that only five percent of soft drink sales are in glass bottles. There are even more suppliers of plastic bottles. This is good because 43% of all sales are from plastic bottles (Prince, 1996). All this makes the concentration for glass and plastic suppliers moderate. The aluminum can industry is even older and more established than the plastic industry. Reynolds Metal Products, American National Can Company and Metal Container Corp. are the main suppliers of aluminum cans. 50.6% of total soft drink sales are packaged

in aluminum cans (Prince, 1996). Since the aluminum industry is older and more established, these are likely to be the only manufacturers for a while. Even though the concentration of aluminum producers are low there are only three major players in the industry, Coke, Pepsi, and Cadbury. These three account for nearly 90% of domestic soft drink sales (Dawson, 1996). This makes the balance of power slightly favor the suppliers of aluminum cans, even though the number of producers and buyers are equal (3).

Syrups and extracts account for 16.7% of input costs to the soft drink industry (Manufacturing USA, Fourth Ed.). Even though these are a small percentage of inputs, all the major soft drink companies own companies that produce flavoring extracts and syrups (Industry Surveys, 1995). This is probably due to the fact that they all have "secret formulas" and this is how they protect the secret. Coke, Pepsi, and Dr. Pepper all have "secret formulas". This makes the concentration of suppliers for extracts very low but they are owned by the soft drink industry. This backward integration by the major players makes the power question moot.

Suppliers do have limited power over the soft drink industry. The concentration of suppliers remains relatively low, which would seem to give the supplier power. The shear mass and volume that the industry buys negates that effect and balances, if not tips it back toward the soft drink industry.