Indian Softdrink Industry Analysis Essay Example

following the liberalization policies initiated by the government in the 1990s.This was ironical in the case of Coca – Cola Company considering that it was government policy that had been responsible for its exit from the Indian market earlier. For any industry the government regulatory policies, or their absence, form an important variable in the political environment which shapes strategy.

For a number of years in India there was an absence of notified standards which made regulation of the soft drink industry difficult. Soft drink manufacturing was exempted from industrial license under the Industries Act of 1951 and only a one-time operating license under the Food Products Order (FPO) 1955 was required.All that the industry was required was a no objection certificate from state governments and the State Pollution Control Boards for its operations. The presence of pesticides and insecticides in food is regulated under the Prevention of Food Adulteration Act, 1954, but bottled water or beverages were not within the scope of the Act.

There was also no mandatory requirement for Environmental Impact and more importantly, the use of water by soft drink manufacturers and bottling plants which is largely non - priced ground water was not regulated.Regulations for the bottled water industry were notified in 2004 after a 2003 report by the Centre for Science Environment (CSE) that found pesticides in bottled water. This prompted the government of India to adopt E. U. standards for bottled water at 0. 1 ppb (parts per billion) for single residues and 0.5 ppb for multiple residues. New regulations for carbonated soft drinks issued by the Health Ministry in the same year mandated that water used by soft drink

companies as an input for their products must meet bottling water standards. However, the Ministry did not notify standards for the final products.In future more stringent regulatory policy and stricter controls on environmental aspects could be a major factor affecting the soft drink industry – especially when it comes to setting up and location of bottling plants.

Macro – economic factors

The Indian soft drinks market generated total revenues of $3. 8 billion in 2006, with a compound annual growth rate (CAGR) of 7. 5% for the five-year period spanning 2002-2006.

In terms of volume, the Indian soft drinks market grew by 10. 1% in 2006 to reach a volume of 10. 1 billion litres.The compound annual growth rate of the market volume in the period 2002-2006 was 11. 2%. The market's volume is expected to rise to 17.9 billion litres by the end of 2011, this representing a CAGR of 12. 1% for the 2006-2011 period (Datamonitor, 2007). The major economic drivers for this growth have been market globalisation and the increase in disposable income. According to India Consumer Report of the McKinsey Global Institute (MGI), over the next twenty years Indian income levels will almost triple.

Average real household disposable income will grow from 113,744 Indian rupees in 2005 to 318,896Indian rupees by 2025, creating a 583 million – strong middle class. Rising incomes and changing customer preferences attributed to market globalisation would be a key factor driving the demand for soft drinks. This has been seen in other fast rising economies of South – East Asia where rising income and increased globalisation have contributed to an increasing trend in soft drink consumption.

Socio – cultural factors

The changing

population demographics, societal concerns and lifestyles are important trends affecting the soft drink industry.

Firstly, India’s population growth rate is projected at 1. 3 per cent per year over the next twenty years. This will give India a youthful demographic profile (the key segment for soft drinks) as its dependency ratio (the ratio of children and elderly to income earners) drops from 60 today to 48 by 2025. Also, if we look at the consumption pattern food, beverages and tobacco forms the largest share of the consumption. This is expected to grow at a CAGR of 4. 5% from 7,147 billion Indian rupees in 2005 to 17,296 billion Indian rupees by 2025.

Considering these facts, the Indian market presents a huge opportunity for the soft drink industry. However, the changes in attitudes and lifestyles present an area of concern too for the soft drink industry. All over the world including India, people are becoming more concerned with a healthy lifestyle. Consumers from the ages of 37 to 55 are also increasingly concerned with nutrition.

According one report on the soft drink industry, “Consumer awareness of health problems arising from obesity and inactive lifestyles represent a serious risk to the carbonated drinks sector”, (Datamonitor, 2005).This trend is causing the industry’s business environment to change, as firms are differentiating their products in order to increase sales, and this is visible in India too. Also product innovation in terms of new flavours has become necessary to combat buyers need for a variety of tastes.

Technological Factors

Since the soft drink industry has a strong dependence on brand loyalty and advertising, technological factors have become important especially in the area of media and advertising.

The new advertising technologies in the internet and in television have had a huge impact on the soft drink industry.

Another area where technology has played a role is in the introduction of cans and plastic bottles have increased sales for these drinks as these are easier to carry and dispose off.

Environmental and Health Concerns

In 2003, CSE published results of a study which alleged that there were more than acceptable levels of pesticides in bottled water and in soft drinks. Also, another controversy erupted when it was found that a bottling plant of the Coca – Cola Company in Kerala was releasing effluents with high level of contaminants, thereby affecting the farmers in the surrounding areas.A number of other studies too around the world have raised concerns about the ill – effects of heavy consumption of soft drinks on the health of the consumers. Addressing such concerns and reassuring increasingly health conscious customers about their products is going to be an area of challenge for the soft drink industry.

Market Definition

Soft drinks form a part of the overall beverage market, which is broadly classified into alcohol and non- alcoholic beverage categories. Soft drinks form a part of the non- alcoholic category of beverages.In fact the name "soft drink" came into being to specify a lack of alcohol by way of contrast to the term "hard drink" and the term "drink", which often carries connotations of alcoholic content. Beverages like colas, sparkling water, iced tea, lemonade, squash, and fruit punch are among the most common types of soft drinks, while hot chocolate, hot tea, coffee, milk, tap water, alcohol, and milkshakes do not fall into this classification.

Overall the

soft drinks market is taken to comprise of carbonated soft drinks, juices, smoothies, bottled water, and ready-to -drink (RTD) tea and coffee, and functional drinks, but excludes concentrates.

Current Market Scenario

As already mentioned, the Indian soft drinks market generated total revenues of $3. 8 billion in 2006 with a compound annual growth rate (CAGR) of 7. 5% for the five-year period spanning 2002-2006 (Table 1).

In comparison, the Chinese market grew with a CAGR of 13. 4% and Japanese market sustained its value over the same period, to have respective values of $11. 3 billion and $38. 9 billion in 2006. Market consumption volumes increased with a CAGR of 11. 2% form 2002-2006, to reach a total of 10.1 billion litres in 2006 (Table 2). The market's volume is expected to rise to 17. billion litres by the end of 2011, this representing a CAGR of 12. 1% for the 2006-2011 period.

Market Segments by Product Category

The soft drink market consists of various product categories as mentioned earlier. These include - bottled water, carbonates, RTD tea & coffee, juices, functional drinks and smoothies. In 2006, sales of bottled water accounted for 45. 5% of the Indian soft drinks market's value. Carbonates sales generate a further 34. 8% of the market's revenues.

The major soft drink manufacturers have diversified their products and have a presence in all product categories. The fact that bottled water has a greater market value than carbonated drinks is also reflected in the fact that the number of players in the bottled water sector is much higher. There are over a hundred brands competing in this category. The bottled water industry is estimated to be worth

more than Rs 1,000 crore . It has grown at a rate of 40-50% annually over the past four years or so.

According to the Bureau of Indian Standards, there are 1,200 bottled water factories all over India (of which 600 are in the state of Tamil Nadu). The advantage that these companies have is that bottling companies have to pay a minute amount to the government for the use of groundwater. To quote one example: In drought-prone Kala Dera, near Jaipur, Coca-Cola gets its water free except for a tiny cess it pays the government -- a little over Rs 5,000 a year in the three years 2000-2002, and Rs 24,246 in 2003 (India Infochange, 2004).Bottled water grew in the early- to mid-1980s with the growth of PVC packaging and, later, PET bottles. By the mid-1990s, many more players had entered the market, along with the entry of the global players: Coca-Cola’s Kinley, Pepsi’s Aquafina, Nestle’s Pure Life and a host of smaller companies competed with Bisleri and number of clone brands with similar sounding names. The major growth in packaged water, however, has been in the bulk water segment supplying 20 litres packages to homes and institutional buyers.

This segment offers a lot of opportunity for growth for the soft drink industry due to the problems associated with tapped water supply in India. With the soft drink manufacturers entering into all kinds of beverages from water to fruit juices to functional drinks, they are no longer limited to the business of carbonated drinks, but can be said to be primarily in the business of quenching thirst. 4. 2Market Share of Major Players The three major

players in the soft drink industry are Coco Cola Company, PepsiCo and Parle Products Pvt Ltd.In addition there are a number of imitation brands made by small regional manufacturers. The share of market is shown in Figure 2.

Figure 2 Market share by value in 2006 (Source: Datamonitor, 2007)

Market Competition

Players in this market may opt for an integrated business, in which they sell ready-to consume drinks to retailers, or they may adopt a business model in which they sell raw materials (syrups) to a network of bottling companies, which may be independent or owned to some extent by the players.The buyer power of retailers in this market is moderate to weak, varying with the degree of retail concentration. Supplier power is not great, as most inputs are readily available commodities. New entrants must contend with the global reach and strong brands enjoyed by the existing brands.

Buyer Power

While manufacturers do make soft drinks ready for consumption and sell them to buyers such as food retailers, the leading players generate most of their revenue from the production of syrups, which are sold to bottling companies. The bottlers are licensed to convert these raw materials into soft drinks, packaged with the manufacturers' branding, and distribute them to buyers within a particular sales territory. Some bottlers are independent, while others are minority- or majority owned by the manufacturers. The close ties between manufacturers and bottlers means that food retailers are the more significant buyers from the point of view of market players.

The Indian soft drinks market is highly concentrated, with the three major players accounting for approximately 80% of the market’s total volume of sales.As a result, buyers are correspondingly

weakened. Consumers are likely to be strongly influenced by brand, and this weakens buyer power of the retailers who need to stock brands popular with consumers, even if these are more expensive. Overall, buyer power is weak.

Supplier Power

Inputs for soft drinks manufacturers include a range of natural and synthetic sweeteners, such as corn syrup and refined sugar (sucrose), aspartame, and similar ingredients. Some of these are commodities, available from several sources, although subject to price fluctuation. Others (e. g. spartame) are available only from a limited number of companies. However, even in these cases, there are usually substitutes available: for example, if aspartame becomes expensive or unobtainable, soft drinks manufacturers could consider using saccharine, or focusing on non-diet products. The importance of brand is very significant in the case of the soft drink industry. Hence, advertising and marketing agencies are therefore also highly significant suppliers in this market.

The advertising industry is highly concentrated, therefore, strengthening these suppliers to some extent.Overall supplier power is moderate in the case of the soft drink industry.

Threat of New Entrants

A new player can enter the market as an entirely new start-up, or as an existing company diversifying into soft drinks manufacturing.

Alternatively, a soft drinks manufacturer established elsewhere may start to distribute its products in India. Even if a new player opts for a business model in which much of the production process is performed by bottling partners under license, there will still be a need to invest in manufacturing capacity in order to produce the syrups.This will generally be fairly capital-intensive, restricting market entry to larger players that can raise the necessary funds. Also, new players would find it very

difficult to compete directly with the existing brands owned by the leading players. However, the healthy growth rates in the Indian market recently may encourage new entrants in some of the product categories (like bottled water and fruit juice).

Overall, there is a moderate threat of new entrants in the soft drink industry.

Threat of substitutes

There are many substitutes for soft drinks: alcoholic beverages, drinks such as tea and coffee, and so on.Leading players tend to have diverse product ranges, which reduces the threat posed by substitutes.

Food retailers are unlikely to stop selling soft drinks altogether. However, switching in the sense of allocating more shelf space to the substitutes may be advantageous in cost terms. For example, most soft drinks are optimally stored in chillers, which require power to run, whereas most substitutes can be stored at room temperature. This may be an issue in parts of India that suffer from unreliable electricity supplies. Overall, there is a moderate threat from substitutes.

Competitive Rivalry

The Indian soft drinks market is dominated by a few large companies. Switching costs for retailers are not prohibitive, which boosts rivalry. The ease of exit depends to some extent on business model. A company which manufacturers ready - for – consumption soft drinks in a single integrated process will need to dispose of assets such as specialized equipment in order to exit the market.

On the other hand, a company of the same size that operates in conjunction with a network of bottling partners will tend to have fewer assets, and exit is therefore easier.As this model is adopted by some leading players, rivalry in the Indian market is correspondingly reduced. Overall, there is a

moderate degree of rivalry in the soft drinks market.

Recent Concerns And Strategic Responses Of The Industry

The Bureau of Indian Standards (BIS), an autonomous body under the Department of Consumer Affairs, is mandated to set standards for quality for different products. In July 2003, its existing standard (IS 2346:1992- Carbonated Beverage) was due for revision.

Its committee -- Food and Drinks (FAD)-14 had the mandate to revise or reaffirm the existing standard.In August 2003, In a comprehensive study covering 12 states, Centre for Science and Environment (CSE) found dangerous levels of pesticides in all samples of soft drinks tested. In November 2003, this committee was directed by the Joint Parliamentary Committee (JPC) to finalise the standard for carbonated beverages. In October 2005, the standard was finalised and in March 2006, it was re-confirmed by the committee as final and ready for implementation. Immediately after, the Bureau of Indian Standards (BIS) website noted in its progress of work that the standard (IS 2346) “has been finalised but not yet ready under print”.Meaning the standard had been finalised but not yet notified.

In December 2004, India's Supreme Court ordered Coke and Pepsi to put warning labels on their products. 6. 1Health impacts of pesticides as per the findings of CSE The study said that there was a cocktail of three to six pesticides found in all samples. Pepsi Cola, the flagship brand of PepsiCo India, on an average contained 15. 2 ppb pesticide residues; this is 30 times the BIS standards.

Coca-Cola, the flagship brand of Coca-Cola India, on an average contained 13. ppb pesticide residues; this is 27 times the BIS standards. The average pesticide residues in all brands of

PepsiCo were 12. 7 ppb. This is 25 times the BIS standards.

The average pesticide residue in all brands of Coca-Cola India was 11. 05 ppb. This is 22 times the BIS standards. 6. 2Industry response to the CSE controversy When governments across India began banning soft drinks, Coke fought back this time with targeted ads featuring celebrities like Khan, a strategy that may have helped the company turn the corner in one of its most important emerging markets.

Center for Science and Environment said tests it conducted found dangerously high levels of pesticide residue in soft drinks being sold across India. Trace amounts of pesticides can be found in India's water supply and in its crops, as well as in raw ingredients such as sugar. Coke’s reply was that it treated the local water in its plants before using it to produce soft drinks. The research center said that pesticide residue can cause cancer, birth defects and damage to nervous and immune systems if consumed over a long period.Coke and Pepsi denied the allegations through the media, even holding a joint news conference.

Coke publicized its own tests that showed the drinks met tough European standards. The controversy flared up again in 2005 and the public's response was harsh. Seven of India's 28 states imposed partial bans on Coke and Pepsi. The state of Kerala banned the drinks altogether, and officials there had ignored a subsequent high court ruling overturning the ban. This time, Coke opted for a more aggressive marketing response.

Coke launched rounds of newspaper ads refuting the claims.The ads were in the form of a letter from India's more than 50 company-owned and franchised Coke

bottlers saying their products were safe. Similar letters were given to retailers. Merchandisers pressed stickers onto drink coolers that proclaimed Coke was "safety guaranteed. " Coke roped in Aamir Khan to set consumer fears at rest.

Also testimonial advertisements were run featuring popular soap stars and a Member of Parliament Smriti Irani which were targeted at housewives and adult women who make the majority of the food-buying decisions in Indian households.Pepsi also chose to run television advertisements featuring a notable scientist and the company's head of operations in India. The company also ran newspaper advertisements making a case for the safety of its products.

Conclusion

In conclusion, the question to be asked is why the Indian market is so important for these soft drink companies, even though, India forms only a small part of the global soft drink business. In 2005, India made up about 1. 4 percent of the 20. billion cases of beverages Coke sold worldwide. Profits on those sales were even thinner.

India's importance to Coke and Pepsi has more to do with the future. Sales of sugary carbonated soft drinks are on the decline in the United States and Europe where consumers are increasingly turning away from high-calorie drinks in favor of diet sodas, water, sports drinks and other noncarbonated beverages. That means soft drink companies have to look for future growth in other markets.India, with its increasing disposable income, favorable demographic dividend and a rising consumerist middle class presents a huge opportunity for growth for the soft drink industry.

References

1. Datamonitor. (2005, May). Global Soft Drinks: Industry Profile, New York. Reference Code: 0199-0802.
2. Datamonitor (2007, September). Soft Drinks in India: Industry Profile, New York, Reference
   

Code: 0102-0802