Description
The soft drink industry is concentrated with the three major players, Coca-Cola Co.,
PepsiCo Inc., and Cadbury Schweppes Plc., making up 90 percent of
the $52 billion dollar a year domestic soft drink market (Santa, 1996). The soft drink
market is a relatively mature market with annual growth of 4-5%
causing intense rivalry among brands for market share and growth (Crouch, Steve). This
paper will explore Porters Five Forces to determine whether or not this is an attractive
industry and what barriers to entry (if any) exist. In addition, we will discuss several
critical success factors and the future of the
industry.
Segments
The soft drink industry has two major segments, the flavor segment and the distribution
segment. The flavor segment is divided into 6 categories and is listed in table 1 by market
share. The distribution segment is divided in to 7 segments: Supermarkets 31.9%, fountain
operators 26.8%, vending machines 11.5%, convenience stores 11.4%, delis and drug
stores 7.9%, club stores 7.3%, and restaurants 3.2%.
Table 1: Market Share
1990 1991 1992 1993 1994 Cola 69.9
69.7 68.3 67 65.9 Lemon-Lime 11.7 11.8 12
12.1 12.3 Pepper 5.6 6.2 6.9 7.3 7.6 Root
2.7 2.8 2.3 2.7 2.7 Orange 2.3 2.3
2.6 2.3 2.3 Other 7.8 7.2 7.9 8.6 9.2
Source: Industry Surveys, 1995
Caveats
The only limitations on access to information were: 1. Financial information has not yet
been made available for 1996. 2. The majority of the information targets the end consumer
and not the sales volume from the major soft drink producers to local distributors. 3. There
was no data available to determine over capacity.
Socio-Economic
Relevant Governmental or Environmental Factors, etc.
The Federal Government regulates the soft drink industry, like any industry where the
public ingests the products. The regulations vary from ensuring clean,
safe products to regulating what those products can contain. For example, the government
has only approved four sweeteners that can be used in the making of a soft drink (Crouch,
Steve). The soft drink industry currently has had very little impact 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.
Economic Indicators Relevant for this Industry
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).
Threat of New Entrants
Economies of Scale
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).
Table 2 General Statistics: Year
Companies Workers Hours Wages Value of Shipments
1982 1626 42.4 85.2 7.84
16807.5 1983 41.5 85.1 8.24 17320.8 1984 39.8
81.7 8.51 18052 1985 1414 37.2 77.8 9.1 19358.2 1986
1335 35.5 73.5 9.77 20686.8 1987 1190 35.4 71.5 10.45
22006 1988 1135 35.2 71.8 10.78 23310.3
1989 1027 33.4
67.7 10.98 23002.1 1990 941 32 65.7 11.48 23847.5 1991
31.9 66.8 11.85 25191.1 1992 29.8 61.6 12.46
26260.4 1993 28.6 59.3 12.93 27224.4 1994 27.4
56.9 13.39 28188.5 1995 26.2 54.5 13.86 29152.5 1996
25 52.1 14.32 30116.5
Source: Manufacturing USA, 4th Ed.
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.
Table 3
CADBURY/SCHWEPPES 93 94 95 96 ASSETS 2963100
3266900 3501500 4595000 SALES 3372400 3724800
4029600 4776000
NET INCOME 195600 236800 261900 300000 Sales/Income 5.80% 6.36%
6.50% 6.28% Income/Assets 6.60% 7.25% 7.48% 6.53%
COKE ASSETS 11051934 12021000 13873000 15041000 SALES
13073860 13963000 16181000 18018000
NET INCOME 1664382 2176000 2554000 2986000
Sales/Income 12.73% 15.58% 15.78% 16.57% Income/Assets 15.06% 18.10%
18.41% 19.85%
PEPSI ASSETS 20951200 23705800 24792000 25432000 SALES
21970000 25021000 28472400 30421000
NET INCOME 374300 1588000 1752000 1606000 Sales/Income
1.70% 6.35% 6.15% 5.28% Income/Assets 1.79% 6.70% 7.07% 6.31%
Source: Compact Disclosure
Capital Requirements
The requirements within this industry are very high. Production and distribution systems
are extensive and necessary to compete with the industry leaders. Table 4 shows the
average capital expenditures by the three industry leaders.
Table 4
Dec-95 Dec-94 Jan-94 Jan-93 Receivables 1624333
1385767 1226633 1077912 Inventories 867666.7
803666.7 777366.7 716673.7 Plant & Equip 5986333
5795367 5246600 4642058 Total Assets 15022667
14055500 12997900 11655411 Source: Compact Disclosure
The magnitude of these expenditures causes this to be a high barrier to entry.
Proprietary Product Differences
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
