Cola wars industry analysis
Strategic Recommendations
Due to changes in the market trend, the Consumer Soft Drink Industry (CSD) industry will need to aggressively pursue the use of natural ingredients within their products, and expand and further develop the selection of non-carbonated beverages such as juices, sports drinks, energy drinks, tea-based drinks, and bottled water. Gross margins for non-CSD beverages such as ready-to-drink coffee, tea, energy drinks, sports drinks, provide the brands’ gross margins of 60%, 60%, 70%, and 65%, respectively. A pivot towards these beverages can offset potential revenue declines in the shrinking CSD market.
Profitability and Market Trends
Since its founding in the late nineteenth century, the CSD market has experienced two eras, one of consistent market growth, and the other involving market saturation. During the latter era, mega brands like Coca-Cola and PepsiCo have continued enjoying profitability growth due to cutting costs and adapting to changing customer taste from soft drinks to healthier alternatives; from 1975 to 2009 these two firms increased profitability of sales and equity invested (net profit to sales ratio and net profit to equity ratio) by roughly 11% (Exhibit D and E). An inability to respond to changing consumer trends, Coca-Cola and PepsiCo have emphasized heavily in marketing and entering the bottled water industry especially after US water sales beat CSD’s in 2017 and CSD sales decreased by 20% from 2000-2020.
Coca-Cola’s and PepsiCo’s market share has remained constant over the past few decades, but since 2004, both Coca-Cola, and PepsiCo have emphasized heavily in marketing and entering the bottled water industry. The financial data for Coca-Cola and PepsiCo has remained stable, but both companies have had a slow growth. Their largest bottler’s Coca-Cola Enterprises (CCE) and Pepsi Bottling Group (PBG) are experiencing challenges in increasing profitability (Exhibit F and G). This has been mainly due to the large amount of operating expenses and supplies required to bottle CSD’s such as concentrate, syrup, packaging, labor, and overhead.
Five Forces Analysis
As time has progressed, the threat of new CSD bottlers has increased from moderate to high alongside the threat of concentrate substitutes, the bargaining power of concentrate providers as well as rivalry among existing competitors which increased from strong to very strong. Threat of new competitors was minimized by mega-brands in the CSD industry enjoying the supply-side and demand-side economies of scale, initial capital requirements for new competitors, incumbency advantages independent of size, and the existing mega-brands’ unequal access to distribution. The bargaining of buyers like bottlers decreased over time due to the saturated bottler market and the fact the depended-on concentrate providers and retail channels as their primary source of revenue. For this same point retail channels had bargaining power over bottlers because bottlers had to compete to have their products sold by their vendors.
Market Projection
In the past two decades, there have been concerns regarding CSDs and health issues such as obesity and nutrition. Additionally, government regulations and federal nutrition guidelines have identified regular CSDs as a large source of obesity-causing sugars in the American diet. The declining consumption of CSDs have made Coca-Cola and PepsiCo shift their focus towards expanding the product mix and more towards diet and zero calorie CSD’s, and have also made an entry into the healthy nutritional drinks and bottled water industry. This trend is projected to see declines of 2.08% for carbonated beverages, while consumption of water and sports drinks are projected to rise 5.12% and 7.37%, respectively (Exhibit 1). In order to remain competitive and increase market share, CSD manufacturers will have to pivot their resources to service the changing consumer dynamic towards healthier beverages.
