Soft Drink Industry Case StudyTable of ContentsIntroduction3Description3Segments 3Caveats 4Socio-Economic 4Relevant Governmental or Environmental Factors, etc.4Economic Indicators Relevant for this Industry 4Threat of New Entrants 5Economies of Scale5Capital Requirements6Proprietary Product Differences 7Absolute Cost Advantage 8Learning Curve 8Access to Inputs 8Proprietary Low Cost Production 8Brand Identity 9Access to Distribution 9Expected Retaliation9Conclusion10Suppliers 10Supplier concentration 10Presence of Substitute Inputs11Differentiation of Inputs 12Importance of Volume to Supplier 13Impact of Input on Cost or Differentiation13Threat of Backward or Forward Integration 13Access to Capital 14Access to Labor 14Summary of Suppliers14Buyers 15Buyer Concentration versus Industry Concentration 15Buyer Volume15Buyer Switching Cost15Buyer Information 16Threat of Backward Integration 16Pull Through16Brand Identity of Buyers 17Price Sensitivity 17Impact on Quality and Performance 17Substitute Products18Relative price/performance relationship of Substitutes 18Buyer Propensity to Substitute 18Rivalry 18Industry Growth Rate20Fixed Costs21Product Differentiation 21Brand Identity 21Informational Complexity 22Corporate Stakes 22Conclusion23Critical Success Factors 23Prognosis 24Bibliography26Appendix 27Key Industry Ratios27IntroductionDescriptionThe soft drink industry is concentrated with the three major players,Coca-Cola Co.
, PepsiCo Inc., and Cadbury Schweppes Plc., making up 90 percent ofthe $52 billion dollar a year domestic soft drink market (Santa, 1996). Thesoft 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 Porter’s Five Forces to determine whether or not thisis an attractive industry and what barriers to entry (if any) exist.
Inaddition, we will discuss several critical success factors and the future of theindustry. SegmentsThe soft drink industry has two major segments, the flavor segment andthe distribution segment. The flavor segment is divided into 6 categories andis listed in table 1 by market share. The distribution segment is divided in to7 segments: Supermarkets 31.9%, fountain operators 26.8%, vending machines11.5%, convenience stores 11.
4%, delis and drug stores 7.9%, club stores 7.3%,and restaurants 3.2%.Table 1: Market Share19901991199219931994 Cola69.969.
2Source: Industry Surveys, 1995CaveatsThe only limitations on access to information were: 1. Financial information hasnot yet been made available for 1996. 2.
The majority of the information targetsthe end consumer and not the sales volume from the major soft drink producers tolocal distributors. 3. There was no data available to determine over capacity.Socio-EconomicRelevant Governmental or Environmental Factors, etc.The Federal Government regulates the soft drink industry, like any industrywhere the public ingests the products. The regulations vary from ensuring clean,safe products to regulating what those products can contain. For example, thegovernment has only approved four sweeteners that can be used in the making of asoft drink (Crouch, Steve).
The soft drink industry currently has had verylittle impact on the environment. One environmental issue of concern is thatthe use of plastics adversely affects the environment due to the unusually longtime it takes for it to degrade. To combat this, the major competitors havelead in the recycling effort which starting with aluminum and now plastics. Theonly other adverse environmental impact is the plastic straps that hold the canstogether in 6-packs.
These straps have been blamed for the deaths of fish andmammals in both fresh and salt water.Economic Indicators Relevant for this IndustryThe general growth of the economy has had a slight positive influence on thegrowth of the industry. The general growth in volume for the industry, 4-5percent, has been barely keeping up with inflation and growths on margins havebeen even less, only 2-3 percent (Crouch, Steve).Threat of New EntrantsEconomies of ScaleSize is a crucial factor in reducing operating expenses and being able to makestrategic capital outlays.
By consolidating the fragmented bottling side of theindustry, operating expenses may be spread over a larger sales base, whichreduces the per case cost of production. In addition, larger corporate coffersallow for capital investment in automated high speed bottling lines thatincrease efficiency (Industry Surveys, 1995). This trend is supported by thedecline in the number of production workers employed by the industry at