Soft Drink Industry Case Study

Soft Drink Industry Case Study
Table of Contents
Segments 3
Caveats 4
Socio-Economic 4
Relevant Governmental or Environmental Factors, etc.4
Economic Indicators Relevant for this Industry 4
Threat of New Entrants 5
Economies of Scale5
Capital Requirements6
Proprietary Product Differences 7
Absolute Cost Advantage 8
Learning Curve 8
Access to Inputs 8
Proprietary Low Cost Production 8
Brand Identity 9
Access to Distribution 9
Expected Retaliation9
Suppliers 10
Supplier concentration 10
Presence of Substitute Inputs11
Differentiation of Inputs 12
Importance of Volume to Supplier 13
Impact of Input on Cost or Differentiation13
Threat of Backward or Forward Integration 13
Access to Capital 14
Access to Labor 14
Summary of Suppliers14
Buyers 15
Buyer Concentration versus Industry Concentration 15
Buyer Volume15
Buyer Switching Cost15
Buyer Information 16
Threat of Backward Integration 16
Pull Through16
Brand Identity of Buyers 17
Price Sensitivity 17
Impact on Quality and Performance 17
Substitute Products18
Relative price/performance relationship of Substitutes 18
Buyer Propensity to Substitute 18
Rivalry 18
Industry Growth Rate20
Fixed Costs21
Product Differentiation 21
Brand Identity 21
Informational Complexity 22
Corporate Stakes 22
Critical Success Factors 23
Prognosis 24
Appendix 27
Key Industry Ratios27
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 Porter’s 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%.

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Table 1: Market Share
19901991199219931994 Cola69.9
69.768.36765.9 Lemon-Lime11.711.812
12.112.3 Pepper5. Root Orange2.32.3 Other7.
Source: Industry Surveys, 1995
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.

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


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