Soft Drink Industry Case Study
Soft Drink Industry Case Study Table of Contents Introduction 3 Description 3 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 Scale 5 Capital Requirements 6 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 Retaliation 9 Conclusion 10 Suppliers 10 Supplier concentration 10 Presence of Substitute Inputs 11 Differentiation of Inputs 12 Importance of Volume to Supplier 13 Impact of Input on Cost or Differentiation 13 Threat of Backward or Forward Integration 13 Access to Capital 14 Access to Labor 14 Summary of Suppliers 14 Buyers 15 Buyer Concentration versus Industry Concentration 15 Buyer Volume 15 Buyer Switching Cost 15 Buyer Information 16 Threat of Backward Integration 16 Pull Through 16 Brand Identity of Buyers 17 Price Sensitivity 17 Impact on Quality and Performance 17 Substitute Products 18 Relative price/performance relationship of Substitutes 18 Buyer Propensity to Substitute 18 Rivalry 18 Industry Growth Rate 20 Fixed Costs 21 Product Differentiation 21 Brand Identity 21 Informational Complexity 22 Corporate Stakes 22 Conclusion 23 Critical Success Factors 23 Prognosis 24 Bibliography 26 Appendix 27 Key Industry Ratios 27 Introduction Description The soft drink industry is concentrated with the three major players, Coca-Cola Co. ... , 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. ... 2 Source: Industry Surveys, 1995 Caveats The only limitations on access to information were: 1. ... The majority of the information targets the end consumer and not the sales volume from the major soft drink producers to local distributors. ... The Federal Government regulates the soft drink industry, like any industry where the public ingests the products. ... 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. ... 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). ... 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. ... 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. ... Absolute Cost Advantage Brands do have secret formulas, which makes them unique and new entry into the industry difficult. ... This leads to the conclusion that the absolute cost advantage is a low barrier within this industry. Learning Curve The shift in the manufacturing of soft drinks is gravitating toward automation due to speed and cost. However, industry technology is low and the manufacturing process is not difficult, therefore the learning curve will be short and will have a low barrier to entry. Access to Inputs All the inputs within the soft drink industry are commodity items. ... Access to these inputs is not a barrier to enter the industry. Proprietary Low Cost Production The process of manufacturing soft drinks is not a proprietary process. The methods used in the process are relatively standard within the industry and the knowledge needed to begin production can easily be acquired. ... Brand Identity This is a very strong force within the industry. ... " (Industry Surveys, 1995) A well recognized brand will foster customer loyalty and creates the opportunity for real market share growth, price flexibility, and above average profitability (Industry Surveys, 1995). ... Access to Distribution Distribution is a critical success factor within the industry. ... The most successful soft drink producers are aggressively expanding their distribution channels and consolidating the independent bottling and distribution centers. From 1978 to the present, the number of Coca-Cola bottlers decreased from 370 to 120 (Industry Surveys, 1995). ... 9% of the soft drink business is in supermarkets, where acquiring shelf space is very difficult (Santa, 1996). ... Expected Retaliation Market share within the industry is critical; therefore any attempt to take market share from the leaders will result in significant retaliation.