the soft drink industry
DESCRIPTION
The Soft Drink Industry. Jonathan Gacioch Alec Kane Taylor Wilson. Introduction. Why soft drinks? $17.6 bn estimated revenue ($739.2 m profit) Falling demand is driving innovation Unique pricing strategies and monopoly power through exclusive contracts - PowerPoint PPT PresentationTRANSCRIPT
The Soft Drink Industry
Jonathan GaciochAlec Kane
Taylor Wilson
Why soft drinks?
◦ $17.6 bn estimated revenue ($739.2 m profit)
◦ Falling demand is driving innovation
◦ Unique pricing strategies and monopoly power through exclusive contracts
◦ Average Americans consume 44 gallons per year
◦ Customer loyalty
Introduction
Challenge
VS.
Industry StructureBackground, Competition, Organization, Major Companies
What does the industry produce?◦ Mixes ingredients with carbonated water
◦ Package and distribute beverages
◦ Does not include:
Still beverages
Carbonated water
Functional beverages (e.g. energy drinks)
Companies that only produce beverage ingredients or distribute beverages
Background
Source: IBISWorld
What is the basic technology?◦ Combining water, flavorings and sweeteners, and
carbonating this mix, and then packaging
◦ Natural sweeteners to limit calorie content
◦ Energy efficiency in production and biodegradable plastic bottles with smaller caps
How are the products distributed?◦ Producers ship their products significant distances to
a large number of markets Completed in-house by larger producers
Outsourced by smaller producers (often to larger players)
Background
Source: IBISWorld
Who buys the products?
◦ Consumers buy soft drinks in both supermarkets and food services and drinking places
◦ Demographics for sugar drink consumption:*
Young people and men consumer sugar drinks more frequently
Lower income individuals consumer more sugar drinks in relation to their overall diet
Background
*Ogden CL, Kit BK, Carroll MD, Park S. Consumption of sugar drinks in the United States, 2005–2008. NCHS data brief, no 71. Hyattsville, MD: National Center for Health Statistics. 2011.
Background
Ogden CL, Kit BK, Carroll MD, Park S. Consumption of sugar drinks in the United States, 2005–2008. NCHS data brief, no 71. Hyattsville, MD: National Center for Health Statistics. 2011.
Background
Ogden CL, Kit BK, Carroll MD, Park S. Consumption of sugar drinks in the United States, 2005–2008. NCHS data brief, no 71. Hyattsville, MD: National Center for Health Statistics. 2011.
How many firms are there in the industry?
Competition
Coca-Cola PepsiCo Dr Pepper Snapple Group Cott Corporation0%
5%
10%
15%
20%
25%
30%
35%
Market Share of Major Companies
Herfindahl-Hirschman Index (HHI):◦ Moderately concentrated industry
Competition
Company Market ShareMarket Share Squared
Coca-Cola 32.70% 1069.29
PepsiCo 17.50% 306.25Dr Pepper Snapple Group 15.20% 231.04
Cott Corporation 3.20% 10.24
HHI 1616.82
The Coca-Cola Company
PepsiCo Inc.
Dr Pepper Snapple Group Inc.
Cott Corporation
Major Companies
Largest company in terms of market share and revenue
Major Brands:◦ Coca-Cola◦ Diet Coke◦ Sprite◦ Fanta
Revenues boosted by consolidation Recently acquired companies to move away
from carbonated soft drinks:◦ Honest Tea
The Coca-Cola Company
Challenged Coca-Cola during the Great Depression with a 12 oz. bottle (same price compared to 6.5 oz. Coca-Cola)
Notable marketing: Pepsi Challenge (1975) Major Brands:
◦ Pepsi◦ Mountain Dew◦ Sierra Mist◦ Mug Root Beer◦ Izze
PepsiCo Inc.
Former division of Cadbury Schweppes Americas Beverages
Brand owner, bottler, and distributor Limited offerings in healthy beverages will hurt
the company in the future Major Brands:
◦ Dr Pepper◦ 7-UP◦ Schweppes◦ A&W Root Beer◦ Canada Dry◦ RC Cola
Dr Pepper Snapple Group Inc.
Largest producer of private label soft drinks
Sells to Safeway and J Sainsbury, which label the beverages with store brands
Success in Canadian market by lowering production costs while maintaining quality and improving packaging graphics
Cancelled contract with Walmart negatively impacted revenue in 2008
Cott Corporation
Source: IBISWorld
High levels of product differentiation:
◦ Make entry into the market difficult
◦ Entrants must differentiate themselves from other products
◦ Alternatively, entrants might find specific niches
Existing producers have achieved economies of scale:
◦ Capital investment is required in the mass production
Competition
Increasing trends of vertical integration:
◦ The Coca-Cola Company formerly sold rights to mix and bottle its beverages
Acquired Coca-Cola Enterprises in December 2010
Combine marketing, distribution, and bottling
◦ PepsiCo started reintegrating its bottling in July 2009
Completed acquisition of Pepsi Bottling Group and PepsiAmericas in February 2010
Organization
Collegiate ContractsEliminating Competition to Gain Full Pricing Power
Exclusive rights to distribute on campus
Most based on 90:10 ratio for shelf space
Includes both vending machines and in-store
Ad space/sports
Collegiate Contracts
Eliminating competition=pricing power
Reduces the effect of preference◦ If you can only get Pepsi, you’ll get Pepsi
College years are habit forming◦ Investment to generate brand loyalty
Exclusive advertising and sales rights
Incentives for Soda Companies
“We looked at it as we could offer different soft drinks and get nothing or just offer Pepsi products and bring in a lot of money the University otherwise wouldn’t have.”
-Bill Mahon, Penn State Spokesperson
Incentives for Colleges
Coca-Cola vs. Pepsi
Coca-Cola vs. Pepsi
2/3
1/3 750
~1500
Source: Scott Jacobson (Coca-Cola Spokesman)
77,000 students
Signed 1992◦ First collegiate contract
10-year
$14 Million
Penn State University (Pepsi)
37,000 students
Signed 1998-2013
$28 million
Student life and athletics
University of Minnesota (Coke)
Advertising Raw DataTelevision Ad Costs (2011)
Advertising Raw Data
Advertising Raw Data
Advertising Raw Data
Collusive BehaviorEvidence for tacit collusion in the soft drink industry
Through our own research we found that the prices of soft drinks made by each of the big 3 producers are identical to each other.
Prices for Coke and Pepsi products were exactly the same at numerous Ithaca locations (Wegman’s, 7-11, etc.).
This suggests tacit collusion on prices.
Collusive Behavior
Collusive Behavior
• A Journal of Economics and Management Strategy study explored the possibility of tacit collusion in the industry.• The study covered the years from 1968-1986 and focused on Pepsi and Coca-Cola• Findings suggest that there is collusive behavior in advertising, but not in pricing
Have things changed since the 1980s?
Is there collusion in pricing now that wasn’t there previously?
Collusive Behavior
Pricing in the Ithaca Area
Are you paying more for your drinks depending on your location?
Is there a difference in the price of a soft drink depending on where you are?
Are soft drinks more expensive on Cornell’s campus than they are off-campus?
Geographic Segmentation
Our research showed that soft drinks are in fact almost the same price per ounce whether you are on or off-campus.
Note that on-campus prices only include Pepsi products, as Cornell has a contract with them.
Geographic Segmentation
Cans of soda are more expensive than bottles per ounce, though not by much (between .5 and 2 cents per ounce)
2 Liters of soda are significantly cheaper per ounce than 12 oz cans or 20 oz bottles
A 2 Liter of soda at Wegman’s is the same price as a 20 oz bottle.
Pricing takes advantage of those who buy single servings (can or bottle).
Other Pricing Differences
Investment Recommendations
Is the soft drink industry a wise place to invest your money?
Soft Drink Consumption and Demand
Prices of sugar and other inputs of production are rising much faster than the price of soda
Revenues for the industry have been falling for over a decade
Revenues for 2013 are projected to be less than 70% of what they were in 2003
Recommendations
Year Revenue ($ million)
Growth %
2003 25,726.0 -7.1
2004 25,751.3 +.01
2005 24,838.5 -3.6
2006 23,150.1 -6.8
2007 21,523.7 -7.0
2008 20,436.6 -5.1
2009 18,640.6 -8.8
2010 19,794.3 +6.2
2011 19,123.5 -3.4
2012 18,263.4 -4.5
2013 17,598.9 -3.6
Revenue Growth
We would not suggest investing in the industry.
Steadily rising cost of inputs suggests that industry revenues will not increase any time in the near future.
Demand for soft drinks is steadily decreasing as people search for healthier options.
Recommendations