Energy drinks are part of the broader soft drink category, which includes carbonated beverages, fruit and vegetable juices, bottled water, sports drinks, beverage concentrates, ready-to-drink tea, and ready-to-drink coffee. Within this industry, consumers have been buying less soda and more energy drinks. Americans today are consuming about the same amount of soda as they were in
Why is the soft drink industry so profitable? Both concentrate producers CP and bottlers are profitable. These two parts of the industry are extremely interdependent, sharing costs in procurement, production, marketing and distribution.
Many of their functions overlap; for instance, CPs do some bottling, and bottlers conduct many promotional activities.
The industry is already vertically integrated to some extent. They also deal with similar suppliers and buyers. Entry into the industry would involve developing operations in either or both disciplines.
Beverage substitutes would threaten both CPs and their associated bottlers. Because of operational overlap and similarities in their market environment, we can include both CPs and bottlers in our definition of the soft drink industry.
This industry as a whole generates positive economic profits. In fact, one could characterize the soft drink market as an oligopoly, or even a duopoly between Coke and Pepsi, resulting in positive economic profits. To be sure, there was tough competition between Coke and Pepsi for market share, and this occasionally hampered profitability.
For example, price wars resulted in weak brand loyalty and eroded margins for both companies in the s. The Pepsi Challenge, meanwhile, affected market share without hampering per case profitability, as Pepsi was able to compete on attributes other than price.
Over time, however, other beverages, from bottled water to teas, became more popular, especially in the s and s. Coke and Pepsi responded by expanding their offerings, through alliances e.
Coke and Nesteaacquisitions e. Coke and Minute Maidand internal product innovation e. Pepsi creating Orange Slicecapturing the value of increasingly popular substitutes internally.
Proliferation in the number of brands did threaten the profitability of bottlers throughas they more frequent line set-ups, increased capital investment, and development of special management skills for more complex manufacturing operations and distribution.
Bottlers were able to overcome these operational challenges through consolidation to achieve economies of scale.
Overall, because of the CPs efforts in diversification, however, substitutes became less of a threat. Sugar could be purchased from many sources on the open market, and if sugar became too expensive, the firms could easily switch to corn syrup, as they did in the early s.
So suppliers of nutritive sweeteners did not have much bargaining power against Coke, Pepsi, or their bottlers.
With an abundant supply of inexpensive aluminum in the early s and several can companies competing for contracts with bottlers, can suppliers had very little supplier power.
Furthermore, Coke and Pepsi effectively further reduced the supplier of can makers by negotiating on behalf of their bottlers, thereby reducing the number of major contracts available to two.
With more than two companies vying for these contracts, Coke and Pepsi were able to negotiate extremely favorable agreements. In the plastic bottle business, again there were more suppliers than major contracts, so direct negotiation by the CPs was again effective at reducing supplier power.
The soft drink industry sold to consumers through five principal channels: Supermarkets, the principal customer for soft drink makers, were a highly fragmented industry. The stores counted on soft drinks to generate consumer traffic, so they needed Coke and Pepsi products.
Their only power was control over premium shelf space, which could be allocated to Coke or Pepsi products.
This power did give them some control over soft drink profitability. Furthermore, consumers expected to pay less through this channel, so prices were lower, resulting in somewhat lower profitability. National mass merchandising chains such as Wal-Mart, on the other hand, had much more bargaining power.
While these stores did carry both Coke and Pepsi products, they could negotiate more effectively due to their scale and the magnitude of their contracts. For this reason, the mass merchandiser channel was relatively less profitable for soft drink makers.
The least profitable channel for soft drinks, however, was fountain sales. Coke and Pepsi found these channels important, however, as an avenue to build brand recognition and loyalty, so they invested in the fountain equipment and cups that were used to serve their products at these outlets.
Vending, meanwhile, was the most profitable channel for the soft drink industry. Essentially there were no buyers to bargain with at these locations, where Coke and Pepsi bottlers could sell directly to consumers through machines owned by bottlers. Property owners were paid a sales commission on Coke and Pepsi products sold through machines on their property, so their incentives were properly aligned with those of the soft drink makers, and prices remained high.
The customer in this case was the consumer, who was generally limited on thirst quenching alternatives. The final channel to consider is convenience stores and gas stations.Historically, the soft drink industry has been extremely profitable.
Long time industry leaders Coca-Cola and Pepsi-Cola largely drive the profits in the industry, relying on Porter’s five forces model to explain the attractiveness of the soft drink market. Carbonated Beverage and Soft Drink Manufacturers.
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Soft Industry Essay. Historically, the soft drink industry has been profitable for a variety of reasons. The traditionally large share of market for Coca-Cola and Pepsi establishes a large barrier of entry for others to enter the market. Nonalcoholic Beverages Industry Profitability.
Nonalcoholic Beverages Industry Net Profit grew by % in 2 Q sequntially, while Revenue increased by %, this led to improvement in Nonalcoholic Beverages Industry's Net Margin to %.
Profitability in the soft drink industry will remain rather solid, but market saturation especially in the U.S. has caused analysts to suspect a slight deceleration of growth in the industry ().
drink companies, the top six controlled 89% of the market. In fact, one could characterize the soft drink market as an oligopoly, or even a duopoly between Coke .