Functional Drinksby Chileshe Mwamba, Sergey Skotnikov and

Diana Villamizar

Overview

• Industry overview

• Company specifics

• Questions

• Personal recommendations

• Conclusion

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Industry Overview

• Global beverage companies

• Small private owned companies

• Entrepreneurs

• Cooperatives

Functional drinks include energy drinks, sports and performance drinks, vitamin enhanced fruit and water drinks and ready to drink teas.

The market grew by 8.4% in 2012 to reach a value of $64.1 billion, (Marketline, 2012).

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Industry Overview

Characteristics

Multiples entrants

Advertising campaigns

Rapid innovation

Increased scrutiny

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PepsiCo• 1893 a pharmacist sought to create a “fountain drink” that help with

digestion and boost energy, yet tasty “Brad’s Drink” later to be known as Pepsi.

• Formed in 1965 as a merger between Pepsi-Cola Company and Frito Lay Inc.

o Headquarter: Purchase, New York

o Total Revenue: $65.4 Billion

o Employees: 297, 000

o Operations: 200 countries

• Competitors include The Coca-Cola Company, Dr Pepper Snapple Group, Inc., Mondelez International, Inc., Hansen Natural Corporation, National Beverage Corp., Kraft Foods Inc., The Kellogg Company, ConAgra Foods, Inc., Nestlé S.A. and more.

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PepsiCo

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PepsiCo

Recent Activity

Low Profit Margin

8,700 Jobs Cut by 2014

Investment in Emerging Economies

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Coca-Cola• More than 500 brands in its portfolio, Coca Cola holds a

second place in the global functional drinks sector with around 16.8% of the market.

• Manufactures more than 3,500 beverage products, this includes a wide variety of juices, sparkling, still beverages and carbonated drinks.

• The Coca Cola company holds operations in more than 200 countries, divided into 5 groups according to the Region.

• Coca Cola has managed to build a strong distribution system thanks to the mix of independent bottlers, bottlers partially owned and company owned bottlers.

27.7 Billion cases units sold worldwide, 2012.7

Coca-ColaHISTORY

• Coca-Cola began as an individual business in 1886, when an Atlanta pharmacist, Dr. John S. Pemberton, created a new refreshing and interesting soft drink that could was sold at soda fountains.

• Frank M. Robinson, then names the beverage “Coca-Cola” and it is now considered the responsible for designing the famous script.

• 1960 that Coca Cola decides to acquire Minute Maid Corporation beginning its expansion strategy adding a line of juices to its portfolio.

• 1992 that they enter the functional drinks market with the introduction of Powerade as the official drink of the olympic games.

• Acquisition of Energy Drinks ( Glacéau) maker of enhanced vitamin water, Coca cola begins to consolidates its portfolio in the functional drinks market in 2007.

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Coca-Cola

Stable growth powered by portfolio expansion

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Red Bull

• Founded by Dietrich Mateschitz and Chaleo Yoovidhya

• 5.2 billion cans sold (2012)

• Product Range:o Red Bull (Zero Calories, Sugarfree)o Red Bull Editionso Red Bull Energy Shotso Red Bull Cola

Red Bull is the uncontested leader in the energy drinks market segment with over 40% of total sales. Its attempts to diversify into other segments, however, are to this moment unsuccessful.

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Red Bull

• Marketing successo Baumgartner stratosphere jump 2012o Formula 1 racing teams

• Energy Drinks scrutinyo Legalo Legislative

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Monster Beverage

• Formerly known as Hansen Natural (Jan. 2012)o Switched all branding to Monster product rangeo Partnership for distribution mainly with Coca-Cola

• Monster Energyo Following the leadero Diverse lineup

• Worx Energy Shot - 70% growth in 2012In 2009 the Food and Drug Administration report indicated that 13 teenager deaths could be linked to Monster Energy and 5-Hour Energy shots consumption.

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Monster Beverage

Stable growth powered by international exposure

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Q1: What are the strategically relevant components of the global and US beverage industry macro-environment?

P - Unstable Political Conditions

E - Unfavorable economic conditions

Emerging & Developing Markets

S - Changing Consumer Preferences

T - Accelerating innovation

Information Accessibility

E - Water scarcity

L - Regulation and Possible Litigation

Carbonated drinks do not fulfill any other desire but thirst and taste.

Energy, sports and ready to drink beverages serve a function

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Porter’s Five Forces• Suppliers

o Many, decentralised

o Common ingredients

• Consumerso Supermarkets’ own brands

o Price differentiation

o Local preferences

• Substituteso Caffeine substitutes

o Water and soft drinks

o Price sensitivity

• New Entrantso Diversification

o Local adaptation

• Market Competitiono Large multinationals

o Focused segment leaders

o New segments

Overall the forces are rather balanced despite found differences. With the current market conditions of growth and high premiums everyone can still get a fair share of the earnings.

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Strategic group map● PepsiCo and Coca-Cola

○ Diversified○ Worldwide

● Red Bull○ Limited○ Wordwide

● Monster Beverage○ Moderately diversified○ Limited Distribution

● Living Essentials○ One Product○ One Market

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Drivers of Market Change

Attractive Variables of the Industry

Profitability

• This might be recognized as the key drivers for the rapid growth of the market and competition of functional drinks.

• Increase of the retail price for sports drink of 50 to 75% above soft carbonated drinks and around 400% for energy drinks.

• The recognition of additional benefits of those offered by common carbonated drinks from the consumer justify this difference in price, allowing the producers to elaborate differential proposals flavor and benefits wise.

Emerging Markets

• Thanks to the maturity of the north American and European Market, new places such as Latin America, Middle East and Asia show new opportunities for development.

• Renovated consumer taste and an increase in the power purchase of the population.

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Attractive Variables of the Industry

Innovation

• Thanks to the maturity of the carbonated soft drink sector, it is clear that the room for new growth is in the functional drinks.

• Flavor new proposals to health benefits and energy enhancement offers there is plenty of room to innovate.

• As the market trends dictates a new niche has been detected, is the relaxation drinks sector that is an example of the opportunities in the business.

• With a lot of variable to play from protein enhanced drinks for the ports sector and relaxation and new sorts of energizers more empathetic to health issues this industry is in constant renovation.

Drivers of Market Change

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Attractive Variables of the Industry

Consumer Taste

• With different profiles of consumer, consumer taste is considered one of the essentials for segmentation and new alternatives in the functional drinks business.

• Health conscious consumers to trendy new proposals seekers there is a wide range of growth and options for this industry.

• Benefits

• New flavors

• New ingredients

• New Claims

Drivers of Market Change

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Less Attractive Variables of the Industry

Health Concerns

• Occurring health trendTheir concerns regard

• Ingredients with negative health implications

• Unethical marketing practices

• Improper use of the products

• Omission of information.

Video: http://www.youtube.com/watch?v=Jf8DcUjiZHw&feature=youtu.be

• Receive numerous complaints

• Stringent consumer protection and food and drug laws

• Subject to liability and possible recall

Drivers of Market Change

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Less Attractive Variables of the Industry

Unfavourable Economic Conditions

Even with the US recovering economically

• Sport drinks due to a matured status of the segment

Outside the United States is an unstable economic environment.

• Tax rates, foreign exchange rates and interest rates.

• Access to capital

• Distributors may face difficulties to maintain less profitable operations.

Drivers of Market Change

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Key Success Factors

Innovation

• For the case of functional drinks we can identify three key elements that have contributed to the success and rapid growth of the industry.

• Functional drinks that have a beneficial effect or a target function in the body innovation can range

• New, experimental and exotic flavors or ingredients, to a variety of enhancing or wellness mechanisms.

• Strong competition of mixes of flavor, visual appeal of the packaging and the functional benefit due to a better informed consumer.

• In the case of energy drinks, innovation holds place in enhancing claims, added value and elements commonly associated to power, strength and performance.

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Brand Image

• Communication is one of the elements responsible for the success of functional drinks.

• Tough competition for shelf and cooler space brands have come up with all sort of strategies to make their products pop.

• With price and health conscious consumers branding activities have become an essential element to develop the brand image.

• Strong competition of mixes of flavor, visual appeal of the packaging and the functional benefit due to a better informed consumer.

• Sponsoring of events have created a clear channel to expose their brands and strengthen their concept.

Key Success Factors

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Brand Image

• Responsible advertising is one of the controversial topic in regards to functional drinks.

• Health value, and the massive offer of functional drinks it is often difficult for the consumer to distinguish between a functional drinks and sugar water in a fancy packaging

• With the booming of social media, other consumers feedback, and experts opinion are an important source of information for the information seeker consumer

Key Success Factors

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Distribution System

• The availability of functional drinks to the consumer have created a new range of opportunities to market and distribute these drinks.

• Convenience stores have become an important distribution channel for vitamin enhances waters and energy drinks by creating the opportunity of an impulse buy and immediate consumption.

• Established channels have help the companies to become leaders in the category.

• For small producer the use of third parties taking the reach and availability more limited and more expensive in comparison to the industry leaders that have a previously established network.

Key Success Factors

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RecommendationsReflecting on PepsiCo’s performance, its extensive product portfolio has been of great advantage.

• Greatly dependent of the US market

• Repeatedly falls behind Coca-Cola world leader in beverage concentrates.

• Its low pricing doesn’t work simultaneously with its operating costs.

Appeal more to customers and consumers in other markets, through

their strategy of mergers and acquisitions.

Avoid duplication of staff functions and fine tune distribution channel. Optimising

value chain by looking at outsourcing production.

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As a late comer to the functional drinks industry Coca cola has approach an aggressive acquisition strategy of independent brands in last few years.

• For the health functional segment responsible advertisement is key to the brand, as well as the disassociation from Coca Cola main business soft carbonated drinks.

• The exploration and investment in emerging markets is key to develop consumer taste for this sector.

• In the energy drinks sector there is a clear advantage from Pepsico and Red Bull, brand exposure and recognition is necessary in order to acquire more market share for this category.

Recommendations

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• Good spread

• Great image and marketing

• BUTo Trouble diversifyingo One-trick ponyo Too excentric?

Recommendations

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• Followero Second entrant experienceo Large Portfolio

• BUTo Needs to spreado Needs to lead

Recommendations

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Thank You!

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