Threat of New EntrantsEconomies of scaleInvestment in automated bottling plantCapital requirementProduction and distribution systemsAccess to Distribution network: - 31.9% of the soft drink business is in supermarketsExpected RetaliationTo enter into a market with entrenched rival behemoths like pepsi and coke is not easy

Bargaining power of BuyerBuyer ConcentrationConsumers do not store the productThreat of Backward IntegrationDistributors specialize in the transportation and promotion of the product that they rely on the carbonated beverage companiesPull ThroughBottlers have a franchise agreementPrice SensitivityMajority of consumers are insensitive to price as they prefer flavor

Industry competitors & extent of rivalryIndustry concentrationDuopoly Industry Intense Rivalry between Coke and PepsiCorporate stakesLeads to a downward pressure on prices and significant investments in advertising in an attempt to maintain brand loyalty.Product differencesLow level of diversity operates on parallel lines to one another.

Supplier ConcentrationMain ingredients are sugar, water, chemicals, and alumininum cans, plastic and glass bottles are easily availableDifferentiation of Substitute ImputesSugar is commonly available NutraSweet is patentedThreat of forward and backward integrationThe suppliers do not have the capital required to forward integrate

Threat of SubstitutesSwitching costsBuyer Propensity to SubstituteContractual relationships between the soft drink companies and the distributorsPrice PerformanceAwareness of pesticides in SDsTrade off of substitutesEnergy drink consumption substitute product like tea, coffee, healthy drinks

(A) Threat of New Entrants

Economies of scale

Large corporate offices make their investment in automated high speed bottling lines that increase efficiency.

This will decline in the number of production workers employed by the industry at higher wages and fewer hours.

Capital requirement

The capital requirement within this industry is high. Production and distribution systems are extensive and necessary to compete with the industry leaders.

Access to Distribution network

Distribution channels are currently one of the largest barriers to entry, Coke and Pepsi must maintain favorable relations with the large retailers so that this barriers remains strong.

31.9% of the soft drink business is in supermarkets, where acquiring shelf space is very difficult.

Retailers enjoy significant margins of 15-20% on these soft drinks for the shelf space they offer. This makes it tough for the new entrants to convince retailers to carry/substitutes their new products for Coke and Pepsi.

Learning Curve

Industry technology is low and the manufacturing process is not difficult, therefore, the learning curve will be short and will have a lower barrier entry.

Expected Retaliation

To enter into a market with entrenched rival behemoths like pepsi and coke is not easy as it could lead to price wars which affect the new computer.

The soft drink industry is a moderately mature market with slow single digit growth. Therefore, growth in market share is obtained by stealing share from rivals causing retaliation to be high in defense of current market position.

Differentiation

Taste of pepsi and coca cola are almost the similar hence they differentiate their marketing campaigns that have created brand identification and loyalties.

Product difference can be easily duplicated but secret formulas do create a difference or good will that cannot be duplicated.

Switching Cost

Currently, the biggest threat of entry faced by the majors is from private label manufactures such as Cott Corporation. Private labels now hold an 8.1% share in the CSD market, the majority of which is held by Cott.

Retailers, finding far more attractive margins with private labels, may choose to push these products instead of the majors.

New companies should spend their time and resources necessary to first convince the consumer to try the new product, and after trial, switch their loyalties. The threat of new entrants is partially increased by the low switching costs for consumers.

Conclusion : To be successful on a large scale, the high capital requirements for manufacturing, distribution, and marketing are high barriers to entry. Therefore the threat of new entrants is low making this an attractive industry.

Low Medium High

(1) Threat of new Entrance

Economies of scale

Capital requirement

Access of distribution net work

Learning curve

Expected retaliation

Differentiation

Switching cost

(B) Bargaining power of supplier

Supplier concentration

The main ingredients are sugar (cane and beet), water, various chemicals and aluminum cans, plastic and glass bottles. There are many places to get the above material.

Sugar is bought but not in the volume that the grocery store or other industries do. The aluminum can, plastic bottles and glass (less now) are all pretty much dependent on the soft drink industry for their livelihood.

Presence of Substitute Inputs

The biggest substitute input was when the industry switched from aluminum cans to plastic bottles. This made the glass industry almost shake out completely.

The next big substitute input was for sugar. Since people were demanding more and more ways to lose weight and consume fewer calories, the diet soft drink exploded in sales.

There are a lot of substitutes for packaging but not for sweeteners because these sweeteners must have government approval (Crouch, Steve). This makes suppliers have power over the industry.

Differentiation of Inputs

Sugar is commonly available while NutraSweet is patented. There is no differentiation for sugar and only one choice in NutraSweet.

The other chemicals and inputs, they are commodity items, and it does not matter who supplies them. This makes suppliers have little power over the soft drink industry.

Threat of Backward and Forward Integration

Now a day there is a trend to concentrate on core business so there is little threat of backward integration into the supplier’s industry.

The suppliers do not have the capital required to forward integrate into the soft drink industry.

Conclusion: According to different aspects of suppler like suppliers concentration, differentiation of inputs, threat of integration and substitute input are less hence the bargaining power of supplier is low.

Low Medium High

(2) Supplier

Supplier concentration

Presence of substitute input

Differentiation of inputs

Threat of backward or Forward Integration

c) Buyers:-

Buyer Concentration versus Industry Concentration

Large retailers such as Wall- Mart and national grocery chains are able to extract profits from the soda manufacturers through incentives such as volume based rebates, promotions and displays which influences a consumer’s decision to purchase simply by altering the in store displays.

Consumers do not store the product they buy as much as necessary. The major soft drink companies will sell their products to the distributors. Therefore,

buyer volume is not a factor for this industry.

Threat of Backward Integration

It is doubtful that local distributors will move into the actual production process of soft drinks.

Distributors specialize in the transportation and promotion of the product that they rely on the carbonated beverage companies’ produce.

Wall– Mart and Harris Teeter have begun distributing their own private label brands of soft drinks with lower price as they cannot provide variety of packaging alternatives.

Pull Through

Bottlers have a franchise agreement to represent a major carbonated beverage company on the local level.

These distributors are legally bound to represent these companies and therefore cannot choose not to promote certain types of beverages.

Price Sensitivity Majority of consumers are insensitive to price as they prefer flavor or brand Distributors are not highly price sensitive buyers. Independent bottlers are on a

national contract so all distributors pay the same price for the same products.

Soft drinks are the single product that the distributors are concerned with so price is very important to them. Soft drink companies rely on these distributors to represent them on the local level, so it is important to maintain a healthy relationship.

Conclusion : According to different aspects of buyers like buyers concentration, back ward integration and price sensitivity are less hence the bargaining power of buyer is low.

Low Medium High

(3) Buyers

Buyers concentration versus Industry concentration

Threat of Backward integration

Pull Through

Price sensitivity

(D) Substitute ProductsRelative price/performance relationship of Substitutes

Awareness of pesticides in soft drinks that has lead to decrease in the consumption of soft drink and increase the consumption of substitute product like tea, coffee, healthy drinks etc.

Energy drink consumption has also climbed, due to the increasingly active lifestyles of teenagers.

Company’s has a significant presence in substitute markets so that a decrease in cola consumption can conceivably be made up in increased consumption of bottled water, juices, teas and energy drinks.

Buyer Propensity to Substitute Buyer propensity to substitute is low due to the contractual relationships between the soft

drink companies and the distributors.

Conclusion: Substitute like fruit juices, sport drink, energy drink, non carbonated drinks, tea, coffee etc. has increase the threat from substitute.

Low Medium High

(4) Substitute Products

Relative price/Performance relationship of Substitute

Buyers Propensity to substitute

(E) RivalryDegree of Concentration and Balance among Competitors

The rivalry leads to a downward pressure on prices and significant investments in advertising in an attempt to maintain brand loyalty. In a maturing market such as the domestic carbonated sodas, the only way to gain market share is to steal from one’s rivals.

Diversity among Competitors Through Coca Cola dominates the industry in sales volume and market share, it does not

dominate when it comes to innovative marketing and business strategy efforts. Clearly both of the industry leaders have different strategies as far as revenue generation is concerned.

Companies are very similar and operate parallel to one another. Pepsi and Coca Cola both have lemon lime, citrus, root beer, and cola flavors. Dr. Pepper/Cadbury does not have as similar a product line to that of PepsiCo and Coca Cola. The relatively low level of diversity makes the soft drink industry unattractive for investment

Low Medium High

(5) Rivalry

Degree of concentration and Balance among competitors

Diversity among competitors

PESTEL Framework:-

Political* Attracted 16% Excise duty plus 8% special Excise duty* Government approved more than US$400 Million Worth of investment* Gross bank credit is 4813 during Nov 2009

THE ORGANIZATION

Economical* GDP in the soft drink industry decreased from $1.0 Billion in 1998 to 981.0 million in 2009.* India’s 10.7 million households with an annual income of up to US$23,000 were in smaller cities such as vadodara, Nagpur,Ahmedabad and Vijayawada.*Inflation rate in India was recorded at 3.93 per cent for the first week of February 2009.

Legal* Food adulteration act1954,*The Fruits products order (FPO), 1955*The bureau of Indian standards has laid down specification IS: 2346:1992”carbonated beverages”*IS: 2451-1997 which prescribes standard for “quality tolerance for water for processed food industry” *Safe drinking water act.

Environmental* Transportation, industries, tourism etc, has increased the consumption.*Environment protection Act

Technological* New marketing technique the internet,E-commerce* Advertisement through media.* Introduction of cans and plastic bottles have increased sales for CSD

Sociocultural* Many citizens are practicing healthier lifestyles.*The ages of 37to 55 are also increasingly concerned with nutrition.*34%consumenr soft drinks were from the income group of 10000-20000 per month.Increase in level of education, the awareness of people that there is presence of pesticide contains in soft drinks.

Political factors Taxation and duties

Aerated Soft drinks and Water attracted 16% Excise duty plus 8% special Excise duty (SED) whereas; all other processed food and beverages are free from the SED. Thus the high level of excise duty of 24% is having an adverse impact on the industry. The Union Budget’06 brought in relief to this issue by reducing the Excise duty to 16%.

Table left

With the reduction in Excise duty the Budget impact on the industry remains positive. The manufacturers of aerated drinks and water will benefit, as they have to pay fewer Excises. If they retain part or full of the excise duty reduction, it will boost margins, and to the extent it is passed on to customers, it can facilitate improved sales volumes. In any case, it is a win win situation for the players. Thus the overall impact of Union Budget 2006 on the aerated soft drinks and mineral water producers is positive.

Custom duty on food processing machinery reduced from 7.5% to 5%. All services provided by technology business incubators exempted from service tax similarly the incubators whose annual business turnover does not exceed Rs. 500000 exempted from service tax for the first 3 years.

These escalating duties mean that, combined with central taxation, CSD prices have been driven up by as much as 50% and as a consequence out of the reach of many rural consumers, as well as drying up the increase in demand seen in the summer season.

Due to inconsistent tax policies growth in consumption has been erratic and the introduction of standardized sales tax policies by all state governments will help stabilize growth in this industry.

Government policy on FDIAutomatic investment approval up to 100% foreign equity or 100% for NRI and Overseas Corporate Bodies investment, is allowed for most of the food processing sector except malted food, alcoholic beverages and those reserved for small scale industries. 24% foreign equity is permitted in the small scale sector. Temporary approvals for imports for test marketing can also be obtained from the Director General of Foreign Trade.

The evolution of a more liberal FDI policy environment in India is clearly supported by the successful operation of some of the global majors like PepsiCo in India. Pepsi was

allowed to increase its turnover of beverages component to beyond 25% and was no longer restricted by its commitment to export 50% of its turnover. The government approved more than US$ 400 million worth of investment of which over US$ 330 million has already been invested.

In beverages & tobacco the deployment of gross bank credit is 4813 during Nov 2009, hence the growth as compared to Nov 2006 to Nov 2009 is 0.8%. This is comparatively low.

(B) Economic Factors

Economic growthThe current GDP rate in India is now 5.3% in third quarter to end December, throwing governmental projections of a 7.1% growth for the full financial year into disarray and bolstering the case for further rate cuts and more proactive fiscal measures. As the higher national income growth may boost demand for a firm’s products, the current GDP rate may reduce the demand for the industry.GDP in the soft drink industry decreased from $1.0 billion in 1998 to $981.0 million in 2009. The decrease in GDP reported between 1998 and 2009 represented a compound annual growth rate of -0.3%.

Disposable incomeReal GDP grew at an annual rate of 9.4% in the fiscal year 2006(ending March 2009), the fastest expansion for 18 years. The services sector has been the main driver of growth.

Strong economic growth has boosted disposable income and consumer spending. In 2006, annual household disposable income reached an average Rs. 116400 up 6.6% over 2001 in real terms.

The impact of India’s robust economic growth has spread to smaller cities. According to the National Council for Applied Economic Research, in 2006 half of India’s 10.7 million households with an annual income of up to US$23000 were in smaller cities such as Vadodara, Nagpur, Ahmedabad and Vijayawada.

The rising incomes and purchasing power of consumers in second tier cities will open up opportunities for a wide range of businesses as well as impacting the economy as a whole.

Interest ratesAs per the Reserve Bank of India the current saving bank rate is 3.5% and deposit rate 7.50-9.60%. Therefore as the interest rate has become lower the consumer would likely to borrow from the bank at the lower rate of interest which can lead the higher disposable income for items like soft drinks and food and many more. So that may be beneficial for the soft drinks industry.

Inflation rate

Inflation rate in India have declined. The weekly inflation rate fell below four percent and was recorded at 3.92% for the first week of February 2009. It may reduce the prices of cocoa which is the major ingredients for production soft drinks.

(C) Socio cultural Factors Lifestyle changesMany citizens are practicing healthier lifestyles. This has affected the non alcoholic beverage industry in that many are switching to bottled water and diet colas instead of beer and other alcoholic beverages. Also, time management has increased and is at approximately 43% of all households. The need for bottled water and other more convenient and healthy products are in important in the average day to day life.

Consumers from the ages of 37 to 55 are also increasingly concerned with nutrition. There is a large population of the age range known as the baby boomers. Since many are reaching an older age in life they are becoming more concerned with increasing their longevity. This will continue to affect the non alcoholic beverage industry by increasing the demand overall and in the healthier beverages.

Population DemographicsIndia is one of the largest emerging markets, with a population of over one billion . India is one of the largest economies in the world in terms of purchasing power and has a strong middle class base of 300 million. Around 70% of the total households in India (188 million) reside in the rural areas. The total number of rural households is expected to rise from 135 million in 2001-02 to 153 million in 2009-10. This presents the largest potential market in the world.

Table left.

The FMCG sector in the urban areas is becoming quite saturated while the penetration in the rural areas is only about 1%.

The rural areas have and will continue to make up more than 50% (153 million) of India’s total households and accounting for more than its current 66% contribution to total FMCG consumption.

Rural India has a large consuming class with 41% of India’s middle class and 58% of the total disposable income.

Currently, nearly 34% of the off take of FMCG companies come form rural areas. Between 2005 and 2010, the FMCG sector in the rural and semi urban areas will

experience some 50% growth, at a CAGR of 10% and increase its market size to nearly US$23 billion from the 2005 level of US$11.4 billion.

As per the above table, it seems that rural area has more population as well a distribution percent, and market etc. so that indicate that rural area can also be the potential market for the soft drink industry. Therefore, industry can also concentrate on rural marketing for the soft drinks.

Consumer Demographics & Buying Patterns of Indian Consumers

Rapid urbanization, increased literacy and rising per capita income, have all caused rapid growth and change in demand patterns, leading to an explosion of new opportunities. Around 45% of the population in India is below 20years of age and the young population is set to rise further. Aspiration levels in this age group have been fuelled by greater media exposure, unleashing a latent demand with more money and a new mindset.

In India, 45% of the population is below the age of 20 years. So soft drinks industry has the potential demand more for carbonated soft drinks among the youth. Therefore the industry can target the young population of India for the growth and surviving in competition.

Income distribution

From our primary research data we can find that about 34% consume soft drinks were from the income group of 10000-20000 per month where as 23% were from the income group of 20000-30000 per month as well as above 40000 per month. Hence we can say that the income group of above 40000 per month was not as much as that of income group of 10000-20000 per month. This means we can say income does not really affect the purchase of soft drinks.

Levels of education

With increase in level of education, the awareness of people that there is presence of pesticide contains in soft drinks. From our primary research data, 78% of people are aware about the pesticide contains.

(D) Technological Factors.

Creates opportunities for new products improvements and of course new marketing techniques the interest, e-commerce.

Some factors that cause company’s actual results to differ materially from the expected results are as follows:

The effectiveness of company’s advertising, marketing and promotional programs. The new technology of internet and television which use special effects for advertising through media. They make some products look attractive. This helps in selling of the products. This advertising makes the product attractive. This technology is being used in media to sell their products.

Introduction of cans and plastic bottles have increased sales for CSD as these are easier to carry and you can bin them once they are used.

As the technology is getting advanced there has been introduction of new machineries all the time. Due to introduction of this machineries the production of the Coca cola company has increased tremendously then it was few years ago.

CCE has six factories in Britain which use the most sate of the art drinks technology to ensure top product quality and speedy delivery. Europe’s largest soft drinks factory was opened by CCE in Wakefield, Yorkshire in 1990. He Wakefield factory has the technology to produce cans of Coca Cola faster than bullets from a machine gun.

(E) Legal

With changes to the chemicals allowed in consumable drinks with the impact of upcoming EU legislation this will impact Soft Drink Co’s Production. They will have less than three years to comply or be forced to remove the product from the shelves. 5

Regulations

In India the soft drinks Industry is virtually unregulated. Rule 65 of the Prevention of Food Adulteration Act 1954, regulates the presence of insecticides and pesticides in food but “food” is so defined in Rule 65 as to exclude “beverages”. This Rule does not apply to soft drinks. Subsection

There are specifications for “sweetened aerated water with no fruit juice or pulp or containing less than 10% fruit juice or fruit pulp” in part 2 (D) of the Fruits Products Order, 1955. It regulates the general characteristics of a beverage. On the quality of basic raw material water it merely says “water used in the manufacture shall be potable and if required by the licensing officer shall be got examined chemically and bacteriological by any recognized laboratory”. The order however does not define what is potable nor does it provide any scope to regulate pesticide residues.

The Bureau of Indian Standards (BIS) has laid down specifications IS: 2346:1992 for “carbonated beverages”. In the foreword to this document water is mentioned as ingredient in carbonated beverages the quality of carbonated beverages depends on the quality of various ingredients that goes into its manufacture water, acidulates, sweetening agents, emulsifiers, and stabilizers, flavor, color and carbon dioxide being the important ones”

This BIS standard is voluntary in nature (unlike mandatory certification for bottled water). The BIS has another standard IS: 4251-1967 (reaffirmed 1977) which prescribes standards for “Quality tolerances for water for processed food Industry”. In its forward it says: “In processed food Industry, water is used for a number of purposes such as processing, washing, flushing and general usage and also for boiler feed and cooling”.

The soft drink industry remains not only unregulated but it is also exempted from the provisions of Industrial licensing under the Industries (Development and Regulations) Act, 1951. It gets a one time license to operate from the ministry of food processing Industries, which includes a no objection certificate from the local government an a water analysis report from a public health laboratory. It also requires a no objection certification from the concerned State Pollution Control Board.

In Contrast in United States, regulations provide that the standard of water used to make soft drinks must be the same as that used to make bottled water. “Raw water used to make bottled water falls under the purview of US Food and DRUG Administration (FDA). According to the rules water consumed in this form Is a “food” therefore water used as an ingredient in beverages must meet the same standard as bottled water?

In addition to the US Safe Drinking Water Act a federal legislation under the Environmental Protection Agency (EPA) stipulates drinking water standards to protect public health. Its primary standards are legally enforceable nation wide. In the state of Massachusetts regulations stipulate that the source water used for Bottled water and carbonated drinks must meet the Federal EPA National Primary Drinking water standards.

In Europe, the European Economic Council Directive 80/778/EEC and 98/83/EEC lay down the standards for quality of drinking water intended for human consumption. Such water it clearly specifies shall include water used in any food production undertaking for the manufacture, processing, preservation or marketing of products or substances intended for human consumption, or affecting the wholesomeness of the food stuff in its finished form”.

(F) Environmental

With several EU countries introducing fines to manufacturers who do not use recycle able packaging, Soft Drink Co will need to review its strategy of using plastic bottles and look towards new packages technology or the use of cans.

Better infrastructure will help better access and more distribution network to the FMCG companies. It will help them improve the supply chain. Companies have huge investments in the liquid funds; the higher tax on dividend distribution will reduce their other income. The impact of higher tax (cess) on the industry is likely to lower net margins, albeit marginally.