Reference no: EM13231981 , Length: 870 Words
The global beverage industry was projected to grow from $1.58 trillion in 2009 to nearly $1.78 trillion in 2014 as beverage producers entered new geographic markets, developed new types of beverages, and continued to create demand for popular drinks. A great deal of industry growth was expected to result from steady growth in the purchasing power of consumers in developing countries, since the saturation rate for all types of beverages was high in developed countries. For example, market maturity and poor economic conditions caused the U.S. beverage industry to decline by 2.1 percent in 2008 and by 3.1 percent in 2009. The 2.3 percent decline in the volume sales of carbonated soft drinks marked the fifth consecutive year that U.S. consumers had purchased fewer carbonated soft drinks than the year before. Industry analysts believed that while carbonated soft drinks would remain the most-consumed beverage in the United States for some time, annual sales would continue to decline as consumers developed preferences for bottled water, sports drinks, fruit juices, ready-to-drink tea, vitamin-enhanced beverages, energy drinks, ready-to-drink coffee, and other types of beverages.
As consumer preferences shifted during the 2000s, sports drinks, energy drinks, and vitamin-enhanced drinks had grown to become important segments within the industry in 2010. In addition, such alternative beverages tended to carry high price points, which made them attractive to both new entrants and established beverage companies such as the Coca-Cola Company and PepsiCo. Sports drinks and vitamin-enhanced beverages tended to carry retail prices that were 50 to 75 percent higher than similar-size carbonated soft drinks and bottled water, while energy drink pricing by volume might be as much as 400 percent higher than carbonated soft drinks. While the alternative beverage segment of the industry offered opportunities for bottlers, the poor economy had decreased demand for higher-priced beverages, with sales of sports drinks declining by 12.3 percent between 2008 and 2009 and the sales of flavored and vitamin-enhanced waters declining by 12.5 percent over the same period. The economy had also impacted the sales of energy drinks, but only by slowing the growth in volume sales to 0.2 percent between 2008 and 2009. Among all types of beverages, only energy drinks and ready-to-drink tea experienced volume growth between 2008 and 2009.
Worldwide dollar sales of alternative beverages (sports drinks, energy drinks, and vitamin-enhanced beverages) grew by more than 13 percent annually between 2005 and 2007 before slowing to about 6 percent annually between 2007 and 2009. In the United States, sports drinks accounted for nearly 60 percent of alternative beverage sales in 2009, while vitamin-enhanced drinks and energy drinks accounted for about 23 percent and 18 percent of 2009 alternative beverage sales, respectively.
Even though energy drinks, sports drinks, and vitamin-enhanced drinks were all categorized as alternative beverages, the consumer profile varied substantially across the three types of beverages. While the profile of an energy drink consumer was a teenage boy, sports drinks were most frequently purchased by those who engaged in sports, fitness, or other strenuous activities such as outdoor manual labor jobs. It was quite common for teens to consume sports drinks after practicing or participating in school sports events and for manual laborers to consume sports drinks on hot days. Vitamin-enhanced beverages could substitute for sports drinks but were frequently purchased by adult consumers interested in increasing their intakes of vitamins. Even though enhanced waters offered potential benefits, there were some features of enhanced waters that might cause consumers to limit their consumption of such products, including the need for sweeteners to disguise the taste of added vitamins and supplements. As a result, calorie counts for vitamin-enhanced beverages ranged from 20 calories per 16-ounce serving for Propel to 100 calories per 16-ounce serving for glacéau vitaminwater. In addition, some medical researchers had suggested that consumers would need to drink approximately 10 bottles of enhanced water each day to meet minimum dietary requirements for the vitamins promoted on the waters' labels.
Distribution and Sale of Alternative Beverages
Consumers could purchase most alternative beverages in supermarkets, supercenters, natural foods stores, wholesale clubs, and convenience stores. Convenience stores were a particularly important distribution channel for alternative beverages since sports drinks, vitamin-enriched drinks, and energy drinks were usually purchased for immediate consumption. In fact, convenience stores accounted for about 75 percent of energy drink sales in 2010. Although energy drinks were typically purchased in convenience stores, sports drinks and vitamin-enhanced beverages were also available in most delis and many restaurants, from vending machines, and sometimes at sporting events and other special events like concerts, outdoor festivals, and carnivals.
PepsiCo and Coca-Cola's soft drink businesses aided the two companies in making alternative beverages available in supermarkets, supercenters, wholesale clubs, and convenience stores. Soft drink sales were important to all types of food stores since soft drinks made up a sizable percentage of the store's sales and since food retailers frequently relied on soft drink promotions to generate store traffic. Coca-Cola and PepsiCo were able to encourage their customers to purchase items across their product lines to ensure prompt and complete shipment of key soft drink products. Smaller producers typically used third parties like drinks distributors or food distributors to make sales and deliveries to supermarkets, convenience store buyers, and restaurants and delis. Most distributors made deliveries of alternative beverages to convenience stores and restaurants along with their regular scheduled deliveries of other foods and beverages.
Because of the difficulty for food service distributors to restock vending machines and provide alternative beverages to special events, Coca-Cola and Pepsi-Cola were able to dominate such channels since they could make deliveries of sports drinks and vitamin-enhanced drinks along with their deliveries of carbonated soft drinks. Coca-Cola and Pepsi-Cola's vast beverage distribution systems made it easy for the two companies to make Gatorade, SoBe, Powerade, and glacéau vitaminwater available anywhere Coke or Pepsi could be purchased.
Suppliers to the Industry
The suppliers to the alternative beverage industry included the makers of such nutritive and non-nutritive ingredients as sugar, aspartame, fructose, glucose, natural and artificial flavoring, artificial colors, caffeine, taurine, glucuronolactone, niacin, sodium, potassium, chloride, and other nutritional supplements. Suppliers to the industry also included the manufacturers of aluminum cans, plastic bottles and caps, label printers, and secondary packaging suppliers. While unique supplements like taurine might be available from only a few sources, most packaging supplies needed for the production of alternative beverages were readily available for a large number of suppliers. The numerous suppliers of secondary packaging materials (e.g., cardboard boxes, shrink-wrap, six-pack rings, printed film or paper labels) aggressively competed for the business of large alternative beverage producers. All but the largest sellers of alternative beverages contracted procurement and production activities to contract bottlers who produced energy drinks and other alternative beverages to the sellers' specifications.
Key Competitive Capabilities in the Alternative Beverages Market
Product innovation had been among the most important competitive features of the alternative beverage industry since the introduction of Gatorade in 1967. Alternative beverages competed on the basis of differentiation from traditional drinks such as carbonated soft drinks or fruit juices and were also positioned within their respective segments on the basis of differentiation. For example, all energy drink brands attempted to develop brand loyalty based on taste, the energy-boosting properties of their ingredients, and image. An energy drink's image was a factor of its brand name and packaging, clever ads, endorsements from celebrities and extreme sports athletes, and sponsorships of extreme sports events and music concerts. Differentiation among vitamin-enhanced beverages tended to center on brand name and packaging, advertising, unique flavors, and nutritional properties. Because of the importance of brand recognition, successful sellers of alternative beverages were required to possess well-developed brand-building skills. The industry's largest sellers were global food and beverage companies-having built respected brands in snack foods, soft drinks, and fruit juices prior to entering the alternative beverage industry.
Alternative beverage sellers also needed to have efficient distribution systems to supermarket and convenience store channels to be successful in the industry. It was imperative for alternative beverage distributors (whether direct store delivery by bottlers or delivery by third-parties) to maximize the number of deliveries per driver since distribution included high fixed costs for warehouses, trucks, handheld inventory tracking devices, and labor. It was also critical for distributors and sellers to provide on-time deliveries and offer responsive customer service to large customers. Also, volume and market share were key factors in keeping marketing expenses at an acceptable per-unit level.
Recent Trends in the Alternative Beverage Market
Despite the impact of the ongoing U.S. recession on the entire beverage industry, alternative beverage producers were optimistic about prospects for the industry. Demand was expected to grow worldwide as consumer purchasing power increased, and even though volume was down in the United States for sports drinks and vitamin-enhanced drinks, alternative beverages offered profit margins much higher than those of other beverages. Innovation in brands, flavors, and formulations was expected to be necessary for supporting premium pricing and volume increases. Industry analysts believed that such exotic flavors as cardamom, hibiscus, and cupuacu might prove to be hits in 2011 and 2012.
The emergence of two-ounce energy shots sold on convenience store counters had proved to be an important growth category for the industry. The category was created with the introduction of Living Essentials' 5-Hour Energy in 2004. 5- Unlike energy drinks that focused on teens, energy shots were targeted to office workers, parents, and other adults who might need a boost of energy during a demanding day. Red Bull, Coca-Cola's NOS, Hansen's Monster, PepsiCo's Amp, and Rockstar had all developed competing energy shots, but none were a serious threat to Living Essentials' 5-Hour Energy in 2010. 5-Hour Energy held an 85 percent market share in the category in 2009.
Unlike carbonated soft drinks, the caffeine content of energy shots and energy drinks was not regulated by the U.S. Food and Drug Administration and could contain as much caffeine as the producer thought appropriate. There was concern among some health professionals over the high caffeine content of energy drinks and the effects of large doses of caffeine on individuals, especially children. The most significant health problems related to high caffeine consumption were heart arrhythmia and insomnia. It was not unheard of for adults with heart arrhythmias to be admitted to emergency rooms after consuming three or more energy drinks in one day.
1. Discuss three external industry changes that have affected companies' profitability within the beverages industry.
2. What strategy does Coca Cola's follow to create competitive advantage over rivals? Discuss one strategy for each of the marketing mix elements: product, price, place and promotion.
3. Discuss one strength and one opportunity that could help Coca Cola achieve better performance in the future.
4. Discuss one weakness and one threat that could hinder Coca Cola's success in the future.