Analysis Soft Drink
Analysis Soft Drink
1 Analysis of the U.S. soft drink industry, based on the competitive forces model of Michael Porter.
In the soft drink industry the entry of new competitors depends on the barriers to entry that are present, and also the reaction from existing competitors that the entrant can expect.
I will now analyze the six major sources of barriers to entry the soft drink industry.
Economies of scale deter entry by forcing the entrant to come in at large scale and risk strong reaction from existing firms or come in at a small scale and accept a cost disadvantage. If a company wants to decline its unit costs of their product, they will have to produce more to lower the cost. The more you produce, the lower the costs.
In the soft drink industry establishing firms have brand identification and customer loyalties. The brand name can have differences. This is a high barrier to enter. Entrants are forced to spend a lot to overcome existing customer loyalties.
The capital requirements within this industry are very high. Production, distribution and advertising are a must to compete with the industry leaders like coca cola and Pepsi. So if a new entrant wants to compete against the biggest competitors it will need a huge capital. This is also very risky because you are not sure if you will succeed competing against these leaders. This makes it a high barrier for new entrants.
Switching costs is also a barrier to entry this business. Switching costs by changing from one supplier to the other may happened. Also employee training, new equipment, testing new technology. This things are common in this industry. This are barriers for new entrants.
The access to distribution channels is a high barrier because the most successful soft drink companies are aggressively spending their distribution channels and buying full ownership of bottling plants. Supermarkets are at present the largest channels in the U.S. and there the competition is very high.
In the U.S. soft drink industry there are a range of government regulations. Regulations in mainly 2 areas. As a food product, soft drinks come under the food and drug administration. The FDA test and certifies new ingredients. The second regulation is that related to the natural environment. The impact of soft drink materials on the natural environment has been one of the most important issues. I would say that if a new entrant collaborates with these regulations it shouldn’t be a big barrier for new entrants.
My conclusion about the force: entry of new competitors:
To be successful in this industry, the high capital requirements for marketing, manufacturing and distribution are the most difficult barriers to entry. Therefore the threat of new entrants is low.
Supplier concentration is low due to the fact that the main ingredients are sugar, water, aluminum cans, plastic and glass bottles. There are many suppliers of sugar and ingredients for soft drinks because they are commodity items. There are also many suppliers of cans, plastic and glass bottles in the U.S.
The aluminum cans, plastic and glass bottles are pretty much dependant on the soft drink industry to survive in the business. This makes suppliers to have little power over the soft drink industry.
There is not a lot of variety in inputs. The big substitute input was for sugar. When diet soft drinks came up, the demand made the soft drink industry to substitute sugar with Nutrasweet.
This made suppliers have some power over the industry regarding Nutrasweet.
My conclusion on the power of suppliers:
After reading all the aspects I came with the conclusion that the soft drink industry has more power than the suppliers.
There are a lot of buyers in the soft drink industry. So the buyer concentration is low.
The major companies sell their products to distributors because of the relationship they have by representing the soft drink company. So therefore the buying volume is not a factor.
Independent bottling plants have contracts agreements with the companies. Switching costs may include establishing new relationships with other companies, and costs from breaking up contracts.
My conclusion on the bargaining power of buyers:
The buyers do have some amount of power but not enough to dictate a soft drink company.
Many of the soft drinks have a relatively elastic demand, due to the variety of substitutes.
My conclusion on the threat of substitutes:
Considering the amount of substitutes in the soft drink market I would say that the threat of substitutes has influence on the soft drink market.
Numerous or equally balanced competitors:
The soft drink industry is very concentrated. The top 3 companies: coca cola, Pepsi and Cadbury account for almost 90% of the U.S. soft drink market. Competition is high especially between the top 2 companies.
The growth in the soft drink market is slow which means that this will make the competition more aggressive between competitors.
Taking these aspects in consideration I will say that the rivalry is very high is this market.
2.Is the U.S. soft drink industry attractive for contemporary players:
After all my findings regarding the 5 forces of Porter I would say that it might be attractive to come in the industry and compete against the smaller companies. Because to come and compete against the big companies is almost impossible. The risks are too high, it will cost a fortune to advertise a new product. But is you compete against smaller companies you might have a better chance of succeeding.
3.What would you advise possible new entrants on the U.S. soft drink market?
As I mentioned on question 2, I will be a better idea to start a small company and compete against the small soft drink companies. Taking all the 5 forces of the market in consideration, it is obvious that it is almost impossible to compete with the leaders of the industry. The risks are too high and it will take a very big investment that is not sure of succeeding.
Literature: Competitive Strategy by M. Porter Chapter 1
Io syllabus case 4