«Meghan Deichert, Meghan Ellenbecker, Emily Klehr, Leslie Pesarchick, & Kelly Ziegler Strategic Management in a Global Context February 22, 2006 ...»
Meghan Deichert, Meghan Ellenbecker, Emily Klehr,
Leslie Pesarchick, & Kelly Ziegler
Strategic Management in a Global Context
February 22, 2006
Industry Analysis: Soft Drinks
Barbara Murray (2006c) explained the soft drink industry by stating, “For years the story
in the nonalcoholic sector centered on the power struggle between…Coke and Pepsi. But as the
pop fight has topped out, the industry's giants have begun relying on new product flavors…and looking to noncarbonated beverages for growth.” In order to fully understand the soft drink industry, the following should be considered: the dominant economic factors, five competitive sources, industry trends, and the industry’s key factors. Based on the analyses of the industry, specific recommendations for competitors can then be created.
Dominant Economic Factors Market size, growth rate and overall profitability are three economic indicators that can be used to evaluate the soft drink industry. The market size of this industry has been changing.
Soft drink consumption has a market share of 46.8% within the non-alcoholic drink industry, illustrated in Table 1. Datamonitor (2005) also found that the total market value of soft drinks reached $307.2 billion in 2004 with a market value forecast of $367.1 billion in 2009. Further, the 2004 soft drink volume was 325,367.2 million liters (see Table 2). Clearly, the soft drink industry is lucrative with a potential for high profits, but there are several obstacles to overcome in order to capture the market share.
The growth rate has been recently criticized due to the U.S. market saturation of soft drinks. Datamonitor (2005) stated, “Looking ahead, despite solid growth in consumption, the global soft drinks market is expected to slightly decelerate, reflecting stagnation of market prices.” The change is attributed to the other growing sectors of the non-alcoholic industry including tea and coffee (11.8%) and bottled water (9.3%). Sports drinks and energy drinks are also expected to increase in growth as competitors start adopting new product lines.
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 (2005). Because of this, soft drink leaders are establishing themselves in alternative markets such as the snack, confections, bottled water, and sports drinks industries (Barbara Murray, 2006c). In order for soft drink companies to continue to grow and increase profits they will need to diversify their product offerings.
The geographic scope of the competitive rivalry explains some of the economic features found in the soft drink industry. According to Barbara Murray (2006c), “The sector is dominated by three major players…Coca-Cola is king of the soft drink-empire and boasts a global market share of around 50%, followed by PepsiCo at about 21%, and Cadbury Schweppes at 7%.” Aside from these major players, smaller companies such as Cott Corporation and National Beverage Company make up the remaining market share. All five of these companies make a portion of their profits outside of the United States. Table 3 shows that the US does not hold the highest percentage of the global market share, therefore companies need to be able to compete globally in order to be successful.
Table 4 indicates that Coca-Cola has a similar distribution of sales in Europe, North America, and Asia. On the other hand, the majority of PepsiCo’s profits come from the United States (see Table 5). Compared to PepsiCo, Cadbury Schweppes has a stronger global presence with their global mix (see Table 7). Smaller companies are also trying to establish a global presence. Cott Corporation is a good example as indicated in Table 8. The saturation of the US markets has increased the global expansion by soft drink leaders to increase their profits.
The ease of entry and exit does not cause competitive pressure on the major soft drink companies. It would be very difficult for a new company to enter this industry because they would not be able to compete with the established brand names, distribution channels, and high capital investment. Likewise, leaving this industry would be difficult with the significant loss of money from the fixed costs, binding contracts with distribution channels, and advertisements used to create the strong brand images. This industry is well established already, and it would be difficult for any company to enter or exit successfully.
Three leading companies have prominent presence in the soft drink industry. The leaders include the Coca-Cola Company, PepsiCo, and Cadbury Schweppes. According to the CocaCola annual report (2004), it has the most soft drink sales with $22 billion. The Coca-Cola product line has several popular soft drinks including Coca-Cola, Diet Coke, Fanta, Barq’s, and Sprite, selling over 400 drink brands in about 200 nations (Murray 2006a). PepsiCo is the next top competitor with soft drink sales grossing $18 billion for the two beverage subsidiaries, PepsiCo Beverages North America and PepsiCo International (PepsiCo Inc., 2004). PepsiCo’s soft drink product line includes Pepsi, Mountain Dew, and Slice which make up more than onequarter of its sales. Cadbury Schweppes had soft drink sales of $6 billion with a product line consisting of soft drinks such as A&W Root Beer, Canada Dry, and Dr. Pepper (Cadbury Schweppes, 2004).
Financial Analysis The carbonated beverage industry is a highly competitive global industry as illustrated in the financial statements. According to John Sicher of Beverage Digest (2005), Coca-Cola was the number one brand with around 4.5 billion cases sold in 2004. Pepsi followed with 3.2 billion cases, and Cadbury had 1.5 billion cases sold. However, the market share shows a different picture. Coca-Cola and PepsiCo control the market share with Coca-Cola holding 43.1% and Pepsi with 31.7% (see Graph 1); however these market shares for both Coca-Cola and PepsiCo have slightly decreased from 2003 to 2004. Coca-Cola’s volume has also decreased 1.0% since 2003, whereas PepsiCo’s volume has increased 0.4% (see Graph 1). Diet Coke posted a 5% growth, but Coca-Cola’s other top 10 brands declined (Sicher, 2005). Overall, Coca-Cola’s market position has declined in 2004. The strategic group map (see Graph 1) also shows the growth of Cott Corp. of 18% which is significantly higher than that of Coca-Cola and PepsiCo.
The American Beverage Association (2006) states that in 2004, the retail sales for the entire soft-drink industry were $65.9 billion. Barbara Murray (2006e) analyzed the industry averages for 2004 and average net profit margin was 11.29%. The current ratio average was
1.11 and the quick ratio average was 0.8. These figures help analyze the financial statements of the major corporations in the industry.
As shown in Table 13, Coca-Cola has seen their net profit margin increase from 20.7% to 22.1% from 2003 to 2004. According to Coca-Cola’s annual report (2004), 80% of their sales are from soft drinks; therefore the total sales amount was used for their financial analysis. These figures show that their profits are increasing, but at a slow rate. This is in line with what is happening in the soft drink industry. The market is highly competitive and growth has remained at a stable level. The slight increase in Coca-Cola’s profit margin is most likely from their new energy drink product line. This industry is currently expanding rapidly, and is allowing the major beverage companies to increase their profits.
Table 13 also shows Coca-Cola’s working capital was around $1.1 billion in 2004. This is a large increase from 2003 at only $500 million. This shows that they have sufficient funds to pursue new opportunities. However, their current ratio and quick ratio are a cause for concern.
A current ratio of 2 or better is considered good and Coca-Cola’s was 1.102. This number shows that they may not have enough funds to cover short term claims. The quick ratio for 2004 was at
0.906 and is considered good when it is greater than 1. This illustrates that Coca-Cola may not have the ability to pay short term debt without selling inventory. These two numbers are a concern because they are not able to satisfy their short term obligations. The current and quick ratios are in line with the industry averages, however (Murray, 2006e), Coca-Cola needs to improve these ratios in order focus on long-term plans (Coca-Cola Company, 2004).
PepsiCo’s financial statements cannot be analyzed for only the soft drinks industry because they do not distinguish between businesses. Over half their profits are from snacks or other beverage items; however there are sales and profit figures for their two beverage subsidiaries. These sales figures grew from almost $16.5 billion in 2003 to $18 billion in 2004 (Pepsi Co. Inc., 2004). Their operating profit margin also increased 1% from 2003 to 2004 as illustrated in Table 13. This shows that beverage profits are increasing for them, but also at a slow rate. The increase could be due to the increase in market share that the Pepsi products gained in 2004 (Sicher 2004). The PepsiCo. Annual Report (2004) stated that beverage volume increased 3% in 2004, but was driven by the high growth of the non-carbonated beverage industry.
Cadbury’s current and quick ratios are very similar to those of Coca-Cola. The current ratio and quick ratio for Cadbury Schweppes for 2004 were both 0.917 (see Table 13). Again, the current ratio should be 2 or more, and the quick ratio should be over 1. This illustrates that Cadbury also has difficulty paying short term debt and claims. Cadbury’s net profit margin has increased by 0.7% from 2003 to 2004. This can be attributed to their market share growth in 2004 of 0.2% (Sicher, 2005). One ratio that is concerning is their debt to equity ratio for 2004 in Table 13. They have almost two times as much debt as they do to equity, which means that their funds are mainly provided by creditors as opposed to owners. This is concerning because they owe a lot of money, and must make a decent profit to be able to pay it off. The industry average for debt to equity is 81%, and Cadbury is far from that number (2006e). Also, Cadbury has a negative working capital for both 2003 and 2004, meaning they have more liabilities than assets.
This shows that they do not have any funds to pursue new opportunities, as their current assets are being used to pay off liabilities (Cadbury, 2004).
Overall, the financial statements of the three top competitors in the soft drink industry show that the industry is highly competitive and has little growth. Net profit margins increased for all three corporations, however only at a small rate. It also seems that all three companies lack sufficient current and quick ratios, but are all within a reasonable range of the industry average (2006e). This may be due to expanding their product lines to include energy drinks and non-carbonated beverages in order to increase profits and diversify their business. The soft drinks market is now in the matured stage of the life cycle. Growth in the industry has remained stagnant, and the financial statements of the major corporations in the industry illustrate that their sales and income are following this trend.
The companies are in good financial positions; gross profits and net profit margins are continuing to increase each year. The leverage and activity ratios are all within reasonable range. However, one area all three corporations need to improve on is the liquidity ratios. Their quick and current ratios are low and need to be increased so they are able to meet short-term obligations.
Five Competitive Forces for Coca-Cola Company The soft drink industry is very competitive for all corporations involved, with the greatest competition being that from rival sellers within the industry. All soft drink companies have to think about the pressures; that from rival sellers within the industry, new entrants to the industry, substitute products, suppliers, and buyers.
The competitive pressure from rival sellers is the greatest competition that Coca-Cola faces in the soft drink industry. Coca-Cola, Pepsi Co., and Cadbury Schweppes are the largest competitors in this industry, and they are all globally established which creates a great amount of competition. Though Coca-Cola owns four of the top five soft drink brands (Coca-Cola, Diet Coke, Fanta, and Sprite), it had lower sales in 2005 than did PepsiCo (Murray, 2006c).