Threat of New Entrants

Economies of scale
Investment in automated
bottling plant
Capital requirement
Production and distribution
systems
Access to Distribution
network: - 31.9% of the soft
drink business is in
supermarkets
Expected Retaliation
To enter into a market with Bargaining power of Buyer
Supplier Concentration entrenched rival behemoths Buyer Concentration
Main ingredients are sugar, like pepsi and coke is not easy Consumers do not store the
water, chemicals, and
Industry competitors & product
alumininum cans, plastic and
extent of rivalry Threat of Backward
glass bottles are easily
Industry concentration Integration
available
Duopoly Industry Intense Distributors specialize in the
Differentiation of Substitute
Rivalry between Coke and transportation and
Imputes
Pepsi promotion of the product
Sugar is commonly available
Corporate stakes that they rely on the
NutraSweet is patented
Leads to a downward carbonated beverage
Threat of forward and
pressure on prices and companies
backward integration
significant investments in Pull Through
The suppliers do not have the
advertising in an attempt to Bottlers have a franchise
capital required to forward
maintain brand loyalty. agreement
integrate
Product differences Price Sensitivity
Low level of diversity operates Majority of consumers are
on parallel lines to one insensitive to price as they
another. prefer flavor
Threat of Substitutes
Switching costs
Buyer Propensity to
Substitute
Contractual relationships
between the soft drink
companies and the
distributors
Price Performance
Awareness of pesticides in
SDs
Trade off of substitutes
Energy 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 Products

Relative 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) Rivalry
Degree 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
Legal * Gross bank credit is 4813
* Food adulteration during Nov 2009 Economical
act1954, * GDP in the soft drink industry
*The Fruits products decreased from $1.0 Billion in
order (FPO), 1955 1998 to 981.0 million in 2009.
*The bureau of Indian * India’s 10.7 million households
standards has laid down with an annual income of up to
specification IS: THE ORGANIZATION US$23,000 were in smaller cities
2346:1992”carbonated such as vadodara,
beverages” Nagpur,Ahmedabad and
*IS: 2451-1997 which Vijayawada.
prescribes standard for *Inflation rate in India was
“quality tolerance for recorded at 3.93 per cent for
water for processed food the first week of February 2009.
industry”
*Safe drinking water act.

Sociocultural
* Many citizens are practicing
Environmental Technological healthier lifestyles.
* Transportation, * New marketing *The ages of 37to 55 are also
industries, tourism technique the increasingly concerned with
etc, has increased internet,E-commerce nutrition.
the consumption. * Advertisement *34%consumenr soft drinks were
*Environment through media. from the income group of 10000-
protection Act * Introduction of cans 20000 per month.
and plastic bottles have Increase in level of education, the
increased sales for CSD 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 FDI

Automatic 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 growth
The 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 income
Real 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 rates
As 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 changes
Many 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 Demographics
India 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.