Running head: PORTER'S FIVE FORCES MODEL IN SOFT DRINK
Porter's five forces model in soft drink
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PORTER'S FIVE FORCES MODEL IN SOFT DRINK
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Executive summary
The purpose of an organization’s management is to make strategic decisions that
would help in sustaining the company in their market industry (Porter, 1979). For a firm to stand
out in the industry, it needs to assess the profitability levels and the sustainability of the profits in
long-run (Baker, 1989). According to Porter (1979), the profitability of an industry in a
competitive environment could be determined by the five major competitive forces. They
include; competition from the substitute products, the threat of new entrance, competition
rivalry, bargaining power of the customers and that of the suppliers. Usually, when the strengths
of the five forces model are addressed effectively, the firm maximizes its benefits while it
minimizes the market strains (Porter, 2008). In establishing whether Porter’s five forces are
useful in predicting the profitability of an industry, this report analyzes the soft drink industry by
applying the value of the model.
The soft drink industry today is dominated by large multi-national companies such as
PepsiCo, Coca-Cola, Nestle and Dr Pepper Snapple (Cotterill, 1996). The consumption of the
soft drinks has enjoyed a lucrative market size of about 46.8 percent in the non-alcoholic drink
sector, which have been growing continuously over the years (Market Line Industry Profile
report, September 2014). In 2012 the market value of the soft drink market was $ 153.1 billion
which represented a growth of 2.5 % against the predicted market line growth of 3percent by
2018 (“Market Line Industry Profile report”, October 2015). Also, the Market Line report 2015
reported that the volume of the soft drinks in 2014 was 121.5 billion liters compared to 119.4 and
122.5 in 2011 and 2013 respectively. Thus, the soft drink market has the potential of being
highly profitable. In spite of the high potential, there are several obstacles that need to be won in
order for the target market share to be captured. The three companies-PepsiCo, Coca-Cola, and
Dr Pepper Snapple- are the major leaders in the industry especially in the production and sales of
carbonated drinks (Cotterill, 1996). However, Nestle offers beverages such as bottled water,
chocolate, and coffee, as well as a diverse range of foods (Barney, 1995). According to Market
Line report (2015), the financial statements show that all the major players in the industry have
been experiencing little growth. Although their net profit margins have been increasing but at a
lower rate, quick and current ratios are lower. This effect may be due to the increasing preference
for non-carbonated, energy drinks, lower-sugar beverages and lack of business diversity. The
financial positions of the companies in the soft drink industry are good since their profit margin
continues to grow every year. Nevertheless, they need to improve their liquidity ratios to enable
them to meet their short-term goals.
This analysis is about the overall competitive forces in the soft drink industry. The forces
are considered to be moderate since the environment is consolidated and avoids significant
pricing competition. The players in the industry consider the operating atmosphere attractive.
Therefore, they have competed among themselves, created a huge barrier to new entrants,
substitutes, and manifestation of both buyer and supplier bargaining power for their profitability.
But with the changing trends of the consumer’s attitude and health concerns, the soft drink
industry should consider buyer preferences for long-term growth. Also, to remain profitable like
Nestle, all the other players in the soft drink product line such Coca-Cola should differentiate
their products to address the social concerns and increase the sales volume in the stagnated
market.
PORTER'S FIVE FORCES MODEL IN SOFT DRINK
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Like other industries, the soft drink industry has been quite competitive (Cotterill, 1996).
However, the major competitive force is the rivalry among the players, especially the sellers, in
the industry. All the constituent companies are aware of the competition pressure that exists from
their rivals, substitute drinks and products, new entrance in the industry, the suppliers, and the
buyers.
The competitive rivalry is explained by the market share of 72.6 percent dominated by
the four major firms in the soft drink industry. Here, PepsiCo and Coca-Cola have outdone the
others with 22.3 and 30.7 percent respectively (“Market Line Industry Profile report”, 2014).
Hence, new entrants have huge task to compete with the strong brand names to get to the level of
the two major players in the market. According to the Market Line Industry Profile reports,
existing firms in the soft drink industry offer substitutes such as bottled water to their primary
products to counteract the threats of substitutes. The leading companies have consolidated the
beverage market from one country to the other, thus establishing strong relationships with
suppliers and partners pointing out at having suppliers power over their hands (“Market Line
Industry Profile report”, 2014). The consumers in the market are greatly influenced by the brand
created by the players which have a direct impact on the customer preferences thus, a reduced
buyer power.
Competition rivalry
The multinational companies in the soft drink industry have been competing for ages
now. Since PepsiCo, Coca-Cola, Nestle and Dr Pepper Snapple have a global image; their rivalry
pressure has been the great determinant of the orientation of their strategies in the market
(Cotterill, 1996). In spite of the establishment, the major duel has been experienced between
Coca-Cola and PepsiCo who have a market share of 30.2 and 21.6 percent in the United States
respectively. For example, though, Coca-Cola’s brands (Coca-Cola, Fanta, Sprite and Diet
Coke) are the most recognized soft drinks in the world. Yet, the company had lower sales in
2013 than PepsiCo’s who had two product brands (Pepsi-Cola and Diet-Pepsi) in the market.
Coca-Cola had revenue of 46.854 million dollars in comparison to PepsiCo’s 66.415 million US
dollars (Market Line Industry Profile report, October 2015). The two firms have also been using
similar ingredients in their identity products, Coke and Pepsi which further creates a competitive
spirit. In addition, from the Market Line report 2015, PepsiCo and coke have diversified their
interests into more similar drinks such as bottled water and orange juices. However, the PepsiCo
has and added an advantage in the market capitalization by offering a diverse range of other
products like Tropicana, Quaker Oats, Doritos, Ruffles,Elma Chips, and Rice-A-Roni (Market
Line Industry Profile report, September 2014). Under the product diversification, Coca- Cola
Company does not have an opportunity in competition, thus the reason behind lower sales than
PepsiCo (Market Line Industry Profile report, October 2015).
Both PepsiCo and Coca-Cola competes directly with Dr. Pepper Snapple and Nestle
firms since they lack a cola in their brands (Market Line Industry Profile report, October 2015).
While PepsiCo diversifies its products it has an indirect impact on Dr. Pepper Snapple and Nestle
since they offer food non-cola beverages and foods. Under this environment, Nestle has been
observed in 2013 to have higher sales of approximately $ 99.404 million in comparison to Dr.
Pepper Snapple and PepsiCo who had $ 66.415 and $ 5.9 million respectively (Market Line
Industry Profile report, September 2014). This advantage is reported to be attributed to a wide
product portfolio comprising of over 2000 brands at the local and global level (Market Line
Industry Profile report, October 2015). The products offered range from healthy baby foods,
PORTER'S FIVE FORCES MODEL IN SOFT DRINK
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cereals, coffee, culinary, dairy products, prepared dishes, ice cream, weight management
products and services as well as chocolate among others. Its variety serves as its strength and
cutting edge in the market despite having a lower market share than PepsiCo and Coca-Cola.
Moreover, lacking cola in Dr. Pepper Snapple product is an advantage for the rival competition
(“Market Line Industry Profile report”, 2014). Even though, PepsiCo, and Coce-Cola are popular
than their counterparts, a shift in the consumer trends towards fewer caffeine beverages would
expose their sales (Smith, 2001). However, Porter suggested that having brand loyal customers
reduces their risks
Threats from new entrants
In the soft drink industry, the entry of new companies is always a possibility of the
emergence of a new rival in competition though not as pressuring as the existing firms. The
major players like PepsiCo and Coca-Cola have capitalized on establishing a strong brand image
for the purpose of developing mass customer loyalty to their products (Porter, 1979). For
example, according to Forbes report 2016, PepsiCo brand is ranked as the 29th most valuable
brand globally, while Coca-Cola is fourth. Therefore, in order to entice customers, new entrants
have diversified their products away from the industry to create an appeal in the market (Dubé,
2005). The great marketing and distribution channels in the industry a makes it difficult for
companies to join the sector. Moreover, the available firms in the industry have covered all over
the major potential soft drink markets globally through their diverse products and market
segmentation making the market highly saturated with minimal growth. Thus, these conditions;
brand loyalty, market share and lower growth, make the industry unattractive to new entrants.
On the evaluation of the capital requirements, for one to be a potential player in the soft
drink industry, there a long list of high-cost facilities and services. They include warehouses,
transporting trucks, production assets, labor and larger economies of production (Dubé, 2005).
These initial establishment expenses and lack of economies of scale eliminates pricing as a
competitive strategy for new entrants who usually have capital limits, therefore discouraging
them. Also, the existing soft drink industry is oligopoly where the firms in operation have
established distribution that is very strong, great relationships with the customers, retailers, and
the suppliers (Porter, 1979).
The ease of entry is more over inhibited by the competitive pressure and rivalry among
the existing companies in the soft drink industry. Each of the players has established strong
global brand names, valuable distribution channels, and has made large capital investments in
advertisements in the process. It is thus difficult for the firms to lose a portion of their market
share for new entrants. And since the parties in the industry are well established new joining
firms have no opportunity to thrive.
Furthermore, with a consumer shift to healthier beverages options such as low sugar
drinks, a potential avenue for a new entrant is possible though a single product or company
would make find it difficult to engage in the industry (Dubé, 2005). When several new firms join
at once, they would defragment the industry destabilizing large companies who have dominated
the industry such as PepsiCo and Coca-Cola. Thus, they should be aware of the potential held by
the environment they operate in.
Threat of substitutes
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In the soft drink industry, more substitutes have been arising offering the consumers a
buying option to the products of the existing companies like PepsiCo and Coca-Cola (Barney,
1995). The major substitutes for their products would include bottled water, beer, fruit juices,
tea, and coffee. The range of products could be a threat when the consumer’s trend moves
towards healthier options than the soft drinks. Those have been taking the soft drinks would wish
to lose carbonation and opt for coffee and tea which are also cheaper. Also, according to Barney
(1995), the carbonated soft diet drinks in the industry may also act as substitutes to the coffee or
tea to the consumer in efforts to keep the caffeine and sugar levels in their body lower. The
production of specially blended coffee by the Starbucks Stores has provided different flavors
such as, Rosemary and lemon or Green Mountain Coffee Roasters who produce Keuring (Market
Line Industry Profile report, October 2015). The flavors and health conscious have moreover
been a threat since people prefer fresh juices whose taste is not provided for by the existing soft
drinks. These factors in the competitive environment generated a great appeal to wide range
customers thus making the firm more popular and achieve a tremendous growth rate. Therefore,
the players of the soft industry should worry of more substitutes which appear cheaper and more
enticing than their products. These substitutes would have a negative impact on their market
shares which would also translate to a reduction in the sales revenues (Porter, 1979).
In responding to the threat of substitutes, the soft drink companies have developed great
customer loyalty towards their flavor (“Market Line Industry Profile report”, 2015). For
example,Coke-Cola has done so for decades and there are no other visible drinks that can
substitute coke flavor. To avoid direct competition, the soft drink companies have been
establishing alliances and acquisitions of companies that produce substitutes (Baker, 1989). For
instance, Nestle operates joint ventures together with cosmetic and pharmaceutical companies,
beverage partners like Coca-Cola and water companies like Nestle Pure Life (“Market Line
Industry Profile report”, 2015). Also, PepsiCo has diversified their flavor by producing
substitutes of Pepsi such as orange juice (Dubé, 2005). Thus, substitutes become less potent to
cause threats to the soft drink industry because the firms diversified their product line since
major substitutes have been acquired through partnerships or buying off of other companies
(Baker, 1989).
Bargaining power of suppliers
The suppliers in the soft drink industry usually do not offer much significant competitive
force. On the event that the suppliers are involved in providing a highly differentiated product
with a strong brand name in a less competitive market, they become more powerful in the market
(Ghosh, 1999). When considering the soft drinks, the suppliers are required to offer packaging
materials and raw materials such as sugar or other sweeteners. In the market, there are a variety
of companies that manufacture sugar which gives the industry a diverse range of options to
choose. Also, in the event that the pricing of sugar surges, the soft drink companies could switch
to an alternative like corn syrup. Hence, soft beverage manufacturers have withdrawn the
supplier power. However, to ensure flavor and quality maintenance, the soft drink firms need to
establish long-lived relationships with the suppliers of their raw materials like Coca-Cola did
with Monsanto to supply sweetener for a contract (“Market Line Industry Profile report”, 2014).
Similar to the packaging units, such as plastic and glass bottles, aluminum can makers
need to be engaged with the soft drink companies. This relationship will facilitate stable supply,
PORTER'S FIVE FORCES MODEL IN SOFT DRINK
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quality, and standardization while it offers an opportunity to firm to negotiate favorable terms.
Also, the corporation may acquire or established alliances with bottling suppliers to reduce costs
(Ghosh, 1999). For instance, Coca-Cola Company owns more of the shares in its majority
supplier enterprises (“Market Line Industry Profile report”, 2015). This ensures standard
equipment and other materials. Hence, offering long-term contracts and the presence of
numerous suppliers to switch to takes away a great deal of the supplier power.
Bargaining power of the buyer
The buyer power is evident in a company through price variation, sales volume, product
standardization or improvement, quality services and brand identity (Porter, 2008). In the soft
drink industry, the buyers are the restaurants, petrol stations, cafes, food stores, fast food centers,
and supermarkets among others. The constituent companies do not directly sell their products
directly to the users but instead they have established a line of wholesalers and retailers or
through the bottlers. For example, and PepsiCo and Coca-Cola used the large-scale retailers like
supermarkets which include; Sainsbury and Tesco (Barney, 1995). Though, these buyers buy in
high volumes they have minimal power in since the players have developed for themselves a
popular brand name and therefore, they do not need to convince the consumers (Ghosh, 1999) In
addition, the selling prices are fixed in the distribution channels making their strategy profitable.
Since, the varied distribution channels, retailers, wholesalers and bottlers vending equipment are
available; the position of the buyer influence of the aspects of the products is minimal.
However, most soft drink manufacturers like Coca-Cola and PepsiCo sell their beverages
at lower prices to the distributors who also provide them at lower costs to the consumer (“Market
Line Industry Profile report”, 2015). Also, when production cost hikes due to materials, labor
expenses or transportation, Coca-Cola do not increase the selling prices but rather, absorbs the
changes (Wright, 1987). These conditions offer the companies in the soft drink a competitive
strategy which ensures that the products remain appealing to the consumer in terms of their
pricing.
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References
Baker, J. B. (1989). Recent developments in economics that challenge Chicago school views.
Antitrust Law Journal, 58(2), 645-655.
Barney, J. B. (1995). Looking inside for competitive advantage. The Academy of Management
Executive, 9(4), 49-61.
Barney, J. B. (1995). Looking inside for competitive advantage. The Academy of Management
Executive, 9(4), 49-61.
Dubé, J. P. (2005). Product differentiation and mergers in the carbonated soft drink industry.
Journal of Economics & Management Strategy, 14(4), 879-904.
Ghosh, M., & John, G. (1999). Governance value analysis and marketing strategy. The Journal
of Marketing, 131-145.
MarketLine Industry Profile Soft Drinks in the UnitedStates October 2015. Retrieved on July
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Porter, M. E. (1979). How competitive forces shape strategy.
Porter, M. E. (2008). The five competitive forces that shape strategy.
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leader. The Academy of Management Executive, 15(2), 59-70.
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Wright, P. (1987). A refinement of Porter's strategies. Strategic Management Journal, 8(1), 93101.