Beverage Industry Market Model Patterns of Change:
We will analyse Pepsi and Coca cola as they are key players in beverage industry.
Beverages industry is the one of the leading industries in United States with over 80% of the American population being customers of Pepsi and Coke. Since 17th century there has been power struggles between these two companies given the fact that they have nearly equal market both globally and in the US. Other companies include: Nestle and Dr. Pepper. Today, not only is Coca cola the biggest American beverage company, it is also ranked as number one in terms of market capitalization ($2253.4 billion) with their main competitor, Pepsi Inc having a market base valued at $1409.1 billion. These four beverages company represent an oligopoly market model. Oligopoly is a form of market structure where a few but big firms with high market power compete amongst themselves with the target market being the same population. In such a scenario, each firm expected to evaluate their competitors’ actions in order to come up with viable marketing strategies, an essential component in business. It is worth to note that the undertakings of these companies are mutually independent since the group is composed of few competitors that are targeting a common market. This is the major difference that exists between oligopoly market structures and other forms of market models.
The beverages industry, like any other food manufacturing industry, has also been greatly affected by the prevailing economic conditions and the call of healthy living by many medical professionals. Research has shown a great margin decline in consumption of sugary beverages. In the past, many people were not conscious of health lifestyles like they do today and hence many people have turned into eating of fruits and drinking of fresh fruit juices. This has been a major blow to Coca Cola the likes as they have to move from the traditional beverages to fruit based juices. According to soft drinks report, the Soda industry has lost over 290 million consumer to fruit based juice companies and it is predicted that this figure will continue to rise if at all the current economic conditions will prevail. Approximately the expected production level of soda beverage is expected to decline up to 36.1 billion litres, which will be about 3% decrease in the produced volume.
The beverage industry must address the problems that come with the deteriorating economic climate. For the soda industry to recapture its market, it must also come up with an appropriate strategy to counter the negative publicity that has been created by health and fitness programs which has many consumers to turn to healthy forms of refreshment. Another problem that exists is the increase in tax that US government imposed on all sugary drinks as a way of fighting obesity (Walker, 2008).
In the short run the industry is able to bounce back when hit with adversity, and able to produce products that are beneficial for their consumers due to their large consumer base. A good example is the way Coca Cola has introduced fruit juices in its brands and also mineral water, a product that is replacing the Soda industry fast. In the long run, there is a need for these companies to maximize shareowner value overtime by maximizing long-term cash flow, increasing gallon sales and optimizing profit margins. Also, there is a dire need to ensure that profits sustainability when the demand of their products will fall. Despite the changes in the industry, Coca Cola Company is able to stand out and still has been a major employer to many people.
Some of the major factors that affect the competitiveness of beverages industry are barriers to entry, rivalry among existing firms, bargaining power of buyers, bargaining power of suppliers and Threats of substitute products or services. Barriers to entry affect competition as it becomes hard for a new firm to venture in such an industry as the forces operating inside the firm are controlled by the big firms in it. A clear example in this case would be bottling networks, Coca-Cola and Pepsi have franchise agreements with existing bottlers, and the agreements prohibit bottlers from taking on new competing brands for similar products. On top of this, we have very few bottling companies in the whole world; it is therefore a problem to any other firm which wants to venture in this industry (Copyright Collection (Library of Congress), 2004).
Both Coke and Pepsi have a long history of heavy advertising a factor which has earned them loyalty and brand equity all over the world. Rivalry among Existing Firms is evident among the big companies due to the small number of large firms that possess the same characteristics that make competition high and the entry difficult. Bargaining power of buyers, based on each segment such as food stores, convenience stores, fountain and vending machines the profitability in each of these segments illustrate buyer power and the different price buyers pay based on their power to negotiate. Bargaining Power of Suppliers is low however, products supplied for firms with dominant position have strong bargaining power.
Threats of substitute products or services, there is threats of substitution, but most competition cannot match because of adverting and brand loyalty. Furthermore, Coca-Cola and Pepsi are able to offer substitutes themselves to shield themselves from competitors. This implies that the two companies have already realized the gap in their products and have included juice brands to avoid losing their consumers to the upcoming juice producing companies (pepsi).
As indicated above, PepsiCo and Dr. Pepper are two major competitors of Coca Cola. Though, these companies are different, their prices do not vary so much, but it can be seen that a major determinant of the price levels is the capital base of each company. A company like PepsiCo has greater loyal customers and hence their prices are high but on the introduction of a new product, they sell it at a cheaper price up to until the brand gets enough loyal customers. The same case applies for Dr. Pepper. It is worth to note that prices in this industry are greatly influenced by the market forces and the competitors’ prices (Food Marketing Institute., Dr. Pepper Co., & Marketing Spectrum (Firm), 2011).
I would recommend brand based pricing strategy to Coca Cola Company. With Brand based pricing method, Coca Cola would be able to charge different prices for different products based on many factors like: brand loyalty and availability of brand substitutes. Coca Cola can price some of its popular brands high than the rest. Also, since Coca Cola Company has a good number of loyal customers, and the only reason why their customers are going to juice companies is just because of health concerns, it can therefore charge higher prices in fresh juices than in other forms of beverages. Using this strategy, Coca Cola, will be able to retain its customers and also attract new ones. This implies that the company will be able to make more sales and at the same time maximize its profits.
Copyright Collection (Library of Congress). (2004). The apprentice. [2004-11-24], The Pepsi challenged.
Food Marketing Institute., Dr. Pepper Co., & Marketing Spectrum (Firm). (2011). Consumer perspectives on national and store brands. Washington, D.C.: Research Dept., Food Marketing Institute.
pepsi. Annual report and accounts for the year ended. Lagos: Seven-Up Bottling Co. PLC.
Walker, Melissa, Cobb, James C., & University of Mississippi. Center for the Study of Southern Culture. (2008). Agriculture and industry. Chapel Hill: University of North Carolina Press.