The beverage and carbonated drink market is arguably the largest and highest earning industry in the world. It equals the market of technology in terms of completion and revenues. Global leaders in the beverage and carbonated drinks market, Coca-Cola and Pepsi, have been posting impressive profits showing the potential of the industry. Reading market reports from the two giants and analyzing their profit margins since 2000 one notes the mild levels of challenges in the industry. Competition and dominance by global brands such as Coca-Cola and Pepsi are the biggest challenges for emerging companies attempting to penetrate the market. Nevertheless, the world’s population is increasing rapidly creating market opportunities. However, the competition here is also stiff combined considering new health awareness campaigns. Thus, the soft drinks market is facing equal amount of challenges and opportunities. Analyzing the soft drinks market using Porter’s five forces exposes strengths, weaknesses, threats and opportunities in the carbonated drinks market, which offers numerous opportunities and equal share of challenges.
Porter explores five main forces that determine the power and success of a business in any market. The forces are “supplier power, buyer power, competitive rivalry, threat of substitution and threat of new entry.”
Supplier's power is a critical factor in the soft drink's production process. Suppliers have the power to alter raw materials supply, quality of materials, pricing of the materials and distribution. In addition, suppliers have real power over the quality and amount of the production in the carbonated drinks market. Carbonated drink chemical composition consists of sugars, preservatives, additives, carbonated water and flavor syrups. The soft drinks market is largely dependent on suppliers for raw materials and supply of the manufactured product across markets, which give the suppliers a bargaining power. The suppliers can use the bargaining power to affect the prices of carbonated drinks by increasing the cost of raw materials. The alteration affects the profit gained by the brand seller after sales. The power of the supplier depends on the demand for products and competition in the supplier business. Carbonated drinks companies such as Coca-Cola, Pepsi, and Red Bull have the power over suppliers as they dominate the market and control the entire manufacturing process.
Porter describes the buyer power as the ability of the buyer to control large share of the market. The buyer power indicates the ability of the customer to determine the leaders and losers in the soft drink markets. Global and dominant brands such as Coca-Cola have mastered the art of seducing buyers and earning their loyalty. For example, two global firms such as Coca Cola and Pepsi control more than 50% of United States’ beverage market. Soft drinks make up 80% of the beverage market meaning that the companies hold a majority stake in the market. The food and beverage market and, in this case, the soft drinks market to be specific is buyer controlled. The customers and the retailing stores and the distributors have spelled doom or success for soft drinks brand. Competition in the soft drinks market allows the buyers, mainly the customers, to control the prices of the products. Top brands such as Pepsi, Coca-Cola, and Dr. Pepper have dominated the market by offering lower prices attracting a large number of consumers. The barging power is also practiced by distributors such as Wal-Mart and other large stores. The stores buy in bulk and have the barging power. The stores also offer self-spaces to the soft drink brands that agree to discounted sales. The consumers, for this reason, control the prices in the soft drinks market indicating real bargaining power.
Competitive rivalry is evident in the soft drinks market as the top brands and the upcoming one's struggle to settle as market leaders. Porter highlights that rivalry competition takes place in several forms including prices, products range, innovations, product differentiation, promotions, and advertisements. The companies mainly compete in the form of prices and unique recipes and flavor that keep customers loyal. Companies that manage to scoop large shares of the market earn mega profits. For example, Coca-Cola earns huge profits that enable them to invest more in research, advertisements, and accusations. The companies, for this reason, build global dominance, making it difficult for upstarts to oust them. The soft drinks market competition is fierce as the top brands and the emerging ones attempt to outdo each other and gain customer loyalty. The global soft drinks market is currently controlled by few brands, but the emerging competition is threatening their dominance. Top brands in the soft drinks market include Coca-Cola, Pepsi, Dr. Pepper, National Beverage, Monster Beverage and Red Bull. Two global brands such as Coca-Cola and Pepsi control more than 50% of the United States market. In total, about ten companies fiercely fight for control of the United States soft drinks market. The companies also lease licenses to local brands to manufacture and sell their products, which might give them a market edge. The competition is so stiff that smaller and upcoming brands have little chance of market success. The soft drinks giants must also remain vigilant to prevent losing market shares to competitors.
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New entrants and entry barriers also play a significant role in the success of many entry-level businesses across all fields, retailing, technology, foods and beverage and even fashion. The challenge is bigger in the soft drinks market due to stiff competition and loss of customer loyalty to new products. As it has been mentioned, the global soft drinks market is dominated by a few brands such as Pepsi, Coca-Cola, and Red Bull. The brands practice monopolistic business practices making it difficult for new entrants to succeed. For example, the leading global brands have licensed hundreds of products and increased acquisition of promising firms in the food and beverage market. The brands also conduct massive promotions and advertisements to ensure customer awareness of new and existing products. To expand the dominance, the organizations have agreements with governments, communities, schools, and distributors. Combined with low product pricing, the companies have managed to guide their interests in soft drinks. Entry firms in the beverage market face several challenges including government licensing, market leader’s dominance, customer loyalty, raw material supply and market penetration. New entrants, for this reason, have little chance of success.
Threat of substitution refers to the risk of a dominating brand such as Coca-Cola losing market share to a rival such as Pepsi. The brand will then be substituted as customer loyalty shift affecting sales and profitability. The threat of substitute product is, however, higher as the top ten companies continue to research on better flavors. For example, companies mainly introduce new substitute products with better prices, flavor, and quality than the competitors. The pricing and taste quality combined with proper advertisement can shift consumer loyalty and substitute a leading brand. However, the leading brands in the soft drinks market face no meaningful threat of outside substitution. The biggest threats of substitution are posed by the rival top ten global brands.
Porter’s five forces effectively cover the issues in the carbonated drinks market by enabling organizations to conduct detailed reviews of their operations, opportunities, and threats. However, the analysis fails to consider other external forces. In this case, carbonated drinks are facing stiff control by health bodies. Carbonated drinks mainly contain sugars and additives, all considered unhealthy and leading to health problems such as obesity and diabetes. Health campaigners have stepped up the fight against carbonated drinks based on health hazards caused by such products. Health awareness by consumers has significantly decreased carbonated drinks sale. Therefore, the challenge has also forced companies to invest in non-carbonated drinks low in sugar and preservatives. As an example, Pepsi launched a new health campaign and introduced healthy cola combined with the acquisition of dairy in Russia. Coca-Cola also launched “Diet Cola" and a range of soft noncarbonated drinks. People have become more health conscious, and beverage manufacturers must consider to the buyer power and produce healthier products. The market diversion combined with dropping sales is a real threat the soft drinks market.
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Coca-Cola and Pepsi are the world’s leading brands controlling more than 50% share in the United States and substantial global market. Each of the brands must consider rivalry and the possibility of substitution by a rival brand as well as upcoming firms such as Red Bull and Monster Energy. Although the smaller companies hold a smaller percentage of soft drinks market, they have the potential to scoop large shares of the market from the two giant corporations. The two brands engage in fierce market control practices such as promotions and advertisement ensuring their global dominance. However, smaller companies are slowly cutting their market share mainly due to customized products and customer engagement. The buyer power is an important factor as emphasized by Porter. In addition, buyers have become more aware of their health and quality of products. The organizations have to increase production of low-sugar and none carbonated drinks that meet consumer health requirements.
In conclusion, the soft drinks market offers wide opportunities and an equal share of challenges. The biggest challenge for new entrants is competition from dominating brands including Coca-Cola and Pepsi. The two companies control over 50% stake in the United States carbonated drinks market. Stiff competition in the market gives buyers a strong bargaining power and ensures affordability of products.