Alternative Beverage Industry – Paper Essay

Alternative Beverage Industry – Paper Essay.

1. What are the strategically relevant components of the global and U.S. beverage industry macro-environment? How do the economic characteristics of the alternative beverage segment of the industry differ from that of other beverage categories? Explain. The strategically relevant components of the global and U.S. beverage industry macro-environment are Market Size, Market Growth, Markets Segmentation, and Intensity of Rivalry.

Market Size:

The beverage industry serves an incredible large market. In 2009 alone, the beverage market consumed more than 458 million liters of beverage, resulting in over .

58 trillion in sales for the industry. Although there is a declining trend in the consumption of carbonated soft drinks in the United States, as of 2009, carbonated soft drinks still accounts for the lion share of the U.S. beverage market with 48.2% of the market; while bottle water and fruit juice account for 29.2% and 12.4%, respectively. The remaining market space was occupied by the alternative beverages segment, which includes sports drinks, flavored or enhanced water, and energy drinks with 4.

0%, 1.6%, and 1.2%, respectively

Market Growth:

While U.S. beverage market saw a decline of 2.1% and 3.1% for the years 2008 and 2009, respectively, due in large part to the economic recession, the global market dollar value as well as volume sales saw an increase year-after-year, from 2005 to 2009. The industry is expected to maintain a growth trend, with sales forecasted to reach approximately $1.78 trillion in 2014, as beverage producer enter new market and develop new types of beverages to accommodate the shifting consumer preferences—and capitalize on the growing and profitable alternative beverage segment.

Market Segmentation:

The global beverage market is categorized as carbonated soft drinks (soda), bottle water and alternative beverages, which includes sports drinks, energy drinks, vitamin-enhanced water, energy shots, and relaxation drinks. Sports drinks accounted for nearly 60 percent of alternative beverage sales in 2009, while vitamin-enhanced drinks and energy drinks were approximately 23% and 18% of sales in the U.S., respectively.

Scope of rivalry: There has been a long lasting rivalry in the carbonated beverage market segment between the two largest producers—PepsiCo and Coco-Cola. However, in the alternative beverage segment, other than Red Bull and Hansen Natural Corporation which also have international presence, most of the other sellers are specialty or regional brands, with distribution limited to a small geographic region.

2. What is competition like in the alternative beverage industry? Which of the five competitive forces is strongest? Which is weakest? What competitive forces seem to have the greatest effect on industry attractiveness and the potential profitability of new entrants? Competition in the alternative beverage industry is low to moderate. Although there are many sellers, the high profit margin in the alternative beverage segment allows for everyone to earn respectable profit. In addition, the leaders, PepsiCo, Coca-Cola and Red Bull appear to understand the importance of maintaining the stability of the industry as a whole, as opposed to aggressively jockeying for individual strategic advantage at the expense of the industry. Although the five competitive forces in the beverage industry are quite favorable, threat of substitute product is the strongest force. This is evidence by the fact that branding and taste are the primary strategic differentiations in the segment.

Additionally, the cost of switching is undiscernibly low; and there were many substitute alternative beverages such as tea, soft drinks, fruit juices, bottled water and tap water, which made it easier for consumers to easily switch from one brand to another. The bargaining power and leverage of suppliers was the weakest competitive force because, with the exception of few rare ingredients, there are many suppliers available for producers to purchase ingredients from. Suppliers for packaging are also abundant. Even though substitute products had a bigger market share in the US, consumers bought more alternative beverages. This change in customer preference weakened the competitive power of substitute beverages. The threat of new brands varies by the development of each alternative beverage category. There is a low threat for mature categories and moderate to strong in young categories.

During the early stages of developing a category, when famous brand leaders had yet to be established, the threat of entry in alternative beverage categories was strong. This enabled consumers who did not have a brand preference to be attracted to new beverages and allow a quick gain in market share. Once brand preference is established, the threat of entry would is lower for all types of alternative beverages except energy shots and relaxation drinks. The proficiency among sellers of alternative beverages could be considered the strongest competitive force. Among the sellers of energy drinks and other alternative beverages competition among major brands is focused on brand image, taste, packaging, R&D, sales promotions, endorsements, and better access to shelf space.

3. How is the market for energy drinks, sports drinks and vitamin-enhanced beverages changed? What are the underlying drivers of change and how might those forces individually or collectively make the industry more or less attractive? As the industry experiences a saturation rate for all types of beverages in the mature markets (i.e. the U.S. and Europe), it is exercising great effort to enter new international markets . In fact, the industry is expected to gain a good portion of its future growth from consumers in developing countries. As a result, maturity of change in the long-term growth rate, industry consolidation and product innovation are all driving forces of the alternative beverage industry.

The annual rate of growth for the dollar value of the global market for alternative beverages was forecasted to decline from the 9.8 percent annual rate occurring between 2005 and 2009 to an anticipated annual rate of 5.7 percent – 2010 through 2014. While dollar value growth rates were expected to decline only slightly in Europe and Asia-Pacific, the annual rate of growth in the U.S. was projected to decline from 16.6 percent during 2005 – 2009 to 6.7% between 2010 and 2014. Product innovation is a constant force as the alternative beverage industry is continuing to create new ideas that give rise to new beverage industry categories and niches.

Drivers of change are unlikely to dramatically alter the attractiveness of the alternative beverage industry in the next 3-5 years. Even with a slowing economy, there is no indication that the larger producers such as Red Bull GmbH, Coca-Cola, or PepsiCo are prepared to compete aggressively on price for volume and market share gains. They will likely rely on product innovation and acquisitions to increase sales and market shares. However, the individual and collective effect of industry drivers of change can make the industry less attractive for unknown independent brands unless such companies gain an advantage in the industry.

4. What does your strategic group map of the energy drink, sports drink, and vitamin-enhanced beverage industry look like? What strategy groups do you think are in the best positions? The worst positions? The strategic group maps show the industry participants competing in scope of geographic distribution and brand portfolio breadth. It shows that beverage producers competing internationally with broad brand portfolios are positioned most favorably in the industry, because as the matured market saturate, and volume sale declines, the producers with international presence and capabilities will have the edge to enter into other international markets. Companies with a single brand and regional or national distribution only (i.e., Living Essentials, Vacation in a Bottle (ViB), Dream Water, or Drank) seem to be positioned most poorly in the industry because they are positioned as specialty or regional brand, which exposes them to the ebb and flows of market conditions of the economic condition or consumer preference of a narrow market.

The current level of competition makes it doubtful that small regional producers will survive over the long-term unless acquired by a large international bottler. 5. What key factors determine the success of alternative beverage producers? There are four factors that are necessary for competitive success in the alternative beverage industry. The first one is access to distribution, which is seen as the most important industry success factor due to the fact that most brands of energy drinks/alternative beverages cannot achieve good sales volumes and market shares unless they are widely available in stores, and there are also too many brands for all to be included on store shelves, especially in convenient stores who require placement fees. The second factor is innovating product skills. By definition, alternative beverages were different from traditional beverage; line extensions permitted entry to new categories.

The third one is name brand, which was also a critical factor in choosing a target customer demographic. The image which the brand represents and exemplified and emphasized in advertisements, endorsements, and promotions created a following and demand for one brand over another. Brand image was also a result of labels and packaging that alternative beverage consumer found appealing; small producers with poor image building capabilities had difficulty competing in the industry. Finally, sufficient sales volume to achieve scale economies in marketing expenditures is also an important driver. Successful alternative beverage producers were required to have sufficient sales volumes in order maintain marketing expenses at an acceptable cost per unit ratio.

6. What recommendations would you make to Coca-Cola to improve its competitiveness in the global alternative beverage industry? To PepsiCo? To Red Bull GmbH? Coca-Cola should go beyond a distribution deal with Living Essentials’ 5-Hour Energy drink, and instead, make a move to acquire it. Secondly, with only 10.2% of market share in the United States, as compared to PepsiCo’s 47.7%, Coca-Cola should focus on building strength in alternative beverage sales in Asia where it has a slight edge over its competitors. As globally established brand, and the market leader in the alternative beverage segment, PepsiCo is well positioned to maintain its market strength in the foreseeable future.

And with its global distribution capacity, PepsiCo should leverage its strength and aggressively enter new markets in Asia, South America, Africa and the Middle East before its competitors and or new entrants gets ahead of it. For its U.S market, PepsiCo should continue to maintain its market position by investing in R&D in order to develop new expand its product lines. As the energy drink market leader in the U.S. and the third-largest producer of alternative beverages worldwide and the number two seller of alternative beverages in the U.S. and Europe, Red Bull had notable performance for an independent producer. To maintain their competitive advantage, Red Bull GmbH should also create product line extensions to aid in the appeal of its brand.

Alternative Beverage Industry – Paper Essay