Porter’s Five Forces Analysis- Soft Drink Industry
Barriers to Entry
- Size is a crucial factor in this industry. It’s important to have a larger economies of scales so the cost of production per unit is minimizes.
- A large capital requirement in production and distribution system is necessary for them to be successful.
- The biggest hurdle when entering this industry is the brand loyalty. Taking business way from these establishes companies like Coca-Cola will be tough.
- The learning curve within this industry is relatively low compare to others. The industry technology and the manufacturing process system is not that complicated.
- Government regulation within this industry is moderate. Their biggest hurdle over the years is the approval of sweeteners by the government.
- The switching cost for customers (retailers) is high. (explain further in the Buyer Power section)
- It is critical to have an efficient distribution channel in this industry. New entries will have a hard time completing for shelves space during the beginning stages.
High
Rivalry
- This industry is dominated by two companies Coca-Cola and PepsiCo and with a distant third in Dr. Pepper.
- The soft drink industry has matured already, so the there is minimal growth. Their demand has actually decreased over the years due to substitutes.
- With the large capital requirement and their contractual agreement with the distributors, exiting the industry is really hard.
- Brand identification, fixed cost on the rise, and high switching cost for distributors.
Moderate – High
Supplier Power
- Most of the material needs to produce a soft drink are commodities, so it is readily available and less chance of being over price.
- Some suppliers is highly depend on the soft drink industry because they purchase a large portion of there sells. Companies like the plastic bottle industry are at the mercy of the soft drink industry.
Low
Buyer Power (Distributors or Retailers)
- A lot of retailers have a contractual agreement with certain soft drink companies, which might bind them to the company.
- Even thought there is a lot of a substitute out on the market. The switching cost is still relatively high. The legal cost to get out of a contractual agreement and the cost of searching for a new deal.
- Lager retail stores are at an advantage when they are able to purchase a large volume of soft drink at a discount. This power is lessens for small retail stores.
- The soft drink industry needs the retailers because they ultimately sell the product to the end consumers. So it is important to have a strong relationship with the retailers because they indirectly affect the company’s reputation.
- Brand loyalty minimizes product switching by the consumer.
Moderate
Threat of Substitutes
- This industry is more susceptible to product substitutes than any other industries.
- The list of substitutes is endless. Some example are tea, coffee, distill water, sport drink, juice, milk, healthy drinks, and etc.
- There is a trend in coffee (Starbucks) and toward healthy drinks, which has fewer calories and more nutrition.
High
Based on the analysis this industry is unattractive. There is too much product substitutes and barriers to entry.
6 comments:
I see this topic is popular - check out paperclips' blog. I agree with both your analysis's and both of you also came to the same conclusion that it is an unattractive industry. Mr. Peretz did raise a good point that regarding the substitutes you mentioned. Although you can drink milk instead of coke, most people wouldn't. When you feel like a coke, most people wouldn't drink a whisky. You noted in your "buyer power" that "brand loyalty minimizes product switching", and I think this is true to some extent also in regarding to the type of good.
We wrote about the same topic and I agree with your assessment which is very similar to mine. The only thing I wasn’t sure I understand is your conclusion; do you say that the market is unattractive to the existing companies due to the variety of product? If yes, I tend to disagree with you because I believe that Coke and Pepsi are controlling the industry and the market is very profitable for them. Their line of product is very divers, and their purchasing power to acquire any small company that stands in their way is big. I do believe that the market is unfavorable to new companies that try to penetrate this market, due to the absolute control of the top two.
I agree with your conclusion that soft drink industry is unattractive to a new competitors, however I disagree with you about substitutes, if you want, for example, to drink pepsi or coke,it is difficult to switch to water or juice.
Great job Hao! The format of your analysis is very clear cut and it is easy to read through.
I agree with you that the soft drink industry is unattractive because of the two dominant players, Coke and Pepsi. I would tend to believe that it would be very difficult for new-comers to take any significant amount away from the two giant players.
I agree with the way you analyzed this industry. I believe your argument is well based, and you gave more than enough examples for each force to support your argument.
I agree that soft drink industry is unattractive to a new competitors. Porter's Five Forces may be used by soft drinks companies to create strategic plans in overcoming the competition in the industry. You may check out http://www.coursework4you.co.uk/porter.htm for more information.
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