Industry brief : Beverages I Carbonated soft drinks At the core of the beverage industry is the carbonated soft-drink category. The dominant players in this area (Coca Cola, Pepsi, and Cadbury-Schweppes) own virtually all of the North American market’s most widely distributed and best-known brands. They are dominant in world markets as well. These companies’ products occupy large portions of any supermarket’s shelf space, often covering more territory than real food categories like dairy products, meat, or produce. As with many mature retail industries, the beverage giants have a problem – growth in the sales of their flagship carbonated products are at a near standstill in the key U.S. market, with 1% growth or less. After years of rapid growth, it seems that the average American can’t drink any more flavored, fizzy soda water. To remedy that, these three companies are rapidly expanding both globally as they enter and promote new markets for existing products and locally, as they add products from adjacent beverage categories in the supermarket, in categories that are still expanding. We'll talk about these areas in a later posting. The prototype of all marketing and branding struggles, the “Cola Wars” keep expanding. The Pepsi and Coca Colakeep rolling out the big guns: dueling pop stars, and new branded products in the form of “Vanilla Coke” and “Pepsi Blue.” . They are fighting on the TV, in the fast-food restaurants, and in the supermarkets; they are also dueling in the schools. One of the biggest pushes of the last few years has been convincing school districts, universities, and other institutions to go all-Coke or all-Pepsi, in return for a (small) cut of the gross sales. Selling costly sugared water and building an increasing demand for it, even in Third World countries, involves marketing in its purest form, unsullied by any preexisting need or local tradition. Markets in Eastern Europe, China, India, and Mexico, among others, are expanding fast, and both Coke and Pepsi are finding local partners (bottlers) in these countries to keep extending their reach. And while the American market may be mature, there’s still an opportunity worldwide to replace hot beverages like coffee and tea that require some preparation with these cold, iconic. ready-to-drink brands. All this worldwide activity can’t disguise an unpleasant core reality for the vendors: U.S. carbonated soft drink sales increased only 0.5% in the year 2002. Although total sales for the industry was up slightly, per capita consumption was down for the third year in a row In other words, domestic soft drink growth is not keeping pace with population growth. Overall soda market In fact, Coke and Pepsi have a third major rival on the bottled soft drink shelves, namely Cadbury-Schweppes. The big three carbonated beverage makers now exist in a stable oligopoly that changes only by small increments and which controls over 90% of the market. Over the years, Cadbury-Schweppes (the result of a merger between a British candy company and a British beverage company) has improved its position by acquiring key brands in the US, namely Dr. Pepper and SevenUp, along with A & W and Canada Dry. In past decades, the carbonated beverage section had been the beneficiary of an amazing record of growth, where consumption has more than doubled over the past 25 years. Americans consume twice as much soda as they did 25 years ago, up from 22 gallons per person per year to over 56. In 2000, these three companies had almost exactly the same share of the U.S. market they had in 1999, namely: Company Coca Cola Pepsico Cadbury/Schweppes
Percentage 44.1% 31.4% 14.7%
Brands Coke, Sprite, Barq, Fanta, Mello Yello, etc. Pepsi, Mountain Dew, Mug, Slice, etc. Seven-Up, Dr. Pepper, Schweppes, A & W, Canada Dry, Sunkist, Squirt, etc.
While individual flavors go up and down, the relative market share of the big three changes at a glacial rate. The next biggest North American soda company, the Canadian-based Cott Beverage company, had only a little over 3% of the market, and that company specializes in supplying private label soda to supermarkets and other chains. In 2001, however, Cadbury acquired moribund RC Cola, giving it a cola drink to battle against the big guys. This gave the company more shelf position and immediately gave the RC Cola brand, long a distant also-ran with weak marketing muscles, more sales and market presence. Pepsi gave itself a small boost because of the popularity of
newly introduced Mountain Dew Code Red, a hyper-caffienated soda. Coke’s numbers declined slightly. The market share figures in 2001: Company Coca Cola Pepsico Cadbury/Schweppes
Percentage 43.7% 31.6% 15.8%
It’s pretty indicative of this mature market that the only major move in market share comes through a takeover. Moreover, the takeover targets that are left are so small that the biggest remaining brand doesn’t make more than 1% difference in total volume.
Industry brief: Beverages 2 New age beverages In the last part of our look at the beverage business, we noted that oligopolies Coca Cola, Pepsico, and Cadbury Schweppes had "flooded" a mature market, so that there was minimal growth potential in the carbonated beverages category. So, how can these companies grow, something all oligopolies are compelled to do? First, by expanding internationally. Second, by acquiring or adding new products in other beverage areas, which show both faster growth and less well-defined competition. In fact, other beverage types have only in the last decade come into focus as separate, important categories, each with a potential for growth. So the search for new beverage footholds has become the second front of the Cola Wars. There is a scramble for new territories in beverage shelf space, and Coke and Pepsi are investing heavily. These alternative beverages areas were established by startup or small cap companies, including Snapple and Arizona Iced Teas, Ocean Spray and Nantucket Nectars, SoBe and Calistoga. The emerging categories began to look like both a threat and an opportunity for the big three. In 2001, according to Beverage Age Magazine. the segments of alternative or "New Age" beverages ranked by order of sales, were: • • • • • • • • • • •
bottled water in clear plastic containers mildly flavored water (Clearly Canadian, Veryfine, Acqua Vie) fruit juices and drinks (some shelf-stable, like Ocean Spray, Mott's, DelMonte; some refrigerated, like Nantucket Nectars, Tropicana) sports and energy drinks (Gatorade. Powerade, SoBE Power, Red Bull, G-Up) iced tea (Snapple, Arizona, Lipton, Nestea) premium soda (Thomas Kemper Soda, Jones Soda) cold coffee drinks (Starbucks cappuccino drinks, PlanetJava, Arizona) vegetable/fruit juice blends, (V8, Odwalla) enhanced dairy drinks (Smooth Moos, Chocolate Moose Energy Shakes, drinkable yogurt) soy-based and other non-dairy beverages (Odwalla, Health Source) other nutrient-enhanced beverages, so called neutriceutical beverages (SoBe, Hansen, Naked Juice, Fresh Samantha)
The problem with this market, like most emerging categories in the grocery business, is an excess of vendors and products, making it hard for retailers to decide who to assign their precious shelf space to. This is accompanied with an even larger number of SKUs of different sizes and flavors, causing generally chaos in the market. That makes for a great opportunity for the oligopolists, who have entered into these markets in a big way. We'll talk about the water category later, but here's some of the other alternative brands now owned in the alternative market by the carbonated Big Three. (The notation (lic.) denoted a beverage licensed from another company.)
Category
Coca Cola
Pepsico
Cadbury-Schweppes
Notes
Iced tea
Nestea (lic. Nestle)
Lipton (lic. Unilever)
Snapple
Lipton #1, Nestea #2, Snapple #3
Sports drinks
Powerade
Gatorade
Mistic
Gatorade #1, Powerade #2
Health drinks
KMX
SoBe
Coffee Drinks
Planet Java
Starbucks (lic.)
Starbucks #1, Planet Java #3
Refrigerated Juices
Minute Maid, Odwalla, Fresh Samantha
Tropicana; Dole Nantucket Nectars (lic.)
Tropicana #1, Minute Maid #2
Shelf-stable juices
Dole (lic.)
Milk-based drinks Soy-based drinks
Orangina; Mott's; Welch's (lic.); Clamato Yoo-hoo; Raging Cow
Tropicana smoothies
Note that most of these products were bought or started in the last three years. The big three already have the salesmen, the vending machines, the bottlers, the money to advertise, and the international reach. With this power, they have managed to take over a second aisle in the supermarket, along with a solid section of the refrigerator case. And as we'll see, the biggest potential is in water.
Industry brief: Beverages 3 (In previous postings we've looked at the carbonated beverage and the new-age beverage segments of the market.} Bottled water The bottled water industry in North America is growing aggressively. It is the fastest growing segment in the beverage industry (around 30% annually, compared to 1% or so in carbonated beverages), and the cost of goods sold is almost negligible. Once confined to Perrier and Evian sippers at fancy restaurants or people with bad--tasting local tap water, there's been a tripling of US consumption since 1985. As a recent FORTUNE magazine article put it, The most brutal battle in the beverage industry is the one for dominance of bottled water. With the niche growing at a 30% annual clip, bottled water will likely catapult ahead of coffee and beer to become the second-best-selling beverage--just behind soft drinks--by 2005. (Currently bottled water's barely ahead of No. 5 milk.) Another article in Beverage Marketing notes the conenctration of the market as water gets to be a bigger deal. Supermarketers have revolutionizing the industry. Since the costs of buying and holding shelf space is so expensive, the small, regional firms, which used to be major water suppliers, are being priced out. The only companies that can get their products on the shelves are the new water oligopolists, large national and multinational companies. Four companies now dominate the North American market for bottles water: Nestle, Danone, Coca Cola, and Pepsico. Like other areas of the beverage market, water, once the province of small, local spring bottlers and a few European importers, has now become an oligopoly. While Nestle (originally a Swiss chocolate company) and Danone (originally a French dairy firm) have been in the market for a while, Pepsi and Coke are Johnnies-come-lately to the market, Pepsi in 1995 and Coca Cola in 1999. But they have so much marketing savvy, power in the distribution and bottling area, and store presence, that they have made their two brands, Aquafina (Pepsi) and Dasani (Coke), the top two selling brands in the US market. That's in spite of the fact that, unlike most of the competitors, these are simply filtered and bottled local tap
water. Yet bottles of the either of these essentially free liquids sell for almost the same a similar container of soda or iced tea. Not a bad business to be in! Both companies use their vast experience in associating drinks with lifestyle, sharpened during the cola wars. They are ramping up their ad budgets and getting significant growth in volume as they do so. And they have a big opportunity. According to estimates, one third of American households have never tried bottled water, and carrying around a bottle of water has become a status symbol for many younger Americans. Nestle is in fact the overall market leader, with $2.5 billion overall in water sales. It sells a number of brands that are popular in various regions of the country, such as Poland Spring in the Northeast. Arrowhead and Calistoga in California, and so on. These are actual spring waters that have to be trucked to the bottler. Nestle also sells Perrier, San Pelligrino, and some other European imports. Danone is number four in volume, with its imported Evian, Volvic, and others, along with Naya and Sparkletts from the U.S. Of the big four, Danone is the one that is sinking, losing sales to the others. In fact, they just signed an agreement with Coca Cola to market and distribute several of its brands in the US, including Dannon and Sparkletts, and some economy brands. Evian and other European brands will not be affected. (Being #4 can be so hard!) In 2002, these four companies had achieved over 60% of the water sales in the US, and that was rapidly expanding. Only two competitors have shares over 2%: Suntory Group (part of a Japanese conglomerate) and independent Crystal Geyser. Our guess is that minor brands will more and more be crowded off the shelf. (By the way, Cadbury-Schweppes has a limited water role at present.) Supermarket sales of cases of water are starting to show competition, as Nestle, Coke, and Pepsi are starting to compete on price as a Wall Street Journal report noted. Coke and Pepsi are trying to avoid a water version of the cola wars, in which they battled it out with price cuts in the supermarket aisle. That's why they're concentrating some 60% to 70% of their sales in the lucrative business of selling single, cold bottles in convenience stores or vending machines. But the next step is differentiating waters by making them vitamin-enriched nutriceutucals. Pepsi, through its Gatorade subsidiary, now offers Propel, enhanced with vitamins and minerals. It is also selling something called Aquafina Essentials, which is flavored water (some sugar added), doubtless a healthy drink. Coke is selling Dasani Nutriwater, a similar gimmick. Even the water category, only recently discovered by these companies, is now spawn new categories, opening new fronts in the cola wars.
Company
Select Brands
Nestle
Perrier, Poland Spring, Arrowhead, Deer Park, Zephyrhills, Ozarka, Ice Mountain, Calistoga, Vittel, San Pellegrino, Acqua Panna, Vittel
Pepisco
Aquafina
Coca Cola Dasani Danone
Evian, Volvic, Dannon, Naya, Ferrarelle, Sparkletts, Pure American, Castle Rock
Industry brief: Beverages 1. In what ways does the beverage industry represent an oligopoly? 2. What is the problem w/being in an oligopolistic market from the beverage companies perspective? 3. How are beverage companies overcoming this problem? 4. What is generally the only way to create shifts in market share in oligopolistic markets? 5. Make an observation regarding the table of alternative brands now owned by the big three. 6. What is surprising about Pepsi and Coke in the bottled water market? 7. What is so attractive about the bottled water market for Pepsi and Coke? 8. What might you anticipate about Cadbury-Schweppes and the bottled water market? 9. How are Pepsi and Coke attempting to differentiate in the bottled water market? 10. How does understanding markets, like the beverage/bottled water market, relate to you being an educated consumer? (In other words, how does learning about market structures in an economics class benefit you?)