1. Why is the soft drink industry so profitable?
According to IBIS World Industry report, soft drink industry is a $47.2 billion industry in America based on revenue and it was forecast to generate a profit of $1.7 billion in 20101. The annual growth of the industry was 1.8% from 2005 to 2010, and it is expected to increase from approximately 3.5% in 2010 to about 4.5% in 2015, though the growth is predicted to be slow2. Porter’s five sources of competition framework provides a useful tool in analyzing the profitability of an industry driven by five sources of competitive pressure. Before that, it is important to draw the boundaries of the soft drink industry.
Definition: Soft drink here refers to Carbonated Soft Drinks (CSDs) with a duopoly industry structure led by Coca Cola and Pepsi-Cola—the concentrate producers, with substitutes consisting of non-cola beverages3.
Competition from substitutes Substitutes include juices/juice drinks, sports drinks, tea-based drinks, dairy-based drinks, bottled water and functional beverages. As consumer behavior shifted towards non-cola beverages due to health considerations, the CSDs faced challenge from substitutes, especially in 1980s and 1990s. The two giants responded by expanding brand portfolio either by launching new drinks or acquiring brands that rounded out portfolios. PepsiCo introduced Pepsi One in late 1998 in diet drink segment. Flavored soft drinks such as citrus, lemon-lime, pepper, and root beer also gained their momentum. Pepsi and Coke sold reverse-osmosis purified water instead of spring water with a distribution advantage. Pepsi acquired Tropicana in 1998, Gatorade in 2000, and SoBe in 20004. Though substitutes posed a big threat to CSDs, the two giants expanded brand portfolio to confront.
Threat of Entry CSDs has high barriers of entry. The industry is hard to enter as the access to channels of distributions, in this case, the supermarket shelf space, is nearly controlled by the established...