ANALYSIS OF SOFT DRINKS

INDUSTRY

Prepared by:
1) T. Harsha Mohan (J059)
2) MeghVasavada (J063)
3) SanyujZadgaonkar(J065)
4) Harshameer Singh (J057)
5) RohitWadhwa (J063)
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TABLE OF CONTENTS

S.No Title Pg. No

1 Executive Summary 2

2 Market structure characteristics: Number of Sellers 3

3 Market structure characteristics: Entry and Exit barriers 4

4 Market structure characteristics: Differentiated products 7

5 Market structure characteristics: Pricing 8

6 Short run and Long run equilibrium 9

7 FDI 10

8 Future review 11

9 Conclusion 12

10 References 13
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1. Executive Summary
TheNon Alcoholic beverage market is broadly classified into soft drinks(carbonated and
non carbonated) and hot beverages .Various categories are :

 Fruit based beverage

 Functional drinks segment
 Hot drinks
 Aerated Drinks
Carbonated or aerated drinks account for more 40% of total non alcoholic beverages
market in India. Over the past two years, the soft drink industry has seen a value growth
of 11% compound annual growth rate (CAGR) and a volume growth of 5% CAGR. In
total, 1.25 billion people in the country drink 5.9 billion litres of soft drinks in a year. This
makes India’s per capita soft drinks consumption large, but just 1/20th of that of the U.S.,
1/10th of Kuwait, 1/8th of Thailand and Philippines, and one-third of Malaysia’s.The
major segmentation in the carbonated market is also done on the basis of flavours used
i.e. Cola flavoured drinks, lime - lemon flavoured drinks, orange flavoured drinks and
other drinks. Currently, the trend in terms of flavours appears to be defined by lime -
lemon flavoured drinks in India. In terms of end users, urban segment dominates the
Indian carbonated non- alcoholic market with a significant market share. But gradually,
rural segment is also expected to take back on the market.

CHALLENGES FACED BY THE SOFT DRINK INDUSTRY

 Health Concerns :Various health concerns like Asthma, Sugar overloading, obesity,
tooth enamel dissolution etc and growing health awareness causing some people to
move away from Soft drinks.
 Nationalistic Concerns : Amid accusations that the multinational companies are
exploiting scarce water resources in the drought-hit states, some states are
boycotting these drinks over local drinks
 Government Moves : Government interventions and steps like Multinationals like
PepsiCo and Coca Cola being asked to blend natural juice and also the move of the
government to put Soft drinks in the highest tax slab of 28% followed by 12%
additional cess is expected to raise the price of the drinks

OTHER TRENDS
 Move towards smaller pack sizes
 Intensified push from the domestic companies
 Shift towards juice based carbonates
 Healthier soft drinks expected to drive markets

Notwithstanding the challenges, soft drink Industry in India is expected to

grow, as the consumption is still very small as compared to global
consumption. Also, growth is expected to be pushed by the rural market.
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2. Market structure characteristics: Number of sellers

India soft drink industry is an oligopolistic market as it can be witnessed from the figure
below. Currently there are 20+ soft drink manufacturing companies in India, but majority of
them are international players. 55% of the entire soft drink industry is commanded by two
players, Coca Cola Ltd and Pepsico Ltd. This is mainly due to the first mover advantage
these companies enjoy which were the first ones to introduce carbonated drinks in India.
Over the last decade presence of these companies became more and more synonymous
with Soft drinks. Some of their brands such as Coca-Cola, Pepsi, Maaza, Slice, Thums Up,
Sprite, Limca, Kinley and Aquafina have become household names and they tend to have
the largest shelf space in all grocery retailers outlets. As a result of these factors the soft
drinks industry is still dominated by these two major international players while the local
players fight against each other for the minority value of the share.
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Market Share

Others
25%
Piamo Coca Cola
1% 33%
UB Group
1%
Dabur India
1% Pepsico
Parle Agro 22%
5%
Parle Bisleri
13%

Market Share by brand

Others
Limca
Slice
Pepsi
Maaza
Thumps up
Aquafina
Sprite
Kinley
Bisleri
0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 45.00 50.00

A quick look at the share by brand data tells us that the largest share is occupied by bottled
water brands Bisleri, Kinley, Aquafina implying that the non-carbonated drinks account for a
larger portion in soft drink industry. Hence segregated category wise competition exists
between each of the player in the industry. However recent trends show that regional players
are steadily gaining grounds in pockets with innovative branding & packaging techniques.

3.Market structure characteristics: Entry and exit barriers

Coca-Cola and Pepsi Co dominate the industry with their strong brand name and great
distribution channels. In addition, the soft-drink industry is fully saturated and growth is small.
This makes it very difficult for new, unknown entrants to start competing against the existing
firms. Another barrier to entry is the high fixed costs for warehouses, trucks, and labor, and
economies of scale. New entrants cannot compete in price without economies of scale

The soft drink industry is affected by macroenvironmental factors of the industry that will lead
to change. First, the entry/exit of major firms is a trend in the industry that will likely lead to
change. More specifically, merger and consolidation has been prevalent in the soft drinks
market, causing some firms to exit the industry and then re-enter themselves. Several
leading companies have been looking to drive revenue growth and improve market share
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through the increased economies of scale found through mergers and acquisitions. One
specific example is how PepsiCo acquired Quaker Oats, who bought Gatorade which will
help expand PepsiCo’s energy drink sector (Datamonitor, 2005). This trend has increased
competition as firms’ diversification of products is increasing

It would be very difficult for a new company to enter this industry because they would not be
able to compete with the established brand names, distribution channels, and high capital
investment. Likewise, leaving this industry would be difficult with the significant loss of
money from the fixed costs, binding contracts with distribution channels, and advertisements
used to create the strong brand images. This industry is well established already, and it
would be difficult for any company to enter or exit successfully

Barrier to entry is too high because :

 Threat of new entry is categorized as a high risk in the industry

 Capital requirements are too high
 Need of investing high finance
 High cost of advertising and other promotional activities

Threat of New Entrants Capital Requirements :

 Production and distribution systems are extensive and necessary to compete with the
industry leaders
 Proprietary Product Differences Each firm has brands that are unique in packaging
and image, however any of the product differences that may develop are easily
duplicated
 However, secret formulas do create a difference or good will that cannot be
duplicated . This is a high barrier to entry
 Absolute Cost Advantage Brands do have secret formulas, which makes them
unique and new entry into the industry difficult
 New products must remain outside of patented zones but these differences can be
slight

This leads to the conclusion that the absolute cost advantage is a low barrier within this
industry. It would be nearly impossible for a new player to enter the industry. New players
would need to overcome the tremendous marketing muscle and market presence of Coke,
Pepsi, and a few others, who had established brand names that were as much as a century
old.These companies had intimate relationships with their retail channels 43 and would be
able to defend their positions effectively through discounting or other tactics.
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So, although the aerated drinks industry is not very capital intensive, other barriers would
prevent entry. Entering bottling, meanwhile, would require substantial capital investment,
which would deter entry

Regulatory approval of intrabrand exclusive territories, via the Soft Drink Interbrand
Competition Act of 1980, ratified this strategy, making it impossible for new bottlers to get
started in any region where an existing bottler operated

Coco Cola case:

COCACOLA Coca Cola entered India in 1967. In 1977, the Janata government led by Moraji
Desai came to power and launched the Sixth Five-Year Plan, which aimed to boost the
agricultural production and rural industries. Seeking to promote economic self-reliance and
indigenous industries, the government wanted multi-national corporations to go into
partnership with Indian corporations. At that time Coca-Cola was India's leading soft drink
when the new government ordered the company to dilute at least 60% of its stake in its
Indian unit as required by the Foreign Exchange Regulation Act (FERA) of 1973 and also
turn over its secret formula for Coca-Cola. The policy proved controversial, diminishing
foreign investment and led to the exit of high-profile corporations such as Coca-Cola and
IBM from India.

After Coca Cola left the Indian market due to problems with Indian Government, the Indian
Government decided to start a local brand to meet the demand for soft drinks in the country.
Pure drinks group was started by Padma Sri late Sardar Mohan Singh in 1942, and in 1950
they started bottling Coca- Cola across India. In 1978, when Coca Cola left India, they
started bottling their own brand ‘Campa Cola’. Thums Up was introduced in 1977 to offset
the expulsion of The Coca-Cola Company from India. The Parle brothers, Ramesh Chauhan
and Prakash Chauhan, along with BhanuVakil, launched Thums Up as their flagship drink,
adding to their portfolio of older brands Limca (lime flavour) and Gold Spot (orange flavour).
Thums Up enjoyed a near monopoly with a much stronger market share, often
overshadowing domestic rivals like Campa Cola, Double Seven, Dukes and United
Breweries Group's McDowell's Crush. According to statistics Parle’sThums Up market share
kept increasing since 1983 (43%) to 1990 (70%), while its chief rivals share had been
declining.

Pepsico saw the opportunity to enter the Indian market after Coca- Cola departed. In their
first attempt in 1985, Pepsico tried to join hands with one of India’s leading business house,
the R P Goenka group, to begin operations in the country. They put forward a deal to
promote the development and export of Indian agro- based products, and in turn get
permission from central government to import cola concentrate and to sell a Pepsico brand.
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This request was rejected on the grounds that the import of concentrate could not be agreed
to and the use of foreign names were not allowed. In their second attempt in 1988, Pepsico
put forward a very impressive offer. They promised to create employment opportunities for
about 50,000, make 75% of the total investments in food and agro processing, bring
advanced technology and 50% of total produce to be exported. PepsiCo gained entry to
India in 1988 by creating a joint venture with the Punjab government-owned Punjab Agro
Industrial Corporation (PAIC) and Voltas India Limited. This joint venture marketed and sold
Lehar Pepsi until 1991, when the use of foreign brands was allowed; PepsiCo bought out its
partners and ended the joint venture in 1994.
The Coca-Cola Company re-entered India through its wholly owned subsidiary, Coca-Cola
India Private Limited and re-launched Coca-Cola in 1993 after the opening up of theIndian
economy to foreign investments in 1991. However, Coke's reentry was based upon several
commitments and stipulations which the company agreed to implement in due course. One
such major commitment was that Hindustan Coca-Cola Holdings would divest 49 per cent of
its shareholding in favor of resident shareholders by June, 2002. As the company had
returned to India after a gap of 16 years, many local brands had emerged till then. It
acquired ownership in the Parle Group which gave the company instant ownership to the
popular brands likes Thumps Up, Goldspot, Limca and Mazza. The deal not only gave
manufacturing, bottling, and distribution assets to Coke but also a strong consumer
preference. Jayadev Raja was made the first Chief Executing Officer of Coca Cola India.
Access to 53 of Parle’s plants and a well set bottling network, gave Coca Cola Company an
excellent base for rapid introduction of the company’s international brands.

4.Market structure characteristics: Product Differentiation

In economics, market structure is an organisational and other characteristics of a

market.Product differentiation is a process that showcases the differences between products.
Differentiation looks to make a product more attractive by contrasting its unique qualities with
other competing products. Successful product differentiation creates a competitive
advantage for the product's seller, as customers view these products as being unique or
superior
In the Beverage industry product differentiation happens on the bases of social strata the
product covers
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CLASS PRICE PRODUCT FEATURES

LOW LOW The price is low, the
product simply works
MIDDLE MIDDLE Use of the good is
comfortable. Most people
use it. Mass market brand
HIGH HIGH Quality,
exclusivity, durability 
(= low life-long price)

Pepsi and Coca Cola in particular have come up with different sizes to cater to different
class of people. Moreover the Cans and the bottles sold in entertainment places at a
premieum cater to the upper class.

In the soft beverage industry, the market is an oligopoly. The key feature of an oligopoly is
that the profitability of any one firm’s actions depends on how the other firms respond to
those actions. In this situation, a firm must make some prediction of how the other firms will
respond to its choices when it decides how much to produce, what price to charge, how
much to spend on advertising, and so on. When firms are aware of other firms’ expected
responses to their choices and take those expected responses into account when making
choices, they are said to be engaging in strategic behavior. There are two ways to think
about strategic behavior, the game theory approach and the conjectural variations approach,
and we will look at oligopoly using both of these.

5.Market structure characteristics: Pricing

PRICING MODEL
A model of the way prices are set within a market for a given good. According to this model,
prices are set based on the balance of supply and demand in the market. In general, profit
incentives are said to resemble an "invisible hand" that guides competing participants to an
equilibrium price.

The demand curve in this model is determined by consumers attempting to maximize their
utility, given their budget. The supply curve is set by firms attempting to maximize profits,
given their costs of production and the level of demand for their product. To maximize profits,
the pricing model is based around producing a quantity of goods at which total revenue
minus total costs is at its greatest. 
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Following factors are kept in mind while determining the pricing strategy in the beverage
industry:

Price should be set according to the product demand of public.

Price should be that which gives the company maximum revenue.

Price should not be too low or too high than the price competitor is charging from their
customers otherwise nobody will buy your product.

Price must be keeping the view of your target market.

The price of Coca Cola, despite being market leader is the same as that of its competitor

Sometimes, Pepsi places its customers into some psychological pricing strategies by
reducing a high priced bottle and consumers think that they save a lot of money from this.

Below given is the pricing followed by the market leader and the similar fashion followed by
its competitors

150 ml bottle- Rs. 18

600 ml Bottle - Rs. 38

750 ml Bottle - Rs. 40

1.25 ltr Bottle - Rs. 60 

1.75 ltr Bottle - Rs. 75 

6. Short run and long run equilibrium

Soft drinks industry has slowly evolved over the decades into an oligopolistic market and
currently dominated by more than 20+ players. Oligopoly equilibrium price is equal to or less
than monopoly equilibrium price but greater than or equal to competitive equilibrium
price.Oligopoly equilibrium quantity is equal to or greater than monopoly equilibrium quantity
but less than or equal to competitive equilibrium quantity.Economic profit is positive unless
oligopolists behave exactly as perfect competitors in which case economic profit is
zero.Unrestricted entry and exit lead to this equilibrium. At the equilibrium output, price
equals long-run average cost and marginal revenue equals long-run marginal cost.
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7. Foreign direct investment

FDI inflow was higher in 2013-14, thanks to two big-ticket investments by Coca-Cola and
PepsiCo, announced in October and November 2013, respectively. Coca-Cola in October
2013 said it would invest $5 billion in India by 2020, while its rival PepsiCo announced its
plans to spend $5.5 billion in India by 2020 the next month, part of which might have been
accounted in the FDI inflow data for the year.Allowing FDI in multi-brand retail alone cannot
bring down inflation or help to streamline the supply chain, as has been envisaged by the
government

It will depend on how a single Goods and Services Tax (GST) is implemented and how the
non-alcoholic beverage sector in particular is treated under the GST. The treatment of the
sector has to be such that it faces uniform low tax, and allowing FDI in multi-brand retail
alone cannot bring down inflation or help to streamline the supply chain, as has been
envisaged by the government

Herein, India can learn from the experiences of countries such as the UK, Canada and
Australia that have used low taxes to streamline the agro-supply chain. There should be
uniform low taxes for all non-alcoholic beverages across different states for consumer health
and safety reasons. Contrary to popular belief, the report found that the subsidies given to
the industry for cold chains or setting up of manufacturing facilities do not meet industry
requirements. In fact, the high cost of doing business and the high and multilayered taxes
erode the benefits of subsidies and, therefore, the country is not receiving the desired
investment from the corporate sector in areas such as cold chains and food processing.
Instead of subsidies, if the government streamlines the tax process, enhances transparency
in governance and provides the necessary infrastructure, investment will automatically flow.
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8. Future review

In total, 1.25 billion people in the country drink 5.9 billion litres of soft drinks in a year. This
makes India’s per capita soft drinks consumption large, but just 1/20th of that of the U.S.,
1/10th of Kuwait, 1/8th of Thailand and Philippines, and one-third of Malaysia’s.Over years,
the soft drinks category has also been affected by issues related to health concerns and
pressure from government policies. However, there have been sporadic efforts to drive
growth in rural areas in recent years, which have received only a tepid response, as rural
consumption levels still stand at two-third of that of consumption in urban areas.The
challenge for this industry therefore, is to restore its pace of volume growth by increasing the
per capita consumption of soft drinks in India, catch up with international consumption levels
of soft drinks and perform at par with other FMCG categories in India, like salty snacks,
chocolates and biscuits.

Also the recent re-categorisation of aerated drinks within the luxury category under India’s
new GST bill, which has instated a 4-tier tax structure of 5%, 8%, 12%, and 28%, represents
the major threat to growth in soft drinks over the forecast period. The implementation of the
GST bill is expected to boost the average unit price of soft drinks, with the average unit price
of cola carbonates set to rise by between 1% and 2%, which is not good news for soft drinks
manufacturers at a time when they are facing stiff competition from companies
manufacturing health and wellness beverages.

Small evolving segments like energy drinks may not be sufficient to either drive the per
capita consumption or bring in the desired growth for this category. The first challenge that
this category faces is to outpace other impulse consumption and traditional options available
and clock high single-digit growth in volume. Moreover, the category is dependent on
soaring summer temperatures across the country, and a delayed onset of rain and winter
can affect demand.

The following three winning strategies have been identified that give growth impetus to
India’s soft drink category.

 Continuous and aggressive focus on innovations

 Making the category season-neutral
 Focus on execution
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9. Conclusion
Thus we have seen how the Soft drinks industry, with various firms producing similar
products and competing for market share, exhibits oligopolistic competition. Despite the fact
that this industry is highly crowded, due to various factors discussed above the product is
differentiated in various aspects. After analysing several aspects of the industry across the
globe, we believe that there is a scope for tremendous growth. Two major challenges lie
ahead for the industry. One is the implementation of the Goods and Services Tax and the
other is automation. The former is expected to organize the industry and the latter is
expected to bring in disruption. However, if the industry is capable of dealing with both
effectively, then the future is far from being bleak.
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10. References

1)https://www.csbsju.edu/Documents/libraries/zeigler_paper.pdf

2)http://www.investopedia.com/university/microeconomics/microeconomics4.asp

3) http://onlinelibrary.wiley.com/doi/10.1111/j.1430-9134.1992.00277.x/full

4) http://onlinelibrary.wiley.com/doi/10.1111/j.1430-9134.1992.00277.x/full

5) http://www.business-standard.com/article/management/kit-non-alcoholic-beverage-

market-in-india-111101700049_1.html

6) http://www.nielsen.com/in/en/insights/reports/2016/whats-bubbling-up-in-indias-soft-drink-

market.html

7) http://economictimes.indiatimes.com/industry/cons-products/food/coca-cola-and-pepsico-

set-up-teams-to-track-smaller-regional-brands-that-are-stealing-market-

share/articleshow/57008603.cms

8) http://www.investopedia.com/terms/m/microeconomic-pricing-model.asp

9) Capitaline company database- Coca Cola