Competition in Energy Drinks 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. Demographics: The total sale for beverages in 2009 in the US was about 458. 3 billion gallons and it is one of the largest markets with dollar value of 1,581. 7 billion in 2009 and with a forecast of $1,775. 3 billion for 2014. 48. 2 percent of industry sales were from carbonated soft drinks and 29. 2 percent of bottle water industry sales. In 2009, The Alternative beverage industry included sports drinks, flavored or enhanced water and energy drinks made up 4%, 1. 6%, and 1. 2% of industry sales respectively. The global market for alternative beverages in 2009 was $40. 2 billion, while it was $17 billion for alternative beverages in US market. It was $ 12. 7 billion and $9. 1 billion for Asia pacific and European markets respectively. Market growth: The market growth has huge potential with the dollar value of the global market for alternative beverages grew at a 9. 8% annually between 2005 and 2009, but was expected to slow down to 5. 7% annually between 2010 and 2014. US is the country which has strongest growth internationally in term of alternative beverage sales with an annual growth rate of 16. 6% between 2005 and 2009 and a forecasted growth rate of 6. 7% between 2010 and 2014. Europe and Asia-Pacific grew at annual rates of 5. 3% and 5. 6% between 2005 and 2009 and were expected to grow at a rate of 4. 4% and 5. 1% respectively between 2010 and 2014. However poor economic conditions in the US in 2008 and 2009 led to a 12. 3% decline in sports drink sales and a 12. 5% decline in flavored and vitamin waters sales. It was also the reason why energy drinks sales increased only 0. 2% between those years. Rivalry between competitors: Coca Cola, Pepsico and Redbull are the three big players that made the industry rivalry become global. However, there were hundreds of brands like Otsuko which were specialty yet regional brands that did not have a foot print internationally but were doing well in their own terms. Beverage producers had made various attempts at increasing the size of the market for alternative beverages by extending existing product lines and developing altogether new products. Social Forces: * Global beverage companies such as Coca Cola and PepsiCo had relied on such beverages to sustain in volume growth in mature markets where consumers were reducing their consumption of carbonated soft drinks. * Expanding the market for alternatives beverages and increasing sales and market share, beverage producers also were forced to content with criticism from some that energy drinks, energy shots, and relaxation drinks presented health risks for consumers and that some producers’ strategies promoted reckless behavior, the primary concern of most producers of energy drinks, sports drinks, and vitamin-enhanced beverages was how to best improve their competitive standing in the market place. Driving Forces for this industry: * Expanding Market share. * Desire to reach out to Consumer needs and meet the demand * Personalization of the Market Segments * Branding * Market Size * Maximization of Growth Potential General Economic Conditions: * Global growth is projected to grow at 3. 5 percent in 2012, then accelerate somewhat to 3. 6 percent from 2013-2014. In 2012 It is expected that emerging economies will be slow in growth by 0. 7 percentage points on average, going from 6. 3 percent growth in 2011 to 5. 6 percent in 2012, partly as a result of slower export growth and partly because several of them have been growing above trend and the GDP Growth for the world is predicted to be at 3. 6. Things look a little slow but are picking up slowly and there is no recession in sight so far. This could really help the industries like Food, Beverages, Health surge ahead like they already are into the market with more percentage of market share and consumer usage based on the increasing numbers in the trend. Impact of Economic Factors: * Demand on beverages and alternative beverages should remain incremental or stable * Branded alternative beverages with national and international presence should do well * Business opportunities should be encouraged with fair and encouraging interest rates 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? The Beverage industry is highly competitive and the segments that come into picture when it comes to competition are Distribution, Shelf management, Licenses, Brand name and Image, Pricing, Labeling and Packaging, Marketing and Advertising, Quality and taste, Trade and Consumer promotions and Branding. * Competition with non-alcoholic beverages * Competition with Carbonated beverages * Competition with regional beverage producers and private label soft drink suppliers * Competition in maintenance of distribution network * Competition on quality and pricing * Competition on Branding, Labeling, Marketing, Packaging and Promotions. Bargaining power of Buyers: Strong * Convenience store, grocery store, and wholesale buyers had considerable leverage in negotiating pricing and slotting fees with alternative beverage producers because of their bulk purchases. * New entrants with comparatively lower market shares are most affected with this like how it is mentioned in the case where the shelf space is limited to top brands like Coke, PepsiCo and Red bull for that particular market segment. The larger brands like coke and Pepsi also already have spaces worked out with them for their other products and this makes it easier for the bigger brands to get their newer products in the shelf’s too. * Delis and restaurants have low switching costs to other brands but they have less volumes compared to stores and less space, shelfs etc.and also will not have the same bargaining power that a store enjoys. * Demand is highly dynamic Bargaining Power of Suppliers: Weak * Suppliers for alternative beverages do exist in huge numbers and the competition is high * The producers of alternative beverages are important customers of suppliers and buy in large quantities. * Packaging is readily available Threat of Substitutes: Medium * Many substitutes like tea, bottled water, juices, nutrition water etc. have surfaced but the market is not as big as alternative beverages and this customer preference had weakened the competitive power of substitute beverages. * Many substitutes that can quench the thirst of the consumers * Price point of substitutes is less compared to alternative beverages Threat of New entrants: Weak * Brand leaders already exist in the industry with competitive prices and well established distribution system * Convenience stores and Shelves across the stores are already in partnership with existing big-wigs * Customer loyalty towards branded products is high * Need for large financial resources and funds * High Brand equity for already existing and successful brands Threat of Rivalry: Strong. * Competition centers among major brands based on brand image, appealing taste, packaging, R&D, Marketing and Distribution capabilities * Attempts by all the brands to increase the number and types of products in their product line * Low switching costs for the consumers of the industry * Strong marketing campaigns by each brand to gain customer loyalty The Bargaining power of consumers and rivalry that exists between the competitions in this industry contributes to the attractiveness of the industry. The numbers are promising, the industry is dynamic and increase in demand each year. The factors that affect the potential profitability of the new entrants are the Brand image, Distribution network and Product line breadth. 3) How is the market for energy drinks, sports drinks and vitamin-enhanced beverages changing? What are the underlying drivers of change and how might those forces individually or collectively make the industry more or less attractive? * Driving forces of the alternative beverage industry are dependent on the creating/sustaining market demand, dynamics of the growth rate and product innovation. * Industry leaders established: Segments within the alternative beverage industry have consolidated as markets have matured and leaders have been established. Red Bull GmbH and Hansen Natural Corporation remained independent in 2010, Coca-Cola controlled such brands as Powerade sports drink, Fuze vitamin-enhanced beverages, glaceau vitamin water and NOS. In addition, Coca-Cola distributed Hansen’s Monster energy drink in parts of the United States, Canada, and six European countries. * Changes in Long term Growth Rate: The recession had an impact on sales of sports drinks and flavored or enhanced water and has stalled growth in the market for energy drinks; there was also growing market maturity for most categories of alternative beverages. 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 for 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 percent between 2010 and 2014 * Product Innovation: The industry is continuing to evolve with introduction of new products that enable rise of new category of products. The recent introduction of energy shots is an example of how an innovation that has given rise to an altogether new sub-segment in the industry. * The creation of new product segments, the increasing positive trends in growth rate and increasing market share for each product are a good indication and good drivers of change that increase the attractiveness of the market for an emergent industry. 4) What does your strategic group map of the energy drink, sports drink, and vitamin-enhanced beverage industry look like? Which strategic groups do you think are in the best positions? The worst positions? The strategic group maps show the industry participants competing with axes of Geographic foot print and Brand. The Map shows that Industry giants like Coke and Pepsico are positioned strongest in the industry due to already existing contracts, supply chain, distribution network and shelf spaces in retail spaces. * Red Bull is seeing a successful brand in Europe and the U. S. * Hansen’s Monster is also doing good standing up to the other market giants with distribution partnership with coke giving it the required space and opportunity to grab the market and hence can be considered at a favorable position. * Rock star has also been at a favorable position due to the same reason of distribution network partnership with PepsiCo * Companies with a single brand and regional distribution like Otsuko, Vitamin water etc. appeared to be at an unfavorable place with chances of competition gulping the market share of the small players very soon. 5) What key factors determine the success of alternative beverage producers? The Key success factors for Alternative Beverage producers are * Constant Product Innovation: A company must be able to identify what a consumer is looking for and also maintain the ability to adapt with the changing market trends. They must be able to keep up and not lag behind. * Price: Price is always a factors in many cases and in this case consumers with a low brand preference will buy a product based on its competitive pricing * Brand Loyalty: Consumers are particular about what brand they purchase and they stick to it in most of the cases. This stresses for a superior brand image and quality * Distribution system: Probably one of the most important, Effective distribution channels will not only help reduce costs but also helps a company remain competitive. * Size and Scale: Successful alternative beverage producers were required to have sufficient sales volumes to keep marketing expenses at an acceptable cost per unit basis. 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? Recommendations to Pepsi. * Pepsico have to launch a major image building campaign for the most promising products it has. * Pepsico also needs to develop its own energy shot brand try to convince Rockstar to add an energy shot to its distribution agreement. * In addition, Pepsi should negotiate for distribution rights to European and Asia-Pacific market with Rockstar or launch its energy drink brands in attractive international markets. * PepsiCo can expand its foot print and focus on other international markets in energy drinks for more international presence and to utilize the demand of a branded and standard product. * Red Bull is currently the number in the energy drinks category and they should really take advantage of that and come up with more product line extensions and more products so people can identify with that brand and try other products too. They should focus more on product innovation and product line extensions. Recommendations to Coca Cola * Coca cola should improve its product by innovating and building up good image to recapture the market share it lost in energy drinks category. * Coca cola should also try to create more rapid growth in vitamin-enhanced beverages and energy shots product. * Coke should focus on products and Branding efforts to gain market and regain lost market share in energy drinks * It should build up its strength in term of alternative beverage sales in by pursuing acquisitions and focus on building its strength of sales in Asia and react quickly to solve the problem of lacking competitiveness in the European market for alternative beverages. * Coca cola can use a combination of new flavors and formulations, brands, line extensions, improved image building, and distribution capabilities to increase sales of alternative beverages internationally. Recommendations to Red Bull GmbH * Redbull should improve the performance of its recently introduced energy shots and continue to expand into rapidly growing country markets for energy drinks. * It is necessary for the company to maintain its lead in the U. S. and European energy drink market with additional product line extensions based upon product innovation. * It should develop sports drinks or vitamin-enhanced beverages that can further exploit the appeal of the Red Bull brand 7. Using the data in Ex. 11, 12, 13 compare Pepsi, Coke, and Hansen. Who has been the most profitable? Who has better managed their expenses? Which business has shown the most growth? Which of the three would you give the strongest grade for their performance? * Using the data from Exhibit 11,12 and 13 for Coke, Pepsi and Hansen, Hansen seems to be the most profitable so far as it became the largest seller of energy drink in the US by leading most of alternative beverage categories. PepsiCo’s global market share in 2009 was 26. 5 percent, overcome by 11. 5 percent to Coca-Cola. The Coca Cola has better managed their expenses it was the third-largest seller of alternative beverage and in the top five best-selling non-alcoholic beverages worldwide in 2009. But they have lot of catching up to do. I would give the strongest grade for performance to Hansen for its market share, range of products, product innovation and distribution strategies. Hansen also managed to have higher revenue growth and higher cash flow growth. Net Revenue| 2007| 2008| 2009| CAGR| Pepsi| 39374| 43251| 43232| 3. 17%| Coca Cola| 28857| 31944| 30990| 3. 40%| Hansen| 904465| 1033780| 1143299| 4. 50%| | | | | | | | | | | Net Income| 2007| 2008| 2009| CAGR| Pepsi| 5674| 5166| 5979| 1. 76%| Coca Cola| 5981| 5807| 6824| 4. 49%| Hansen| 149,406| 108032| 208716| 11. 70%| | | | | | | | | | | Operating profit| 2007| 2008| 2009| CAGR| Pepsi| 7182| 6959| 8044| 3. 85%| Coca Cola| 18451| 20570| 19902| 2. 55%| Hansen| 230986| 163591| 337309| 13. 40%| The company growth rate analysis of the three companies in terms of revenue, income and profit show that Hansen has higher percentage of growth rate well above the industry average. Hansen has greater revenues in the industry segment and higher customer demand and financial success.