Softdrink PROJECT

8/3/2019 Softdrink PROJECT

1/25


2/25

ACKNOWLEDGEMNT

Perseverance Inspiration and motivation have always played a key role in the

success of any venture. So hereby, it is our pleasure to record thanks and gratitude

to the people involved.

Firstly, we thankMR. R.K OJHA, for his continuous support in the project.

Prof. R.K OJHA was always there to listen and to give advice. He is responsible for

involving us in the project on Softdrink Industry in the first place. He showed us

different ways to approach a research problem and the need to be persistent toaccomplish any goal. Without his encouragement and constant guidance we could

not able to finish the project. He was always there to meet and talk about any query.

Last, but not least, we would like to thank all class mates and hostel mates who

support us throughout the project.


3/25

Introduction to Soft Drink Industry

The main production of soft drink was stored in 1830s & since then from those

experimental beginning there was an evolution until in 1781, when the worlds first

cola flavored beverage was introduced. These drinks were called soft drinks, only

to separate them from hard alcoholic drinks. The drinks do not contains alcohol &

broadly specifying this beverages, includes a variety of regulated companies that

manufacture carbonated soft drinks, diet & caffeine free drinks, bottled water

juices, juice drinks, sport drinks & even ready to drink tea/coffee packs. So we can

say that soft drinks mean carbonated drinks. Today, soft drink is more favorite

refreshment drink than tea, coffee, juice etc.


4/25

Raw Materials used in Soft Drinks

There are different types of raw materials used in different soft drinks. Most of the

raw materials are as under:

1. Water

The simple sweetened soft drink contains about 90% of water, while in diet drinks;

it contains 95% of water.

2. Flavour

Flavour is of great importance in soft drink. Even water from different places has

different taste. The flavour for taste added can be natural or artificial, acidic,

caffeine.

3. Artificial Flavour

These are the flavours manufactured from natural extracts; this is used to give

greater choice, in taste to consumers.

4. Acids

Acids like citric acid & phosphoric acid are added to give refreshing tartness or bite

& help in preserving the quality of a drink.

5. Natural Flavors

These are the flavors, which are extracted from fruits, vegetables, nuts, barks,

leaves etc. in soft drink containing natural flavors & fruit juice

6. Caffeine

Caffeine has special kind of taste makes the taste of soft drink a royal one. Caffeine

was added to soft drink from its introduction to a commercial market but now

caffeine free soft drinks are also available. Its quality is than compared with

same amount of coffee.


5/25

7. Carbon Dioxide

Carbon Dioxide is a colorless & smell less gas, which is added to cold drink to get

bubble & it also help in keeping drink strong & fresh

8. Colour

Along with taste of soft drink is also of very important, the company tries to

maintain both taste & colour of the soft drink everywhere in the world.

9. Sugar

Sugar syrup is added to the drink at around 75 degree C to the pure drinking water,

this is to make soft drink taste sweet. Even artificial sweetness is also use

Distributions of Soft Drinks


6/25

The soft drinks can be distributed on the basis of two concepts.

1. Distribution according to taste.

2. Distribution according to consumption.1. Distribution according to taste:

The soft drinks can be distributed in Cola & non cola taste. Non cola taste consist

of drink of orange, lime, mango etc. & lime taste can further divided in to cloudy

lime & clear lime.

Orange taste market is occupied by brands like Fanta, Mirinda Orange & Crush.

Mango taste market occupied by brands like Slice, Maaza, and Mangola.Cloudy

lime taste is occupied by brands like Limca, Mirinda Lime etc.Clear lime taste is

occupied by 7 UP, Sprite, Canada Dry etc. This is basically produced in green

bottle as sunlight spoils the taste of the drinks; its colour is transparent like water.

2. Distribution according to the consumption:

80% of soft drinks are consumed on the spot, where it is sold at place like cinemas,

railway stations etc. Other 20% of the market of soft drink is consumed at home or

other places

Soft Drink Production area in India

The market preference is highly regional based. While cola drinks have main

markets in metro cities and northern states of UP, Punjab, Haryana etc. Orange

flavored drinks are popular in southern states. Sodas too are sold largely in southern

states besides sale through bars. Western markets have preference towards mango

flavored drinks. Diet coke presently constitutes just 0.7% of the total carbonated

beverage market.

Types

Soft drinks are available in glass bottles, aluminum cans and PET bottles for home


7/25

consumption. Fountains also dispense them in disposable containers Non-alcoholic

soft drink beverage market can be divided into fruit drinks and soft drinks. Soft

drinks can be further divided into carbonated and non-carbonated drinks. Cola,

lemon and oranges are carbonated drinks while mango drinks come under non

carbonated category. The market can also be segmented on the basis of types of

products into cola products and non-cola products. Cola products account for nearly61-62% of the total soft drinks market. The brands that fall in this category are

Pepsi, Coca- Cola, Thumps Up, diet coke, Diet Pepsi etc. Non-cola segment which

constitutes 36% can be divided into 4 categories based on the types of flavors

available, namely: Orange, Cloudy Lime, Clear Lime and Mango.

Consumption of Soft Drink in IndiaIndia is one of the lowest soft drink consuming countries in the world. The per

capita consumption in India is 5 bottles per year, while highest consumption in

USA of 800 bottles per year. Delhi reports the highest per capita consumption in

the country 50 bottles per annum. The consumption of PET bottles is more in the

urban areas [75% of total PET bottle (plastic bottles) consumption] whereas the

sales of 200ml bottles were higher in the rural areas. Reports say that Lower, Lower

middle & upper middle class consume 91% of soft drink market. But even in india

The consumption diagram graph of soft drink is constantly growing from 1993 the

people of India consume only 0.7 lt/head, while in 1995 it increased from 0.7to0.93 lt/head, in 1997 it was 1.14 lt/head & in 2001 it was 1.62 lt/head.


8/25

1-131989-2001


9/25

Nature of Soft Drink Market

Oligopoly

Indian Soft-Drink industry in an oligopoly market. Coca-cola, Pepsi, etc are the

only producers. An oligopoly is a market dominated by a few large suppliers. The

degree of market concentration is very high (i.e. a large % of the market is taken upby the leading firms). Firms within an oligopoly produce branded products

(advertising and marketing is an important feature of competition within such

markets) and there are also barriers to entry.

Another important characteristic of an oligopoly is interdependence between firms.

This means that each firm must take into account the likely reactions of other firms

in the market when making pricing and investment decisions. This creates

uncertainty in such markets - which economists seek to model through the use of

game theory.

Economics is much like a game in which the players anticipate one another's moves.

Game theory may be applied in situations in which decision makers must take into

account the reasoning of other decision makers. It has been used, for example, to

determine the formation of political coalitions or business conglomerates, the

optimum price at which to sell products or services, the best site for a

manufacturing plant, and even the behavior of certain species in the struggle for

survival.

The ongoing interdependence between businesses can lead to implicit and explicitcollusion between the major firms in the market. Collusion occurs when businesses

agree to act as if they were in a monopoly position.

Key features of Oligopoly market

* A few firms selling similar product

* Each firm produces branded products

* Likely to be significant entry barriers into the market in the long run which

allows firms to make supernormal profits.

* Interdependence between competing firms. Businesses have to take into account

likely reactions of rivals to any change in price and output

Theories about oligopoly market


10/25

There are four major theories about oligopoly pricing:

(1) Oligopoly firms collaborate to charge the monopoly price and get monopoly profits

(2) Oligopoly firms compete on price so that price and profits will be the same as a competitive

industry

(3) Oligopoly price and profits will be between the monopoly and competitive ends of the scale

(4) Oligopoly prices and profits are "indeterminate" because of the difficulties in modellinginterdependent price and output decisions

The importance of price and non-price competetion

Firms compete for market share and the demand from consumers in lots of ways. We make an

important distinction between price competition and non-price competition. Price

competition can involve discounting the price of a product (or a range of products) to increase

demand.

Non-price competition focuses on other strategies for increasing market share. Consider the

example of the highly competitive UK supermarket industry where non-price competition hasbecome very important in the battle for sales

Mass media advertising and marketing

Store Loyalty cards

Banking and other Financial Services (including travel insurance)

In-store chemists / post offices / creches

Home delivery systems

Discounted petrol at hyper-markets Extension of opening hours (24 hour shopping in many stores)

Innovative use of technology for shoppers including self-scanning machines

Financial incentives to shop at off-peak times

Internet shopping for customers

PRICE LEADERSHIP IN OLIGOPOLISTIC MARKETS

When one firm has a dominant position in the market the oligopoly may experience price

leadership. The firms with lower market shares may simply follow the pricing changes prompted

by the dominant firms. We see examples of this with the major mortgage lenders and petrol

retailers.


11/25

Demand curve

Above the kink, demand is relatively elastic because all other firms'

prices remain unchanged. Below the kink, demand is relatively inelastic

because all other firms will introduce a similar price cut, eventuallyleading to a price war. Therefore, the best option for the oligopolist is to

produce at point E which is the equilibrium point and the kink point.

This is a theoretical model proposed in 1947, which has failed to receive

conclusive evidence for support.

Major Market Players

Coca Cola:

Coca-Cola India Pvt. Ltd maintains its leading position. Coca-Cola India

Pvt Ltd maintained its leading position in soft drinks in India, followed

by PepsiCo India Holdings Pvt Ltd in 2006. Whilst the retail volume

shares of Coca-Cola India and PepsiCo India slipped in 2006, as a result

of the growing health concerns caused by the aftermath of the pesticides

controversy, both maintained a comfortable lead over the other

manufacturers. Parle Bisleri Ltd has steadily gained shares from the

carbonates giants over the review period, to emerge as the third ranked

company in 2006. The battleground for beverages has moved from

carbonates to bottled water and fruit/vegetable juice, with manufacturers
http://en.wikipedia.org/wiki/Price_warhttp://en.wikipedia.org/wiki/Price_war


12/25

turning their attention towards these healthier beverages, as consumer

interest continues to surge forward. A number of new players have

entered fruit/vegetable juice and bottled water, vying for a slice of the

growing pie.

Future soft drinks growth to come from healthier beverages. Soft drinks

is expected to grow at a healthy pace over the forecast period. Much of

the demand for soft drinks is expected to be for healthier beverages. With

consumer preferences shifting towards healthier options worldwide,

India is following suit. A growing consumer awareness about healthier

soft drinks and the effects of the pesticides controversy mean that

consumers are likely to opt for healthier alternatives over the forecast

period. Thus, sales of carbonates are expected to stagnate over theforecast period while fruit/vegetable juice and bottled water are projected

to experience robust growth. Functional drinks and RTD tea are expected

to reproduce the dynamic growth of 2005-2006, albeit from a low base.

Pepsi:

Pepsi gained popularity following the introduction in 1934 of a 12-ounce

bottle. Initially priced at 10 cents, sales were slow, but when the price

was slashed to 5 cents, sales went through the roof. With twelve ounces a

bottle instead of the six ounces Coca-Cola sold, Pepsi turned the price

difference to its advantage with a slick radio advertising campaign,

featuring the "Pepsi cola hits the spot / Twelve full ounces, that's a lot /

Twice as much for a nickel, too / Pepsi-Cola is the drink for you,",

encouraging price-watching consumers to switch to Pepsi, whileobliquely referring to the Coca-Cola standard of six ounces a bottle for

the price of five cents (anickel), instead of the twelve ounces Pepsi sold

at the same price. Coming at a time of economic crisis, the campaign

succeeded in boosting Pepsi's status. From 1936 to 1938, Pepsi Cola's


13/25

profits doubled. Pepsi's success under Guth came while the Loft Candy

business was faltering. Since he had initially used Loft's finances and

facilities to establish the new Pepsi success, the near-bankrupt Loft

Company sued Guth for possession of the Pepsi Cola Company. A long

legal battle then ensued, with Guth losing. Loft now owned Pepsi, andthe two companies did a merger, then immediately spun the Loft

Company off.

In 1975, Pepsi introduced the Pepsi Challenge marketing campaign

where PepsiCo set up a blind tasting between Pepsi-Cola and rival Coca-

Cola. During these blind taste tests the majority of participants picked

Pepsi as the better tasting of the two soft drinks. PepsiCo took great

advantage of the campaign with television commercials reporting the testresults to the public.

In 1996, PepsiCo launched the highly successful Pepsi Stuff marketing

strategy. By 2002, the strategy was cited by Promo Magazine as one of

16"Ageless Wonders" that "helped redefine promotion marketing

Growth & Size of Market in India


14/25

Until 1990s, domestic players like Parle Group (Thumps Up, Limca,

Goldspot) dominated the soft drink market in India. However, with the

advent of the MNC players like Pepsi (1991) and Coke (re-entered in

1993 after it was banned in 1977) in the early 1990s, the market control

shifted towards them by the late 1990s.Last one century witnessed the

entry of various soft drink companies but only few of them were able tosurvive. The major among them are COKE and PEPSI. These are the

only two companies that has shared the whole market between them and

left a very small share for the remaining ones. This made the word cola

drink synonymous to the word soft drink. In the booming soft drinks

industry, multinationals seem to be the biggest winners in terms of

market share. The Coca-Cola Company led the highly consolidated

market with a 57% volume share, followed by PepsiCo at 41% in

2004. Danone is a minor player in India with a 0.5% share, chiefly due toits late market entry and limited offerings.
http://www.just-drinks.com/companies/danone_id135http://www.just-drinks.com/companies/danone_id135


15/25

PEPSI V/S COKE

Heralding the cut-throat summer competition in soft drinks, Pepsi said on

Tuesday that it has slashed prices of its 300 ml returnable glass bottles to

Rs 6 in the capital and this price cut may be extended to other markets to

make its brands more affordable.

However, Coca-Cola appears to have been caught on the wrong foot,

with its 300 ml pack still priced at Rs 8.

When contacted, Sunil Gupta vice-president (external), of Coca-Cola

India, toldPTI, "We're making no fresh comments on our pricing

strategy. Right now, our 300 ml pack continues to be priced at Rs 8."The

fresh price war, triggered by Pepsi, follows an earlier onslaught when

both the companies reduced prices by about 20 per cent across the board

just before the Union Budget for 2003-04, which provided them excise

duty relief.A Pepsi spokesperson said, "In a high-consumption

market like Delhi, aggressive price points devolving from the 300-ml

segment will work much better. Our price strategy for this market,

therefore, works off this thinking. As a consequence, 200-ml bottles are

priced at Rs 5. The new price points are 300 ml at Rs 6, and 200 ml at Rs

5."

According to industry sources, this sector is heavily dependent onreturnable glass bottles and Pepsi's latest price reduction strategy is

critical to drive volumes.


16/25

Sources said earlier this year, Coca-Cola had taken the price war head on

by introducing 600-ml PET bottles priced at Rs 12 each, beginning with

Maharashtra, one of Pepsi's key markets.

Pepsi, which was selling 500-ml PET bottles priced at Rs 15 each, was

caught on the backfoot and was forced to react, beginning with reduction

in prices of its 500 ml bottles to match that of Coke, the sources said.

Meanwhile, action may now shift to the 200-ml segment.

According to industry sources, Coke is offering Sunfill sachets priced at

Rs 2 each, free with 200-ml and 300-ml bottles, in some regional

markets. In effect, therefore, while Coke's price points for 200-ml and300-ml bottles remain at Rs 5 and Rs 8 respectively, the consumer is

being offered more for less.

In the home-consumption segment too, Coca-Cola took the lead earlier

this year by slashing prices of its 1.5-litre and 2-litre PET bottles.

Pepsi too reduced prices of its 1.5-litre and 2-litre PET bottles, to Rs 35

and Rs 40 respectively, against the earlier price of Rs 43 and Rs 50.

ANALYSIS: -

It can be inferred from the above article that

Coca-Cola and Pepsi are perfect substitutes

and hence the pricing strategy of one directly

impacts the demand for the other product.

Hence, the indifference curve of Coca-Cola

and Pepsi would be a straight line with equal

slopes across all points on the line.


17/25

Pepsi slashed the price of its 300ml bottles from Rs.8 to Rs.6, thusanticipating an increase in the demand and consumption of its product.

The same can be depicted by plotting the price elasticity of demand for

Pepsi. Pepsi reduced its price from P1 (Rs.8) to P2 (Rs.6), which would

result in an increase in consumption from Q1 to Q2.

Since, Coca-Cola and Pepsi are perfect

substitutes; an increase in consumption on

Pepsi would result in a proportionate

decrease in the consumption of Coca-

Cola. In order to maintain the balance and

not loose out on the market share, Coca-

Cola decided to offer Sunfill sachets

priced at Rs2. for free along with the 300ml bottle, thereby increasing theMarginal Utility of its product. This would also result in an increase in

the consumption of Coca-Cola. Thus, as Coca-Colas Marginal Utility

moved from MU1 to MU2, due to the value addition, so would the

Quantity move from Q1 to Q2.


18/25

However, since Pepsi reduced the price

of its 300ml bottle, it resulted in the

movement of the budget line, due to

which more customers will be prompted

to consume Pepsi instead of Coca-Cola.

As depicted in the adjoining figure,

since the price of Pepsi reduced, the

Budget Line of Pepsi and Coca-Cola, moved from B1 to B2. This

resulted in a further increase in the consumption of Pepsi from P1 to P2.

Hence, it can be concluded that the best way for Coca-Cola to counterthis would be by reducing the price of its 300ml bottle to match it to that

of Pepsis. This would be needed since Pepsi and Coca-Cola are perfect

substitutes.


19/25

Economic Indicators Relevant for this Industry:

The general growth of the economy has had a slight positive influence on

the growth of the industry. The general growth in volume for the

industry, 4-5 percent, has been barely keeping up with inflation andgrowths on margins have been even less, only 2-3 percent.

Economies of Scale:

Size is a crucial factor in reducing operating expenses and being able to

make strategic capital outlays. By consolidating the fragmented bottling

side of the industry, operating expenses may be spread over a larger sales

base, which reduces the per case cost of production. In addition, larger

corporate coffers allow for capital investment in automated high speed

bottling lines that increase efficiency (Industry Surveys, 1995). This

trend is supported by the decline in the number of production workers

employed by the industry at higher wages and fewer hours. This in

conjunction with the increased value of shipments over the period shows

the increase in efficiency and the economies gained by consolidation.

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. The best example of this is the "New Coke" fiasco of

1985. Coke reformulated its product due to test marketing results that

showed New Coke beat Pepsi 47% to 43% and New Coke was preferred

over old Coke by a 10% margin. However, Coke executives did not take

into account the good will created by the old Coke name and formula.

The introduction of New Coke as a replacement of Coke was met

by outrage and unrelenting protest by the public. Three months from the

initial launch of New Coke, management apologized to the public and


20/25

reissued the old Coke formula. Test marking shows that there is only a

small difference in actual product taste (52% Pepsi, 48% Coke), but the

good will created by a brand can have significant proprietary differences

(Dess, 1993). 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.

Learning Curve:

The shift in the manufacturing of soft drinks is gravitating toward

automation due to speed and cost. However, industry technology is low

and the manufacturing process is not difficult, therefore the learning

curve will be short and will have a low barrier to entry.

Access to Inputs:

All the inputs within the soft drink industry are commodity items.

These include cane, beet, corn syrup, honey, concentrated fruit juice,

plastic, glass, and aluminum. Access to these inputs is not a barrier to

enter the industry.

Proprietary Low Cost Production:

The process of manufacturing soft drinks is not a proprietary process.The methods used in the process are relatively standard within the

industry and the knowledge needed to begin production can easily be

acquired. This is not a barrier to entry.


21/25

Brand Identity:

This is a very strong force within the industry. It takes a long time

to develop a brand that has recognition and customer loyalty. "Brand

loyalty is indeed the HOLY GRAIL to American consumer product

companies." (Industry Surveys, 1995) A well recognized brand willfoster customer loyalty and creates the opportunity for real market share

growth, price flexibility, and above average

profitability (Industry Surveys, 1995). Therefore this is a high barrier

to entry.

Access to Distribution:

Distribution is a critical success factor within the industry. Withoutthe network, the product cannot get to the final consumer. The most

successful soft drink producers are aggressively expanding their

distribution channels and consolidating the independent bottling and

distribution centers. From 1978 to the present, the number of Coca-Cola

bottlers decreased from 370 to 120 (Industry Surveys, 1995). In

addition, 31.9% of the soft drink business is in supermarkets, where

acquiring shelf space is very difficult (Santa, 1996). This is a high barrier

to entry.

Expected Retaliation:

Market share within the industry is critical; therefore any attempt to

take market share from the leaders will result in significant retaliation.

The soft drink industry is a moderately mature market with slow single

digit growth (Industry Surveys, 1995). Projected growth rates are 4-5%

in sales volume and 2- 3% in margin (Crouch, Steve). Therefore, growth

in market share is obtained by stealing share from rivals causing

retaliation to be high in defense of current market position. This is a high

barrier to entry.


22/25

Access to Capital

The soft drink industry is very profitable and therefore looked upon

favorably by financial institutions. This includes the stock market, direct

investors (bondholders), and banks. Currently the operating margins for

the industry have grown from 17.9% in 1992 to 19.5% in 1996. Theprojected operating margins are projected to grow to 20.5% from 1997 to

2001 (Value Line 1996). The profit margins and demand are increasing

for the soft drink industry (Industry Surveys, 1995). What this means is

that capital is available for expansion or upgrading, if additional capital

is required. This is favorable to the industry.

Access to Labor

The industry is not highly technical except for chemical engineering.

This means that the demands for skilled labor are not very high. Which

means that the soft drink industry will not have trouble finding labor.


23/25

Elasticity of soft drink industry

The elasticity of soft drink industry as a whole is inelastic but when we

take the products individually it becomes elastic.

for example- in case of coca cola Because there are many alternative

brands for Coca Cola that have more or less the same taste. thus when

the price of coca cola rises, demand decreases because consumers will

find alternative brands that taste the same but at a lower price, therefore

demand is elastic. Demand for soft drink as a whole is inelastic because

whether or not the price increases/decreases, demand would not

decrease/increase by a whole lot, since it's the consumers' preferred

choice of drinks (just like milk is inelastic). Just because the price

increases, doesn't mean that consumers will start to drink water all the

time, they'll just drink less amounts of soft drink than usual (and vice

versa).

Individual elasticity curve


24/25

Soft drink industry elasticity curve


25/25

Conclusion:

Thus it can be concluded that soft drink industry in India is growing day by day.

According to our research we have observed that market share of Coca Cola ishigher than Pepsi in Indian market. Our study shows that the demand of certain

soft drink is more due to taste and preference than price. This industry works more

on volume than on margin, and advertisement plays an important role in this non-

price competitive industry.

Documents

Softdrink PROJECT