Analysis of Case 5 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. About the market size, The worldwide total market for beverages in 2009 was $1,581. 7 billion. The sales of beverages in the U. S. during 2009 totaled nearly 28,859 billion gallons, with carbonated soft drinks accounting for 48. percent of industry sales and bottle water making up 29. 2 percent of industry sales. Sports drinks, flavored or enhanced water, and energy drinks made up 4. 0 percent, 1. 6 percent, and 1. 2 percent of industry sales, respectively, in 2009. The global market for alternative beverages in 2009 was $40. 2 billion (12. 7 billion liters), while the value of the U. S market for alternative beverages stood at $17 billion (4. 2 billion liters) in 2009. The market for alternative beverages in the Asia-Pacific region in 2009 was $12. billion (6. 2 billion liters) and the European market size in 2009 was $9. 1 billion (1. 6 billion liters). About the market growth rate, The dollar value of the global beverage industry had grown at a 2. 6 percent compounded annual growth rate between 2005 and 2009 and was forecasted to grow at a 2. 3 percent annual rate between 2010 and 2014. The dollar value of the global market for alternative beverages grew at a 9. 8 percent annual rate between 2005 and 2009, but was expected to slow to a 5. percent annual rate between 2010 and 2014. The U. S. had the strongest growth internationally in alternative beverage sales with an annual growth rate of 16. 6 percent between 2005 and 2009 and a forecasted growth rate of 6. 7 percent between 2010 and 2014. Europe and Asia-Pacific grew at annual rates of 5. 3 percent and 5. 6 percent, respectively, between 2005 and 2009 and were expected to grow at annual rates of 4. 4 percent and 5. 1 percent, respectively, between 2010 and 2014. However, poor economic conditions in the U.
S. in 2008 and 2009 led to a 12. 3 percent decline in sports drink sales and a 12. 5 percent decline in flavored and vitamin-enhanced waters sales between those two years. The poor economy also helped slow the growth of energy drink sales to just 0. 2 percent between 2008 and 2009. The global market for alternative beverages was segmented by product type (sports drinks, energy drinks, vitamin-enhanced beverages, energy shots, and relaxation drinks). with the demand in each segment varying significantly. In the U. S. sports drinks accounted for nearly 60 percent of alternative beverage sales in 2009, while vitamin-enhanced drinks and energy drinks accounted for about 23 percent and 18 percent of 2009 alternative beverage sales, respectively. Rivalry in the industry could be considered global, with the three largest sellers of alternative beverages worldwide competing in most international markets. However, there were hundreds of regional and specialty brands of alternative beverages brands that did not compete internationally. 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 bargaining power and leverage of buyers—a ________competitive force Convenience store, grocery store, and wholesale club buyers had considerable leverage in negotiating pricing and slotting fees with alternative beverage producers because of their large purchases. New brands or brands with low market shares were most vulnerable to buyer leverage since shelf space was limited.
Brands highly demanded by consumers such as Red Bull were almost always assured of shelf space. Coca-Cola and PepsiCo were least vulnerable since they offered a wide variety of beverages that convenience stores, grocery stores, and wholesale clubs wished to offer to consumers. As a result of Coke and Pepsi’s appeal with consumers, the two companies’ alternative beverage brands almost always found shelf space in retail stores. Delis and restaurants had low switching costs from brand to brand, but had less ability to negotiate for deep pricing discounts because of volume limitations.
The bargaining power and leverage of suppliers—a _______competitive force Students will easily conclude that suppliers to beverage producers have little leverage in negotiations and represent a weak competitive force. Packaging is readily available from many suppliers and is commodity like. It is possible that suppliers of ingredients available from only a few suppliers (such as taurine) would have a moderate amount of leverage in negotiations with energy drink producers. Additionally, the producers of alternative beverages are important customers of suppliers and buy in large quantities.
Competition from substitutes—a _______________ competitive force There were many substitutes to alternative beverages, including any other type of beverage (e. g. , tea, soft drinks, fruit juices, and bottled water) and tap water. Students are likely to suggest that other beverages represent a strong competitive force since there are many types of beverages that can satisfy one’s thirst. Consumers were familiar with substitute beverages and likely consumed substitute beverages on a regular basis.
In addition, and most substitute beverages sell at price pointss much lower than alternative beverages, which leads to switching if consumer income is limited. Threat of entry—varies by market maturity of each alternative beverage category ( _________ for mature categories and moderate to strong in young, emerging segments) The threat of entry in alternative beverage categories remained strong during the early stages of category development when no well-known brand leaders had been established.
For example, entrepreneurs launching new beverages with novel formulas or well-developed image campaigns could quickly build market share among consumers lacking any established brand preference who were drawn to the new beverage category. However, as the category matured, consumer preferences developed, which shaped retailers’ purchasing decisions. Once the category had established brand leaders, it became very difficult for new entrants to gain shelf space in convenience stores, supermarkets, and wholesale clubs.
Students should conclude that, in 2010, the threat of entry was low for all types of alternative beverages except energy shots and relaxation drinks. Rivalry among competing sellers of alternative beverages—a _________ competitive force that is likely to intensify Rivalry among the sellers of energy drinks and other alternative beverages is very strong and will only grow stronger in coming years. Competition among major brands centers primarily on brand image, an appealing taste, attractive packaging, new product R&D, sales promotions and endorsements, and gaining better access to shelf space and strengthening distribution capabilities.
As of 2010, there did not seem to be any evidence of strong price competition in any of the alternative beverage categories. The lack of price competition should make it difficult to argue that competitive rivalry is fierce or brutal. Factors that were acting to increase the strength of competitive rivalry included efforts on the part of industry rivals to expand the number and types of alternative beverages in their product lines, low switching costs on the part of consumers, active and aggressive efforts on the part of sellers to establish consumer brand loyalty, and a strong emphasis on advertising, sales promotions, and endorsements. . 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 include: ?Change in the long-term growth rate. While the effects of poor economic conditions that began in late-2007 had a strong negative effect on sales of sports drinks and flavored or enhanced water and have stalled growth in the market for energy drinks (see case Exhibit 2), 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—see case Exhibit 3. 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. Case Exhibits 5 – 7 present the volume and dollar value sales figures and estimates for the U.
S. , European, and Asia-Pacific geographic regions. ?Industry consolidation. Segments within the alternative beverage industry have consolidated as markets have matured and leaders have been established. For example, while 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 vitaminwater, and NOS, Full Throttle, Rehab, Vault, and TaB energy drink brands. In addition, Coca-Cola distributed Hansen’s Monster energy drink in parts of the United States, Canada, and six European countries. Product innovation. The alternative beverage industry is continuing to evolve with new product innovations that give rise to new beverage industry categories and niches. 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. It was undetermined in 2010 if the relaxation drink sub-segment would thrive or prove to be a short-lived fad. Drivers of change are unlikely to dramatically alter the attractiveness of the alternative beverage industry in the next 3-5 years.
Even with a slowing economy, there is no indication that the larger producers such as Red Bull GmbH, Coca-Cola, or PepsiCo are prepared to compete aggressively on price for volume and market share gains. It is more likely that these larger producers will rely on product innovations and acquisitions to increase sales and market shares. However, the individual and collective effect of industry drivers of change are likely to make the industry less attractive for lesser-known independent brands unless such companies gain a first mover advantage in the development of a new beverage category. . 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? If we have chosen to look at the size of producers’ brand portfolios and the scope of geographic distribution. Strategic group maps est that industry participants competing internationally with broad brand portfolios are positioned most favorably in the industry.
However, Red Bull GmbH has been quite successful marketing a single brand in Europe and the Americas. While Hansen Natural is technically a multibrand producer, it should be considered a dominant brand company since Monster energy drinks account for 90 percent of its sales. Hansen’s success is partly a result of its distribution agreements with Anheurser-Busch and Coca-Cola which give it broad retail coverage across the U. S. and parts of Europe. Similarly, Rockstar Inc. ’s success is heavily dependent on distribution by PepsiCo.
Companies with a single brand and regional or national distribution only (e. g. , Living Essentials, Vacation in a Bottle (ViB), Dream Water, or Drank) seem to be positioned most poorly in the industry. The current level of competition makes it doubtful that small regional producers will survive over the long-term unless acquired by a large international bottler. 5. What key factors determine the success of alternative beverage producers? Factors that are necessary for competitive success in the alternative beverage industry include: ?
Access to distribution. Access to distribution is the most important industry key success factor since brands of energy drinks/alternative beverages cannot achieve good sales volumes and market shares unless they are widely available in stores—there are far too many brands for all to be included on store shelves. Highly popular brands that enjoyed first mover advantages such as Red Bull and 5-Hour Energy and brands offered by Coca-Cola and PepsiCo were assured of consistent access to distribution. ?Product innovation skills.
Alternative beverages, by definition, were differentiated from traditional beverages based upon some product innovation. In addition, continuing product innovations were essential to developing additional volume gains from line extensions and the entry into new categories like energy shots. ?Brand image. Image was also a critical factor in helping consumers choose a brand. The image presented by the product’s name and emphasized in advertisements, endorsements, and promotions created demand for one brand over another. Brand image was also a result of labels and packaging that alternative beverage consumers found appealing.
Small producers with poor image building capabilities found it difficult to compete in the industry unless the product enjoyed a first-mover advantage similar to that achieved by 5-Hour Energy. ?Sufficient sales volume to achieve scale economies in marketing expenditures. 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?
While the market share of Hansen Natural Corporation’s Monster energy drink brand has grown from 15 percent in 2006 to 27 percent in 2009 because of its distribution agreement with Coca-Cola, the sales of Coke’s own brands of energy drinks have been lackluster. NOS’s market share has increased from 2 percent to 4 percent between 2007 and 2009, while Full Throttle’s market share had declined from 7 percent in 2006 to 2 percent in 2009—see case Exhibit 9. In addition, as shown in case Exhibit 10, the sales of Coca-Cola’s NOS Energy Shot amounted to only $11. 8 million in 2009 and had declined by 10. percent from 2008. In addition, the combined sales of Powerade, Full Throttle, NOS, Rehab, TaB, and Vault energy drinks; glaceau vitaminwater; and Fuze vitamin-enhanced dirnk fell just short of the sales of Red Bull energy drinks. While it may it may be unrealistic for Coca-Cola to seriously challenge Gatorade in the mature U. S. market for sports drinks, recommend that the company bolster its product innovations and image building efforts to regain lost market share in energy drinks and capture more rapid growth in vitamin-enhanced beverages and energy shots.
Coca-Cola should pursue the acquisition of Living Essentials’ 5-Hour Energy or at least enter into a distribution agreement with the company that would be patterned after its agreement with Hansen Natural Corporation. Coca-Cola should concentrate its efforts to build upon its strength in alternative beverage sales in Asia and act quickly to resolve its lack of competitiveness in the European market for alternative beverages. We would suggest that a combination of new flavors and formulations, brands, line extensions, improved image building, and distribution capabilities are needed to increase sales of alternative beverages internationally.
We would commend PepsiCo management on its strategy in the alternative beverage industry that has yielded number-one rankings for worldwide, U. S. and European sales of alternative beverages. As shown in case Exhibit 8, the company was also a close runner-up in the Asia-Pacific market for alternative beverages in 2009. Also, Gatorade held a commanding 75 percent share in the $1. 57 billion sports drink market and Propel and SoBe Lifewater were other best-selling alternative beverage brands. In addition, its distribution agreement with Rockstar, Inc. allowed it to offer the number-three brand of energy drink sold in the United States
However, PepsiCo’s strategy in the energy drink category of the alternative beverage industry outside of its distribution agreement with Rockstar, Inc. is questionable. Amp’s market share in the energy drink category has declined from 4 percent in 2006 to 3 percent in 2009 after rising briefly in 2007 and 2008. Also, the company’s DoubleShot energy drinks do not seem to be gaining any traction in the marketplace with a 3 percent market share in 2009. Also, the company did not offer an energy shot beverage in 2010 and it was unclear who well its new brands (Charge, Rebuild, Defend, and Bloodshot) would perform in the marketplace.
Students may recommend that the company launch a major image building campaign for whichever of its energy drink brands show the most promise. Students should also recommend that the company develop its own energy shot brand or encourage Rockstar to add an energy shot to its distribution agreement with the company. Even though PepsiCo has strong positions in the European and Asia-Pacific alternative beverage markets, its success in those markets comes more from the performance of Gatorade and SoBe since none of its energy drink brands appear to have any popularity outside the U.
S. and its distribution agreement with Rockstar, Inc. is for the U. S. and Canada only. We would recommend that the company negotiate for the European and Asia-Pacific distribution rights to Rockstar or launch its most promising energy drink brands in attractive international markets. Analysts believed that Europe, Australia, South America and the Middle East were attractive markets for energy shots. These markets might also be attractive markets for PepsiCo to pursue when seeking growth in international sales of energydrinks.
We are very impressed with Red Bull’s worldwide number-one ranking in the market for energy drinks, which made it the third-largest producer of alternative beverages worldwide and the number two seller of alternative beverages in the U. S. and Europe. We are also quite pleased with the company’s broad image building campaign that included wide-ranging sports team sponsorships, music event sponsorships, advertising, promotions, and its signature Flugtag events.
We would recommend that Red Bull GmbH should emphasize its need to improve the performance of its recently introduced energy shots and continued expansion into rapidly growing country markets for energy drinks. We also recommend that the company maintain its lead in the U. S. and European energy drink market with additional product line extensions based upon product innovation. And finally we also recommend that the company develop sports drinks or vitamin-enhanced beverages that can further exploit the appeal of the Red Bull brand.