Energy drink is among the alternative beverages that have shown rapid growth in the beverage industry in the mid-2000s in the United States. As a response to the declining demand for carbonated soft drinks due to shifting consumer preferences towards beverages like energy drinks, sports drink, bottled water, fruit juices, ready-to-drink tea, vitamin-enhanced beverages, ready-to-drink coffee, and other types of beverages, PepsiCo had relied on these alternative beverages for its sustained growth in mature markets, and prospectively, market expansion for alternative beverages to emerging international markets.
In 2009, PepsiCo led in the beverage industry in most beverage categories other than carbonated soft drinks. In particular, PepsiCo’s bestselling energy drink brand is the Amp Energy. Other energy drinks bottled and marketed by the company include No Fear energy drinks, SoBe Adrenaline Rush energy drinks, DoubleShot Energy drinks, and Charge. Also, the company entered a distribution agreement with Rockstar to distribute Rockstar energy drink in Canada and United States. In 2010, the company ranked 4th among the largest food and beverage companies worldwide.
The task at hand is to provide an analysis of the United States’ and the global industry of alternative beverages. As the new member of the brand management department of PepsiCo, the task includes the determination of the strategic issues confronting the company and the alternative beverage brands, and to draw recommendations to address the issues. The discussion made use of Porter’s Five-Forces Model, PEST analysis, the key success factors, and drivers of change. Also included is a strategic group map.
There are several issues that are apparent in the alternative beverages industry in general and the energy drink segment in particular:
- The economic downturn in the United State made the consumers more price-sensitive especially in their purchases of food and beverages.
- While the alternative beverage segment of the industry offered opportunities for bottlers the poor economy had decreased demand for higher-priced beverages. The economy had impacted the sales of energy drinks however by only slowing the growth in the sales volume. Among all types of beverages, only energy drinks and ready-to-drink tea experienced volume growth between 2008 and 2009.
- Several researches have shown that alternative beverages have negative effects on health. For instance, there were criticisms that some energy drinks, energy shots and relaxation drinks present health risks to consumers, e.g., excessive consumption of energy drinks (have high caffeine content) could produce arrhythmias and insomnia, and mixing alcohol with energy drinks could mask the consumer’s level of intoxication and lead to increased risk-taking and other serious alcohol-related problems.
- The premium prices, high profit margins, and the rapid growth in the alternative beverage line-up of brands not only affects the existing beverage manufacturers but also entices the rise of new sellers that focus only on the production of alternative beverages.
- Energy drink segment reached maturity in 2009.
The analysis involves the use of Porter’s Five Forces model, characterization of the macro-environment, identification of the key success factors and drivers of change, and description of the dynamics of the alternative beverage industry.
Porter’s Five Forces Model. This model is used to ascertain the relative strength of each of the five forces that includes competitive rivalry in the alternative beverages industry, bargaining power of buyer, bargaining power of suppliers, threat of substitute products, and, threat of new entrants with focus on energy drinks. Michael Porter (1980) stressed that these forces equally affect the profitability of the industry since they shape the prices which can be charged, the cost which can be incurred, and the amount of investment needed to be able to compete in the industry.
- Threat of new entrants. Porter (1980) referred to new entrants as the firms that are not yet currently competing in the alternative beverages industry but have the potential if there is the opportunity. New players entering the industry increase the capacity of the industry, initiates competition for share in the market and decreases the current costs. In the alterative beverages industry in the US, high-premium prices and high profit margin were the forces that entices new entrants in the industry.
- Bargaining Power of Suppliers. Bargaining power of suppliers refer to the possibility of the suppliers to raise input prices like labor, raw materials, services, etc) or the cost of industry in other ways. The number of suppliers in the industry for alternative beverage is huge. These suppliers include the ingredient makers, manufacturers of aluminium cans, plastic bottles and caps, label printers and secondary packaging material. The competitive force of the bargaining power of suppliers is viewed as the weakest. For instance, packaging materials are readily available and producers of alternative beverages normally buy in large quantities. In this case, suppliers cannot influence the price for inputs.
- Bargaining Power of Buyers. The bargaining power of buyers is the possibility that the buyers of alternative beverages to negotiate lower prices or the potential that the cost to firm to increase by demanding better services and quality product. The bargaining power of buyers is a considerable competitive force. For one, the purchasing in large volumes by grocery stores, convenience stores and other large distributors enables these establishments to negotiate prices with alternative beverage producers.
- Threat of Substitute products. Substitute products refer to the goods that have the ability to satisfy the needs of the consumers effectively. Substitutes pose a ceiling on the potential returns of an industry by putting a limit on the price that companies can charge for their products in the industry Substantial competitive force is accounted with substitute products like bottled water, tea, fruit juices and soft drinks.
- Competitive Rivalry. The industry’s leading sellers of energy drinks are the Coca Cola, Rockstar, Inc., Red Bull GmbH,Hansen Natural Corporation (Monster Energy), Living Essentials (5-Hour Energy), and Energy Brands (originator of glaceau vitaminwater). In addition, there were hundreds of regional and specialty brands of energy drinks not only in the United States but also globally. These companies were privately held bottlers with distribution limited to either small geographic regions or specialty grocers and health food stores.
The rivalry among competitors is the strongest competitive force.
In alternative beverages industry, product innovation is very important since differentiation is the basis for competition. In particular, for energy drink, innovation in flavour, energy boosting properties and image are the key. Efficient distribution system is also important differentiation tool.
Macro-environmental characteristics. The macro-environment includes the political/legal, economic, social, technological, as well as international factors that have influence the environment of PepsiCo. The macro-environment characteristics are:
- Prevailing regulations on the content of energy drinks from the US Food and Drug Administration and similar agency in other country.
- The global beverage industry was projected to grow from $1.58 trillion in 2009 to approximately $1.78 by 2014 according to the projections published by Datamonitor as cited by Gamble (2010).
- The competition between the leading producers namely PepsiCo, Coca Cola and Red Bull in the beverage industry made the competition to become global.
- Steady growth in the purchasing power of consumers, especially in the developing countries.
- Market maturity in the carbonated soft drink segment.
- The poor economic condition in the United States and global economic crisis made consumers more sensitive to price changes.
- Increasing concern coming from health experts like physician and health professionals about the content and effect of alternative beverage intake.
- Medical researches influence consumer perception and preferences.
- Consumer preferences shifted from carbonated soft drink to alternative beverages. Hence, there is an increasing demand for alternative beverages.
- The consumers for alternative beverages differ in terms of age, job, and lifestyle.
- The fast development in technology affects the production and distribution system
- The Internet and Social Media affects marketing.
Industry dynamics. The global beverage industry was projected to grow from $1.58 trillion in 2009 to nearly $1.78 trillion in 2014 as producers of beverages enter new geographic markets, develop new kinds of beverages, and continue to create demand for popular drinks (Gamble, 2010 p. 76). Industry growth was expected to result from steady growth in the consumers’ purchasing power in the developing countries (saturation rate for all types of beverages was high in developed countries).
As consumer preferences shifted during the 2000s, sports drinks, energy drinks, and vitamin-enhanced drinks had grown to become important segments within the industry in 2010. In addition, such alternative beverages tended to carry high price points which made them attractive to both new entrants and established beverage like Coca Cola Company and PepsiCo. Energy drink pricing by volume might be as much as 400 percent higher than carbonated soft drinks (Gamble, 2010 p. 76).
Key Success Factors and Drivers of Change
The drivers of change in the alternative beverage industry were the product innovation, industry consolidation, and long-term growth. Innovation of products in the alternative beverage industry is a constant force, thereby allowing for the creation of new ideas, which in turn give rise to new beverage industry category and niche. The next driving factor is the consolidation of segments within the alternative beverage industry as markets reached maturity and market leaders are established. The rising market maturity for most categories of alternative beverages led to the projected long term growth.
Likewise, the key success factors in alternative beverages industry, and in the energy drink segment in particular are as follows:
Product innovation. Constant innovation of product is imperative in the alternative beverage industry. PepsiCo, though one of the leading company in the industry must keep up with the changing trends. This also implies that the company must be able to recognize the buyers needs and wants and have the ability to adjust with the changing market at the same time. Product Innovation may involve modifying product ingredient, flavour, packaging, or nutritional benefits. Apart from this, the improvement in the brand must not violate any of the country rules regarding the standard requirements for beverages, e.g., Food and Drug Administration (FDA) approved.
Segment. Choosing the right segment of the market to serve may be also a key competitiveness factor for PepsiCo. Big companies like PepsiCo have the capacity to compete in all segments, but the efficient strategy is to focus on one segment only.
Utilizing the distribution channels. In term of the use of the channels of distribution, PepsiCo has been dominating convenience stores. Establishing the effective channel would also be a key success factor in the industry for alternative beverages.
Brand image. One of the key to win the competition is choosing the right message and the media in communicating the brand. Likewise. establishing brand loyalty is very essential factor, hence PepsiCo must develop and maintain a superior brand image.
Price. As the consumers become more sensitive to prices, PepsiCo must set energy drink prices at competitive level. Also, global expansion become inevitable hence it must also be considered as a success factor.
Strategic Group Map
The strategic group map depicts the participants in the alternative beverages industry that are competing in terms in the of brand portfolio flavour, and and the geographic distribution. As shown in the strategic group map, producers of alternative beverages are competing globally, positioning their broad broad brand fortfolio very favourably.
The industry for alternative beverages is characterized by a market that have reached its mature state and the tight competition among so many players that compete in several segments. The players commonly compete in terms of product diversification, taste, ingredients, and price. It is recommended that PepsiCo be aware of the changes in the industry not only in the United States but in the whole world.
PepsiCo has to introduce a major image building campaign for its energy drink product lines which are the most promising.
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