PepsiCo and the Alternative Beverage Industry: Executive Summary

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Executive Summary

For more than 30 years, the five-force model of competition has been used as a tool when analyzing industry effectiveness, the possibility of an attractive level of profit and threats to such profitability. This executive summary will utilize the model in order to analyze PepsiCo and its place in the alternative beverage industry.

The alternative beverage industry is very large, with the numbers and types of new specialty or alternative beverages increasing daily. The influence of calls for curbing the purchase of so-called “junk food” has caused the sales of traditional soft drinks to plummet and the major soft drink manufacturers have turned to the alternative beverage industry, which mainly includes energy drinks, sports drinks, and vitamin-enriched drinks.

The industry in which PepsiCo produces and distributes its alternative beverages, including Gatorade, Propel, and RockStar, as well as bottled water Aquafina, coffee drink Frappuccino, and other specialty drinks, is vast and ever-changing. During the mid-2000s the industry grew very quickly, but more recently has seen a sales decline of 12.3%, during 2008-2009. This decline may be correlated with the worldwide economic recession, given that alternative beverages are not considered to be a necessary purchase, but rather a luxury. However, while vitamin-enriched drinks and sport drinks sales decreased, sales of energy drinks increased.

The five forces comprising the model are as follows: Threats of new entrants into the industry; industry rivalry; bargaining power of buyers; bargaining power of suppliers; and, the threat that buyers will turn to substitute products. The goal of this paper will be to identify the relevant competitive pressures associated with the five forces, to evaluate how strong the pressures are and, finally, to determine the impact of the collective pressures on profit potential, on the industry as a whole and specifically on PepsiCo. Following is an assessment of the five possibilities of threats to the industry as a whole and to PepsiCo in particular.

Threats From Rivals

In any industry with as many players as the alternative beverage industry, there is bound to be a significant rivalry. However, given that the prices of alternative beverages tend to be within a small range, most of the rivalry is addressed through enhancing brand and image, rather than lowering prices, as well as producing a product that is in some way unique, given the array of products on the shelves. Since demand for alternative beverages remains high, particularly for energy drinks, and since these products are often, although not always, impulse purchases rather than purchases made through brand loyalty, the opportunity to win market share from rivals is always present. This can be accomplished by serving new markets, both in terms of customers or geography, by expanding the company's product line, or by taking advantage of falling trade barriers in foreign markets. This is where global expansion has helped heir main rival, Coca-Cola.

For the industry as a whole, there are always threats from rivals and the threat is moderate to normal. However, while PepsiCo enjoys many advantages over rivals, particularly in the financial and distribution network sphere, it enjoys no such advantage as a brand. PepsiCo's alternative beverages are not marketed as being PepsiCo products; in fact, such marketing might even cause sales of a vitamin-enriched product, for example, to fall. Health-conscious adults might think twice about purchasing what they want to consider a healthy product from the company that makes Pepsi Cola.

There is also the issue of brand loyalty. The major buyers of energy drinks are male teenagers and young men in their twenties, a notably disloyal segment of the population. And, given that energy and sports drinks are purchased more for their physical impact than for their taste, it is likely that such consumers are easily convinced to purchase a new product on the shelf. The threat to PepsiCo from rivals is strong.

The Threat of New Entrants

The barriers to entry into this industry are low when considering the cost of capital equipment if that company already sells other bottled products. The main barrier to entry remains the need to build a distribution network, making it easier for a company that already distributes products to retailers of alternative beverages to access distribution channels. The competitive pressures from this threat are heightened by a large pool of possible entrants lured by attractive profits, and relatively low barriers to entry, and are mitigated by heightened buyer demand, and the ease of transitioning into a new geographic area or introduce a new product line.

On balance, the competitive pressure of the entry of new competitors is strong within the industry, particularly given the large number of companies already distributing bottled drinks. Those types of companies would not face high capital costs were they to enter the alternative beverage market.

The competitive pressure on PepsiCo from new entrants into the industry is medium to normal. As one of the largest companies marketing bottled drinks, including alternative beverages, PepsiCo has contracts with bottlers that prevent them from taking on any new, competing bottling contracts. This proscription will lessen the pressure on PepsiCo of new entrants into the industry.

Competitive Pressure From Sellers of Substitute Products

Practically all substitute products are cheaper than alternative beverages, so the cost of switching would be a gain for the consumer. However, since most buyers of alternative beverages purchase them for their physical impacts, the cost is not an important consideration. These consumers are unlikely to switch to tea, coffee, or soft drinks given their reason for consuming alternative beverages. The threat for both the industry as a whole and for PepsiCo of competitive pressure from sellers of substitute products is weak.

Competitive Pressure From Supplier Bargaining Power

There is strong competitive pressure from supplier bargaining power in parts of the supplier industry and weak pressure in other parts of the supplier industry. For example, there are numerous suppliers of cans, bottles, packaging, and sweeteners and distributors are able to obtain good deals on prices from these suppliers, who are in competition among themselves. However, there are few suppliers of the unique supplements used in many alternative drinks and in those cases the bargaining power of the supplier is enhanced.

Even with a field of few suppliers, PepsiCo enjoys a large advantage over smaller companies since the PepsiCo contract is likely an enviable one for a small supplier to secure and PepsiCo would, therefore, have a negotiating advantage. On the whole, the alternative beverage industry experiences competitive pressure from the bargaining power of suppliers that is moderate to normal, while PepsiCo experiences such pressure as weak.

Competitive Pressure From Bargaining Power of Buyer

The alternative beverage industry provides high margins to retailers, sometimes as much as 30%, and it is easier for large corporate entities to provide such margins than it is for new, small companies. There is, therefore, an advantage for the larger companies, such as PepsiCo, to secure shelf space and good product placement. However, as noted above, this market is fickle and disloyal, particularly for energy drinks. Therefore, the retailer will attempt to stock a broad and varied supply of alternative drinks and, to that end, may seek out the small distributor with the unique product over the large corporate conglomerate.

The threat from the competitive pressure from the bargaining power of the buyer, for the industry as a whole, and for PepsiCo, is moderate to normal. The key success factors for the alternative beverage industry are access to distributor networks and favorable displays, access to bottlers, and a favorable and well-known image and brand. PepsiCo has access to distributors and to bottlers and has a well-known image and brand. PepsiCo certainly has the budget to market its products, including its alternative beverages.

Yet, on one level, alternative energy products are antithetical to the long-held image of PepsiCo, as a soft drink company, and this presents a challenge to the company. It is on the marketing level that PepsiCo faces its most daunting challenges. Customers buy Rockstar because it is an energy drink, Gatorade because it is a sports drink and a PepsiCo distributed vitamin-enriched drink because that is the type of product they are seeking. The purchases are not made based on the brand or the company.

While Pepsico is one of the top two soft drink industry producers in the world, there are significant strategic challenges for PepsiCo's expansion within the alternative beverage marketplace. Development of the plan for PepsiCo going forward in the alternative beverage field must include two aspects: a consideration of the alternative beverage industry, PepsiCo's competitive environment, and the forces acting in its environment; and, PepsiCo's market position and competitiveness. Clearly, PepsiCo is a leader in the bottling industry. Yet it is less competitive in the alternative beverage industry, with strong threats from rivals and moderate to normal threats from new entrants and buyer's bargaining power.

PepsiCo might be well-served to use its superior financial and sales network capacities to develop and market truly unique alternative beverages in order to address these competitive disadvantages. Given that there is likely to be more brand loyalty to those drinks purchased by adults – sports conscious adults buying sports drinks and health-conscious adults purchasing vitamin-enriched drinks – it may be profitable to focus, in the long-term, on these types of drinks, not to the exclusion of the energy drink Rockstar but with more of a branding focus. In addition, given the falling sales of soft drinks, PepsiCo, which has so many other products, might consider moving its alternative beverage line of products to a higher priority than it currently is at, as well as considering the possibility of linked promotions, such as between a vitamin-enriched drink and a protein bar, also produced and distributed by PepsiCo.

The profit outlook for the alternative beverage industry, considering the five forces of competition, is high. There will, of course, be some challenges that even strong competitors like PepsiCo will need to face. It is always tricky to predict consumer behavior. The most popular energy drinks, for example, have evolved from full-size cans to “shots,” and the smaller cans present some supplier challenges, as any non-standard size can or bottle does.

There may be some regulatory challenges on the horizon, as questions about the actual benefits of vitamin-enriched drinks have been raised. Legal issues have also arisen over the impact of overusing energy drinks with resultant aggressive behaviors, particularly behind the wheel, so-called “road rage.” However, none of the five forces are likely to overcome the profitability of this industry nor of PepsiCo. The overall attractiveness of the industry and the competitive environment are very strong.