Assessing PepsiCo’s Standing in the Alternative Beverage Industry

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As PepsiCo’s earnings have lacked the growth that we would like to see, it is a necessity that we look at the different avenues for improving our sales. As much of Pepsi’s product line are brands that are well known to consumers who have already formed strong opinions as to their preferences in these markets, the growth potential for these products is limited. However, one market that does offer PepsiCo strong growth potential is the alternative beverage market. Therefore, we must examine how PepsiCo can assure that it stays ahead of the competition in this crucial market.

While the alternative beverage industry shows much promise, it has not been without its share of turbulence. The alternative beverage industry, like most industries, recently experienced a decline during the great recession. However, the alternative beverage industry was not impacted significantly harsher than the rest of the commercial beverage industry (Gamble, 2010). Yet Pepsi has lost market share in its beverage unit to Coca Cola and has continued to see declining beverage sales, even as the economy has seen signs of improvement (Tadena, 2013). This can be attributed in part to a continued overall decline in commercial beverage consumption, but we cannot deflect the blame entirely away from ourselves.

The moderately low barriers to enter the alternative beverage market have led to large shares of the market being taken by relatively new, independent manufacturers. However, most of these companies still rely on established beverage companies for the distribution of their product. The customers in the alternative beverage industry are too numerous to hold any monopsony power, but they are still price-sensitive (Wahlen, Baginski, & Bradshaw, 2010). Therefore, any change in the price of the product or the income of consumers could lead consumers to leave our products in favor of substitute products or leave the market altogether. The relatively low barriers to entry mean that substitute products pose a threat in markets that may not currently be competitive. Therefore, if we produce a product in a market that lacks a direct competitor and charge the profit-maximizing price, we risk enticing new entries, leading to long term losses of market share which may outweigh any additional profits we may have been able to make by charging the higher price.

As is the case with the consumers of the alternative beverage industry, the suppliers in the alternative beverage industry do not hold significant market power to pose a threat. Although some of PepsiCo’s suppliers may hold some market power when compared to the consumers in the alternative beverage industry, none of the products we require are exclusive to one supplier, so none could be said to hold monopoly power. Whatever market power any supplier may have is more than canceled out by the monopsony power held by PepsiCo (Wahlen, Baginski, & Bradshaw, 2010). Furthermore, none of the products used to produce any of PepsiCo’s alternative beverage products are exclusive to PepsiCo, so any sharp change in the price of any of our suppliers' products would likely be felt industrywide, reducing any long term impact that it would have on PepsiCo’s sales volume and market share.

One of the alternative beverage markets that PepsiCo has struggled to gain a foothold in the energy drink market. As the following strategic group map illustrates PepsiCo’s Amp Energy lags most of its competitors, even though it is among the lowest priced.

With a 40% share of the energy drink market, Red Bull is the most popular energy drink, costing 2.00 for an 8 oz. can, coming to 25 cents per ounce. With respective market shares of 27% and 8%, Monster and Rockstar are both priced at $2.50 for a 16 oz. can, coming to 15.625 cents per ounce (Pride & Ferrell, 2008). With respective market shares of 4% and 3%, the lowest-priced energy drinks are and Coca-Cola’s NOS PepsiCo’s Amp Energy, both costing 1.99 for a 16 oz. can, which comes to 12.4 cents per ounce. With a 3% market share, Starbucks’ DoubleShot costs 1.99 for a 6.5 oz. can, which comes to 30.6 cents an ounce, making Double Shot the priciest of the leading energy drinks. Finally, with a 2% market share, Coca-Cola’s Full Throttle costs 2.19 for a 16 oz. can, which comes to 13.7 cents an ounce (Gamble, 2010). The fact that Red Bull can charge a significantly higher price while remaining the market leader is an illustration of the high level of brand equity that they possess. The fact that DoubleShot can sell at a comparatively higher price is also a testimony to the brand equity held by Starbucks. Amp does not yet possess this level of brand equity and so we are forced to compete primarily based on price. However, this strategy has not yet yielded a satisfactory share of the energy drink market.

Considering our weakness in the energy drink market, action must be taken soon to strengthen PepsiCo’s standing in this crucial market. One possible solution is to acquire some of the alternative beverage brands that we distribute but do not own, such as Rockstar (Gamble, Thompson, & Peteraf, 2012). This would permit us to streamline and consolidate operations with related brands, eliminating redundancies, reducing costs and enabling both our existing brands and the brands we acquire to become more competitive.

One large market of the alternative beverage industry where PepsiCo is well-positioned is the sports drink market. The strength of PepsiCo’s Gatorade brand is illustrated in the following strategic group map. Among sports drinks, Gatorade and Powerade thoroughly dominate the market. With a 70% market share, PepsiCo’s Gatorade is the clear market leader, compared to Coca-Cola’s Powerade’s 28.5% market share. However, Gatorade has lost significant market share to Powerade in recent years (Pride & Ferrell, 2013). Gatorade and Powerade’s prices vary greatly based on region, although Powerade is generally the lower-priced brand. The sports drink market has long been very price competitive, with Gatorade discounting its product in areas where Powerade was being promoted (Etzel, Walker, & Stanton, 1997). Yet Gatorade continues to see growth in its sales volume and PepsiCo has taken a stand against any further significant discounting aimed at competing with Powerade solely based on price (MacArthur, 2011). This is a sound strategy, as Gatorade is a brand that carries with it a strong level of brand equity.

The fact that Gatorade has continued to experience growth in sales volume, even as Powerade has taken a larger share of the sports drink market and commercial beverages overall have declined, is evidence that Powerade’s growth is due to its low prices bringing new customers into the sports drink market. There is little evidence to show that Powerade’s growth is due to it stealing any of Gatorade’s loyal customers, though this does not mean we should become complacent. Just as Red Bull’s customers’ strong brand loyalty allows them to maintain a higher price than most of its competitors and continue to dominate the energy drink market, the brand loyalty of Gatorade’s customers should allow us to avoid engaging Powerade in a price war.

PepsiCo’s SoBe line of beverages spans a wide spectrum of beverage types, which places some of SoBe’s products in direct competition with other PepsiCo products. However, SoBe has a unique established customer base and a product that is significantly differentiated from other similar PepsiCo that the threat cannibalization is minimal (Hays, 2000). PepsiCo has increased SoBe Lifewater’s share of the vitamin-enhanced drink market by appealing to SoBe’s core demographics (Lamb, Hair, & McDaniel, 2013). This leaves an opening for PepsiCo to compete more directly with Coca-Cola’s VitaminWater brand by targeting demographics that prefer VitaminWater to SoBe Lifewater. One way that we can appeal to demographics that are not attracted to SoBe Lifewater is through our Aquafina brand. This can be accomplished by reviving the discontinued Aquafina Alive and Aquafina plus+ vitamin-enhanced water product lines, possibly using different names.

With alternative beverage leaders such as Gatorade, SoBe, and Amp Energy among Pepsi’s brands, PepsiCo has held the position as the global market leader among alternative beverage producers. Yet in 2012, Pepsi decided to focus its attention on our top 12 brands, of which only Gatorade is in the alternative beverage industry (Geller, 2012). By doing this we have neglected to focus on areas that offer the greatest opportunity for growth. While PepsiCo remains strongly positioned within the alternative beverage industry, this position is threatened if we do not give these markets the attention that they deserve. As the commercial beverage market evolves, PepsiCo cannot afford to focus on products that are in markets without long term growth potential.

References

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