Developing Operations in the Indian Soft Drink Industry

Introduction

The soft drinks industry in India forms a large fraction of the production, consumption, and export industry. It also has very promising growth projections. In an actual sense, India is endowed with a favorable policy environment and high demand for the young consuming class of citizens with increasing disposable incomes. As such, India presents reasonable investment opportunities in the soft drinks industry (Hofstede 1994).

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The world soft drinks consumption style is changing at an alarming rate. This is because consumer needs change with changing lifestyles. Consumers, more so in India, are increasingly getting informed about internationally established brands. With these new trends, manufacturers, retailers, and suppliers of soft drinks are re-energizing their businesses to meet the growing demands.

In India, the soft drinks industry is ranked third in the packaged food industry immediately after tea and biscuit. The total export earning from soft drinks is estimated to well over EUR 1250 mn per annum. The common soft drinks in India include colas, lemonade, squash, Limca, Mirinda, 7Up, and fruit punch (Budd & Hirmis 2004). As expected, the urban population in India consumes more soft drinks than their rural counterparts.

Industry Trends

The common trends in the soft drinks industry in India are that it provides growth opportunities to the companies, including a bigger focus on innovations, creativity, and most importantly, new product developments. Also, it facilitates a shift in consumer trends in consumption patterns where the consumers are keen on getting quality products that have both convenience and value. It has also improved the rate of growth of opportunities in foreign markets (Culberson 1986). With increasing attention on the rate of water usage and energy conservation, sustaining a position in the market amidst the competition is very critical.

In India, the two key industry players in the soft drink segment are; Tropicana and Real. Real has a bigger market share of 55-60% hence the market leader. On the other hand, Tropicana comes in second with an estimated share of 30-35%. There also exist several other regional brands although the industry is largely an unorganized sector. The Juice sub-sector is the highest expanding subsector at present, estimated to be growing at a rate of 20-25% p.a.

The fruit drinks category has also been experiencing growth of about 5% p.a. The major reason for this growth is the change of consumer preference from the carbonated to the non-carbonated soft drink sector. This has been boosted by increasing health awareness among consumers and the pesticide traces issue relating to Coke and Pepsi.

The profitability of the soft drink industry in India

A thorough industry evaluation through Porter’s National Diamond model shows that market forces are favorable. This has resulted in an increased level of profits in the soft drink industry in India. In essence, the producers and bottlers have been making good profits over time. In most cases, they work together. Concentrated producers are at times involved in bottling and promotional activities. Both are also known to have the same suppliers and consumers.

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The new entrance in the Indian soft drink market would threaten not just the concentrated producers but also their associated bottlers. This is large because of operational overlap and some characteristics of the market environment. The soft drink industry is known for the generation of positive economic profits.

Porter’s National Diamond for soft drinks in India

According to Michael Porter’s National Diamond model, four basic forces can be considered in making a new entrance in the Indian soft drink economy namely;

Factor Conditioning

The recent technological advancement in India serves a big role in the processing of soft drinks. There is also huge skilled manpower available to operate modern equipment. The capital necessary since excess production is easily available (Porter 1990). The technological environment includes knowledge based on scientific discoveries, innovations, and inventions. However, major discoveries can have significant marketing implications since they can drastically change the industry.

Besides technological innovations, companies also try to ensure that the development process of such innovation is achieved within the shortest time possible to trickle down the resulting benefits to the clients, and for them to keep pace with their competitors. Companies in this industry are spending millions of dollars to develop their products in a bid to ensure that they maintain appeal to their clients.

International marketers need the technological environment particularly for gathering crucial information. The internet and information technology have significantly revolutionized the way business is done. A firm that intends to trade internationally should be conversant with the technological environment of the country it intends to trade with, considering that certain countries are technologically advanced than others.

The technological development of the pets care products manufacturing sector in India is dependent on factors such as the investment climate. There have been major structural changes since the 1990s which has seen considerable progress in pets care products manufacturing and distribution. Although there have been major challenges recently, the progress of the reform India is significant and much development is dissected. Nonetheless, the long-term competitiveness of India pets cares firms is mainly dependent on production efficiency and the ability to import, develop, and adopt new technology.

The intensity of the rivalry

The Indian soft drink industry is highly competitive; there is a big number of large-scale players. This means big internal competition among the industries. High levels of earnings are concentrated in the soft drink industry. Coke and Pepsi, as well as other associated bottlers, do control 73% of the case market. In a real sense, one can rightly characterize the soft drink industry in India as an oligopoly, or as a duopoly of Coke and Pepsi, giving birth to positive economic profits (Aiginger 2006).

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At some point, there existed almost unhealthy competition between Coke and Pepsi for market share; this affects profit margins negatively. A good example is the price wars that gave birth to weak brand loyalty from consumers and had an effect of declined margins for the two companies in the 1980s.

Local demand condition

The urban population of India is high and is on the rise, which forms a potential market for the soft drinks industry (Porter 2008). External partnerships also provide additional demand for products of soft drinks nature.

Competitiveness of related and supporting industries

Most soft drinks processing firms engage in partnership agreements with other firms. This provides good opportunities for high production in soft drinks firms.

About porter’s (1990) theory, India is endowed with factor conditions such as human resources. Recent UN research revealed that the population of India is rising significantly and now, India is the second-most populous nation after China with a population of 1.21 billion people where life expectancy in India is 65.77 years for males and 67.90 for female. The country of India has the largest population of Hindus, Zoroastrians, Jains, and Sikhs.

This nation is the home of the largest Muslim population through the distribution of religion varies from one territory to another (Pasricha 2006). The population patterns show that the labor ability is increasing while the cost of the elderly is on the decline. Over thirty percent of the Indian population is under 35 which means that a big proportion of the population is economically productive. Another factor condition in India is knowledge resources. The soft drink industry is successful partly because of a good education. Education on production engineering builds strong manpower for soft drinks production plants.

Other factors to consider when venturing into the India market

Substitutes

A new entrant should also be familiar with soft drinks substitutes available in the Indian market. In the early 1960s, the soft drink was taken to mean “colas” in the mind of most consumers. Soft drink companies commonly form alliances and acquisitions to take advantage of internal popular substitutes.

Power of Suppliers

Over a long period, most soft drinks have been using sugar, primarily as their input product. Sugar can be readily available from a range of sources in the open market. Whenever sugar prices escalate, soft drinks processing firms turn to corn syrup, as it was in the early 1980s. In this case, producers of nutritive sweeteners lack much bargaining power against soft drinks products or even their bottlers.

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Supply of cheaper aluminum since the early 1990s has been significant, with the majority of the can producers battling it out with the soft drink bottlers. However, suppliers of the can had lesser supplier power. The large number of firms bidding for bottlers’ contracts results in favorable negotiations by the processors of soft drinks. When dealing with the plastic bottle business, the suppliers proved yet again to be more than major contracts.

Power of buyers

Most of the soft drink products follow five key channels through which they reach the consumers. These include food stores, fountains, vending, mass merchandisers, and convenience and gas. Supermarkets are key customers for soft drink products, though they prevail in a highly fragmented market. The supermarkets rely on soft drinks to achieve consumer traffic and hence record-high sales levels. On the other hand, their significant level of fragmentation results in an extremely high level of fragmentation with the biggest chain commanding 6% of food retail sales, and more than 25% of a region.

Fountain sales channels are however the lowest in profitability when it comes to the distribution of soft drinks. The profitability level at fountain sales point is so low that soft drink producers consider this channel as a paid sampling (Timothy & Geoff 1997). This is largely brought about by the fact that buyers at major fast-food chains just put to stock the products of one manufacturer to enhance negotiations for higher prices. For soft drinks producers, these channels are viewed as important for enhancing the creation of brand recognition and customer loyalty.

In real practice, there are few or at times no buyers to sell to at these locations. As such, soft drinks bottlers sell directly to consumers by hiring the services of machines owned by bottlers. The machine owners are therefore paid a sales commission on soft drinks products that reach the consumer through machines on their property. In this case, they get incentives that are properly aligned with those of the soft drink processors, making the prices remain high.

Industry changes

The soft drink industry in India has been affected by external environmental factors of the industry that often causes some change. There have been entrances and constant exits of major firms, a trend in the industry that is likely to result to change. In more specific terms, merger and consolidation have been witnessed in the soft drinks market. Most major companies have been seeking to increase revenue growth and improve market share by taking advantage of increased economies of scale through mergers and acquisitions.

Conclusion

It is extremely challenging for a soft drink company to enter the Indian market. Any new industry would need to overcome the grounded and strong marketing muscle and market presence of established brand names that have been in existence for over a century now. Many of the companies that have strong grounds in this industry have established strong relationships with their distributors and hence guarding theory market positions. Although the soft drink industry does not demand a lot of capital during the market entry, entering the bottling sector requires high capital investment, hence preventing new market entrants from venturing into the soft drinks business (Levitt 1983).

Another major soft drink market entry hindrance is the established and exclusive territories that products are distributed. This has made it extremely difficult for new with their carries a very significant market share of the soft drink industry. The major driver for competitive success within the soft drink industry originates from the trends of the business macro environment. In essence, continuous product innovation is indispensable. A company needs to identify consumer wants and needs, and still retain the ability to adjust to the changing market conditions (Murray 2006).

Recommendations

Pricing

The Indian soft drink industry can be referred to as a mature market. The determinant of the industry sales growth is mainly a product of population increase and the extent of product publicizing and product innovation going on in the industry. Due to the mature nature of the market, a new market entrant must adopt pricing discrimination strategies to increase the value of consumer demand and hence increase sales level. A good avenue of getting the best from customer surplus is offering different prices to different customers based on their location and purchasing power (Ohmae 1989).

When offering different prices to customers, it can be based on distribution channel segmentation. Fountain drinks offered in restaurants, single drinks at gas stations, and carry-home packs sold in supermarkets carry different prices on a one-unit basis. This is the case even though their costs adjusted for packaging and distribution cannot give room for such a difference (Yip & Loewe 1988).

The company that intends to enter this market can target the restaurant customers because they are seen as the most price-insensitive consumers. On the same note, one-drink buyers at gas stations are most often impulse buyers and hence are less sensitive to prices as compared to the weekend family shoppers’ common in supermarkets who buy soft drinks in bulk for home consumption (Jing & Rug man 2007).

Complements

A new entrant can consider providing complimentary products especially those used together with soft drinks. There are several areas where complements can be provided by the firms in the soft drinks industry. These include products that are served with soft drinks, places where soft drinks are sold, and inputs and the product distribution channels (Jing & Rug man 2007). Goods that are used together with soft drinks may include items such as salty snacks, candy, vegetables, ice cream, ice, cups, or even coolers. A new entrant can venture into these products too (Jing & Rug man 2007).

Profitability levels in the soft drink industry are expected to remain high in the foreseeable future. However, the level of market saturation and more so in India is thought to experience a slight deceleration in growth. This is the reason why soft drink leaders are considering venturing into alternative markets such as the snack, confections, bottled water, and sports drinks industries (Murray 2006). It is evident that to venture into a new market in India and grow, a company needs to diversify its product and other market offerings.

It is also a recommendation that a new entrant company seeks ways and means to improve their brand loyalty to the Indian population. Extensive advertising campaigns can assist in building brand loyalty. Customers’ brand loyalty is important because it will allow the new company to increase profits and increase its market share.

Critical evaluation of Porter’s National Diamond

Porter’s (1990) diamond of competitiveness measures the quality of inputs such as inflows that companies obtain from a particular market. The variables internal to the firm are used to measure the sophistication of the firm’s strategies. The international competitiveness of the industry of any country can be better understood by the employment of porter’s diamond model. The industry technology, material conditions, and support from the related industries are the main determinants of the competition potential.

Factor endowments and the country’s resources are the determinants of the material conditions. The growth of the industry is largely determined by the provision of raw materials and transport among other factors that involve support from other industries. The competitive potential is highly reliant on the industry technology support. When experiencing similar products’ rivalry in the international market, the industry’s first production efficiency can be improved by a powerful industrial technology while at the same time gain an advantage in price.

The macroeconomic situation together with the market structure encompasses the competitive conditions. Porter (1990) provides that the competitiveness of the macroeconomic conditions and international industry can be used to improve fierce market competition hence creating the opportunity for the industry to develop from outside.

This model introduces bias when used for analysis because it has a management of science point-of-view and uses study-specific economics theoretical tools. This means that induction and qualitative description are the basis of the results hence making it hard to establish quantifiable targets in a particular flame work. Evidence of national competitiveness from across the world is used to provide evidence for the national diamond theory, in which specific characteristics of specific countries are not included.

The national environments under which the competing firms thrive are described by porters’ diamond. However, the description is made without consideration of national culture which is a critical part of the national environment. Authors such as Lindkvist (1988) have described the impact of national culture on the national environment which reflects the importance of including it in the porters’ diamond as an influence on nations’ competitive advantage. Although porter points out the importance of national culture, he fails to include it in his national environment framework. To emphasize the importance of national culture to the country’s competitive advantage, the national culture should be incorporated in porter diamond theory in the same way as Stede (1980).

All in all, porter’s diamond model is advantageous because it makes consideration of the firms’ central factors such as resources and capabilities which are essential in formulating its strategy. These are the basic factors that a firm can frame its strategy and establish its identity. Strategy formulations based on resources of the firm required understanding of the relationship between capabilities, resources, and profitability and competitive advantage-specifically identifying how competitive advantage can be sustained with time. This calls for strategies that can lead to optimum exploitation of a firm’s unique nature, similar to what porters’ model proposes.

Unlike the traditional economic theories which cite location, land, natural resources, population, and labor as the competitive advantage determinants, Porter’s Diamond Model is more practical in the approach it takes in considering factors such as conditions of demands for products, factor conditions, related supporting industries and the structure, rivalry, and strategy of the firm. The Diamond Model theory is therefore unique as it shows that natural endowment factors are not a must for a country to achieve competitiveness in a certain market.

References

Aiginger, K 2006, ‘Competitiveness: from a dangerous obsession to welfare creating ability with positive externalities’, Journal of Industrial Trade and Competition, Vol. 6, pp. 63–66.

Budd, L & Hirmis, AK 2004, ‘Conceptual framework for regional competitiveness’, Regional Studies, Vol. 38, no. 9, pp. 1015–1028.

Culberson, J M 1986, ‘The folly of free trade’, Harvard Business Review, Vol. 64, no. 5, pp. 122–128.

Hofstede, G 1994, ‘The Business of International Business is Culture’, International Business Review, Vol. 3, no. 1, pp. l-14.

Jing, L & Rug man, A 2007, ‘Real options and the theory of foreign direct Investment’, International Business Review, Vol. 16, pp. 687–712.

Levitt, T 1983, ‘The globalization of markets’, Harvard Business Review.

Lindkvist, L 1983, ‘The cultural diversity of western conceptions of management,’ International studies of management, Vol. 13, pp. 1-2.

Murray, B 2006, Carbonated beverages. Web.

Ohmae, K 1989, ‘Managing in a Borderless World’, Harvard Business Review, Vol. 67 no. 3, pp.152-161.

Pasricha, A 2006, ‘India’s Communist Parties Slow Pace of Economic Reform.’ VOA News, 2006.

Porter, M 2008, ‘The five competitive forces that shape strategy’, Harvard Business Review, Vol. 86, no.1, 78-93.

Porter, M 1990, ‘The Competitive Advantage of Nations,’ Harvard Business Review.

Stede, K 1980, Culture Consequences, Sage publications, Beverly Hill.

Timothy, C & Geoff, M 1997, ‘The Process of Internationalization in the Operating Firm’, International Business Review, Vol. 6, no. 6, pp. 605-623

Yip, G & Loewe, P 1988, ‘How to take your company to the global market’, Columbia Journal of World Business, Vol. 12, no. 2, pp. 145.

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