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A Guide to the Soft Drink Industry Acknowledgments

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A Guide to the Soft Drink Industry Acknowledgments BREAKING DOWN THE CHAIN: A GUIDE TO THE SOFT DRINK INDUSTRY AcKNOWLEDGMENTS This report was developed to provide a detailed understanding of how the soft drink industry works, outlining the steps involved in producing, distributing, and marketing soft drinks and exploring how the industry has responded to recent efforts to impose taxes on sugar-sweetened beverages in particular. The report was prepared by Sierra Services, Inc., in collaboration with the Supply Chain Management Center (SCMC) at Rutgers University – Newark and New Brunswick. The authors wish to thank Kristen Condrat for her outstanding support in all phases of preparing this report, including literature review and identifying source documents, writing, data analysis, editing, and final review.S pecial thanks also goes to Susanne Viscarra, who provided copyediting services. Christine Fry, Carrie Spector, Kim Arroyo Williamson, and Ayela Mujeeb of Public Health Law & Policy prepared the report for publication. PHLP would like to thank Roberta Friedman of the Yale Rudd Center for Food Policy and Obesity for expert review. For questions or comments regarding this report, please contact the supervising professors: Jerome D. Williams, PhD Prudential Chair in Business and Research Director – The Center for Urban Entrepreneurship & Economic Development (CUEED), Rutgers Business School – Newark and New Brunswick, Management and Global Business Department 1 Washington Park – Room 1040 Newark, NJ 07102 Phone: 973-353-3682 Fax: 973-353-5427 [email protected] www.business.rutgers.edu/CUEED Paul Goldsworthy Senior Industry Project Manager Department of Supply Chain Management & Marketing Sciences Rutgers Business School Phone: 908-798-0908 [email protected] Design: Karen Parry | Black Graphics The National Policy & Legal Analysis Network to Prevent Childhood Obesity (NPLAN) is a project of Public Health Law & Policy (PHLP). PHLP is a nonprofit organization that provides legal information on matters relating to public health. The legal information in this document does not constitute legal advice or legal representation. For legal advice, readers should consult a lawyer in their state. Support for this document was provided by a grant from the Robert Wood Johnson Foundation. © 2011 Public Health Law & Policy TABLE OF CONTENTS EXECUTIVE SUMMARY 5 Market Leaders 7 SOFT DRINK INDUSTRY OVERVIEW 7 Earnings 8 Product Segments and Major Market Brands 8 Major Markets 9 Future Outlook 10 Demand Determinates 11 OVERVIEW OF THE THREE MAJOR PLAYERS 12 The Coca-Cola Company 12 PepsiCo, Inc. 12 Dr Pepper Snapple Group 13 SUPPLY CHAIN OVERVIEW 15 Operating Model 15 Syrup Producers 18 Bottlers 19 Distribution Channels 20 MARKETING OVERVIEW 21 2008 Federal Trade Commission Study 22 Children’s Food and Beverage Advertising Initiative 28 Marketing Strategies 32 POLICY AND LEGISLATIVE AcTIONS IN RESPONSE TO THE SSB TAX 73 Current Events Regarding SSB Taxes 73 Public Support for SSB Taxes 75 Soft Drink Industry’s Internal and External Responses to SSB Taxes 75 CONCLUSION 81 www.nplan.org | www.phlpnet.org Breaking Down the Chain: A Guide to the Soft Drink Industry 3 APPENDIX 81 Appendix 1: Coca-Cola North America’s CBBB Pledge 82 Appendix 2: PepsiCo’s CBBB Pledge 86 Appendix 3: Product and Brand List for the Soft Drink Industry Leaders and Top Three Private-Label Brands 90 Appendix 4: Incidence of Purchasing Soft Drinks by Promotion Type, by Age 92 ENDNOTES 93 4 Breaking Down the Chain: A Guide to the Soft Drink Industry www.nplan.org | www.phlpnet.org EXECUTIVE SUMMARY This report was developed to give public health advocates a window into The Soft Drink the soft drink industry and reveal opportunities for intervention at various Supply Chain points of the supply chain, from production and distribution to marketing and sales. The report covers the main product lines of the industry: carbonated soft drinks, fruit beverages, bottled water, so-called functional beverages (including energy drinks and ready-to-drink teas and coffees), and sports drinks, across such powerful brands as Coke, Pepsi, Gatorade, and Snapple. We focus much of the discussion on the products that contain Syrup Producer caloric sweetener – known as nondiet beverages in the industry – as these products are of particular concern to the public health community. The soft drink industry is actually made up of two major manufacturing systems that, taken together, bring soft drinks to the market.T hese two systems fall into distinct categories: (1) flavoring syrup and concentrate manufacturing and (2) soft drink manufacturing. The supply chain is largely Bottler dependent on the syrup producer, as this is the driver for most downstream operations. The majority of the bottled soft drinks follow a similar product life cycle, moving from syrup producer, to bottler, to distributor (if used), to merchant, to final consumer.T he locations of the syrup manufacturers and the bottlers are closely linked to both the locations of strategic raw materials and major population centers in the United States and/or areas that see above-average temperatures, where demand for the soft drinks Distributor tends to be highest. Once soft drinks are bottled and ready for distribution, a variety of distribution channels are leveraged to get the final product to the end consumer. The industry as a whole faces challenges as a result of the slumping economy and changes in consumers’ consumption patterns due to increased health consciousness. Marketing is an important component of the industry chain, Merchant used to generate demand and build consumer loyalty. It has undergone a number of changes over the last five years due to efforts to reduce advertising directed at children, to introduce new types of media, and to update marketing messages for consumers who are looking for more healthful alternatives. Areas of growing interest for all industry players are the African-American and Hispanic markets, which have been identified as key consumers and Consumer growth markets. While the industry adapts to changes in consumption www.nplan.org | www.phlpnet.org Breaking Down the Chain: A Guide to the Soft Drink Industry 5 patterns and new forms of media, researchers are investigating the impact marketing practices and pricing tactics have on consumers’ consumption patterns. Research shows that marketing for any product plays a significant role in setting norms and encouraging behavior among children, and that young children and economically disadvantaged consumers are the most vulnerable to food and beverage advertising. In addition, research has found that when it comes to discouraging consumption of sugar-sweetened beverages (SSBs), a price increase is more effective than education interventions. The soft drink industry is also in the middle of a growing policy debate in the United States regarding the taxation of sugar-sweetened beverages. Surveys show mixed feelings about an SSB tax; a poll in New York City indicated more support if the proceeds went toward health-related initiatives. Meanwhile, the soft drink industry has responded strongly to proposed SSB taxes. Internally, the soft drink industry is responding with efforts to influence consumer behavior by introducing smaller-size packaging, encouraging active lifestyles, and looking into alternative, noncaloric sweeteners. Externally, lobbyist and other activist groups have successfully gathered support to defeat many of the proposed SSB taxes. Soft Drink Terms There are many overlapping terms used to describe soft drinks. In this report, we tried to remain precise and consistent with our terminology. In figures and tables, we occasionally deviate from these terms due to the terminology used by the original data sources. Here are some of the most common terms: Soft drink: any type of nonalcoholic beverage Fruit beverage: type of soft drink that either contains produced by a soft drink manufacturer; includes fruit juice or is fruit-flavored bottled water, but not tap water Juice drink: soft drink that contains juice and other Sugar-sweetened beverage (SSB): term used by public ingredients health advocates to describe a soft drink containing Fruit-flavored drink: soft drink that is flavored to taste caloric sweetener (e.g., sugar, high-fructose corn syrup) like fruit but does not contain juice Nondiet: refers to beverages that contain calories, Bottled: refers to beverages that are packaged in usually from an added sweetener bottles or cans Diet: refers to beverages with zero calories and Fountain: refers to beverages that are produced on usually sweetened with noncaloric sweeteners demand at a dispenser Carbonated soft drink (CSD): type of soft drink that is carbonated; includes both nondiet and diet soft drinks 6 Breaking Down the Chain: A Guide to the Soft Drink Industry: Section Name www.nplan.org | www.phlpnet.org SOFT DRINK INDUSTRY OVERVIEW The U.S. soft drink industry is composed of two distinct subindustries, by classification standards, under the manufacturing industry title (North American Industry ClassificationS ystem: 31–33). The first industry is the Flavoring Syrup and Concentrate Manufacturing Industry (NAICS: 311930), and the second is the SoftD rink Manufacturing Industry (NAICS: 312111). Flavoring Syrup and Concentrate Manufacturing Industry As of 2010, there were 151 companies in the U.S. soft drink industry that manufacture flavoring syrup concentrates, powdered concentrates, and related products for use in soda fountains or for manufacturing soft drinks.1 Their
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