IBS Executive Batch 2009-10 Pricing Strategy for Soft Drink Industry Submitted to: Submitted By: Amit Kumar (09ESHYD003) Ashwin Bhadviya (09ESHYD008) Deepa Patnaik (09ESHYD012) Jinson Rajgopalan (09ESHYD016) A Project for Accounting for Decision Making Table of Contents Introduction .................................................................................................................................................. 3 Entry Barriers in Soft Drink Market .......................................................................................................... 3 SWOT Analysis: ......................................................................................................................................... 4 Various Cola Brands Products Available: ............................................................................................... 5 Pricing Strategy .......................................................................................................................................... 6 Coke – Price ............................................................................................................................................ 6 Pepsi – Price ........................................................................................................................................... 6 Pricing strategy for Buyer and Suppliers ................................................................................. 6 Effect of Competition and Price War on Industry Profits:......................................................... 7 Pricing Strategy Used for Market Capitalization: ..................................................................... 7 Penetration Pricing: ................................................................................................................ 8 Conclusion: .................................................................................................................................................. 9 Soft drink Industry Introduction The soft-drink industry comprises companies that manufacture nonalcoholic beverages and carbonated mineral waters or concentrates and syrups for the manufacture of carbonated beverages. Soft drinks are available in glass bottles, aluminum cans and PET bottles for home consumption. Non-alcoholic soft drink beverage market can be divided into fruit drinks and soft drinks. Soft drinks can be further divided into carbonated and non-carbonated drinks. Cola, lemon and oranges are carbonated drinks while mango drinks come under non carbonated category. Cola products account for over 60% of the total soft drink market and include popular brands such as Coca-Cola, Pepsi, and Thumps up etc. Non-cola segment constitutes for over 35% of the market. Until 1990s, domestic players like Parle Group (Thumps Up, Limca, Goldspot) dominated the soft drink market in India. However, with the advent of the MNC players like Pepsi (1991) and Coke (re-entered in 1993 after it was banned in 1977) in the early 1990s, the market control shifted towards them by the late 1990s. The per capita consumption of soft drinks in India is among the lowest in the world - 5 bottles per annum compared to the 800 bottles per annum in the USA. Delhi reports the highest per capita consumption in the country – 50 bottles per annum. The consumption of PET bottles is more in the urban areas [75% of total PET bottle (plastic bottles) consumption] whereas the sales of 200ml bottles were higher in the rural areas. According to a survey, 91% of the soft drink consumption in India is in the lower, lower middle and upper middle class section. Last one century witnessed the entry of various soft drink companies but only few of them were able to survive. The major among them are COKE and PEPSI. These are the only two companies that has shared the whole market between them and left a very small share for the remaining ones. This made the word cola drink synonymous to the word soft drink. We will basically focus on the pricing strategies adopted by these two affluence companies, how the change in the strategy of one of them reflects in the strategy of the other. Entry Barriers in Soft Drink Market Before coming on to the core topic of price strategy, we will discuss what are the factors that made the soft drink market a duopoly market. The several factors that make it very difficult for the competition to enter the soft drink market include: The factors that made the duopoly soft drink market and that make it very difficult for the competition to enter the soft drink market include: Network Bottling: Both Coke and PepsiCo have franchisee agreements with their existing bottler‟s who have rights in a certain geographic area in perpetuity. These agreements prohibit bottler‟s from taking on new competing brands for similar products. Also, with the recent consolidation among the bottler‟s and the backward integration with both Coke and Pepsi buying significant percent of bottling companies, it is very difficult for a firm entering to find bottler‟s willing to distribute their product. The other approach to try and build their bottling plants would be very capital-intensive effort with new efficient plant capital requirements in 2009 being more than $500 million. Advertising Spend: The advertising and marketing spend in the industry is very high by Coke, Pepsi and their bottler‟s. This makes it extremely difficult for an entrant to compete with the incumbents and gain any visibility. Brand Image / Loyalty: Coke and Pepsi have a long history of heavy advertising and this has earned them huge amount of brand equity and loyal customer‟s all over the world. This makes it virtually impossible for a new entrant to match this scale in this market place. Retailer Shelf Space (Retail Distribution): Retailers enjoy significant margins of 15-20% on these soft drinks for the shelf space they offer. These margins are quite significant for their bottom-line. This makes it tough for the new entrants to convince retailers to carry/substitute their new products for Coke and Pepsi. Fear of Retaliation: To enter into a market with entrenched rival behemoths like Pepsi and Coke is not easy as it could lead to price wars which would affect the new comer. SWOT Analysis: Strength: Pepsi Coke PepsiCo brands enjoy a high-profile global presence Coke brands enjoy a high-profile global presence Pepsi owns the world‟s 2nd Best-Selling Soft Drinks brand Four of the top five leading brand Constant product innovation Broad-based bottling strategy Aggressive marketing strategies using famous celebrities 47% of global volume sales in carbonates Weakness: Pepsi Coke Carbonates market is in decline Carbonates market is in decline Pepsi is the strongest in North America Over-complexity of relationship with bottlers in North America They only the target young crowd Execution ability Opportunities: Pepsi Coke Increased consumer concerns with regard to drinking Soft drinks volumes in the Asia-Pacific region forecast to water increase by over 45% Growth in the functional drinks industry Brands like Minute Maid Light and Minute Maid Premium Heart Wise are positioned well with the “Health-concerned” market Growth in RTD Tea , Asian Beverages and Healthier Use distribution strengths in Eastern Europe and Latin Beverages America Threats: Pepsi Coke Obesity and health concerns Growing "health-conscience" society Coca-Cola increases marketing and innovation PepsiCo‟s Gatorade, Tropicana and Aquafina are stronger spending to $400M globally brands Relying only on North America. Boycott in the Middle East. Protest against coke in India. Various Cola Brands Products Available: Coca Cola Pepsi Limca (1971) Teem (1960) Sprite (1999) Mountain Dew(1964) Low calorie cola Tab (1963) Diet Pepsi (1964) Diet Coke (1982) Lemon Lime Slice (1984) Caffeine free coke (1983) Caffeine Free Pepsi Cola (1987) Coca-Cola classic (1985) Sierra Mist (2000) New Coke (1985) Mountain Dew Code Red (2001) Cherry Coke (1985) Pepsi one (2005) Thums Up (1977) 7 up (1984) Kinley (2001) Aquafina (2001) Fanta (1993) Mirinda (1993) Maaza (1993) Slice (1993) Minute Maid Pulpy Orange Mountain Dew MDX (2005) (2008) Pricing Strategy In economics and business, the price is the assigned numerical monetary value of a good, service or asset .Price is also central to marketing where it is one of the four variables (4 P‟s namely Product, Price, promotion, Place) in the marketing mix that business people use to develop a marketing plan. Pricing is a big part of the marketing mix. Choosing the right price and the right pricing strategy is crucial to the marketing process. The price of the product is not something that is fixed .On the other hand the price of the product depends on many other factors .Sometimes the price of the product has got nothing to do with the actual product itself .The price may act as a way to attract target customers. The price of the product is decided keeping many things in mind. These things include factors like cost incurred on the product, target market, competitors, consumer buying capacity etc. Coke – Price Coke was a company ruling the markets before Pepsi entered. Earlier the price of coke was cost based i.e. it was decided on the cost which was spent on making the product plus the profit and other expenses. But after the emergence of other companies especially the likes of Pepsi, Coca-cola started with a pricing strategy based on the basis of competition .Nowadays more expenses are spent on advertising by soft -drink companies rather than on manufacturing