Soft Drinks and Bottled Water

SIC 2086

NAICS 312111

Producers in this industry supply the world's sodas, bottled waters, and other prepared nonalcoholic beverages. See also Alcoholic Beverages.

INDUSTRY SNAPSHOT

The global soft drinks industry is almost exclusively a marketing phenomenon. The actual product is a comparatively simple blend of water, sweeteners, flavors, and other additives. The industry's genius lies in convincing billions of consumers to drink soft drinks instead of plain water or other beverages. Through its vast annual investments in advertising and marketing, the industry enjoyed some of the highest brand recognition in the world along with spectacular sales. In 2002, according to USDA's Agricultural Outlook, annual sales of carbonated soft drinks reached US$193 billion, with sales for fruit and vegetable drinks reaching approximately US$69 billion each. The overall trend through the early 2000s was expected to be an increase in product variety, improved infrastructure and packaging, and expanded markets—particularly in the developing world.

Global soft drinks consumption reached 327 billion liters in 2003, a 5.7 percent increase from the previous year, with the global soft drink industry being valued at US$393 billion in 2002. While soft drinks are enjoyed in virtually every nation on earth, most of the major markets—such as North America, Europe, and Japan—were considered mature, meaning that per-capita consumption was expected to rise slowly, if at all. For example, in Europe, only about 2.5 billion gallons of soft drinks are consumed annually, according to Britvic, a leading soft drinks manufacturer in the United Kingdom and Europe. As a result, throughout the 1990s and into the twenty-first century, soft drink manufacturers moved aggressively into developing but highly populated areas, such as the alliance of 11 former Soviet Republics that make up the Commonwealth of Independent States (CIS), Eastern Europe, China, and India. The industry was projected to grow at about 5 percent through the early 2000s, with the largest increase coming from Asia.

The global soft drinks industry in the early 2000s was dominated by the Coca-Cola Company and PepsiCo Inc. at an unprecedented level seen in international business. Coca-Cola in 2003 controlled about 25 percent of the global soft drinks market, and had a 43.3 percent share of the U.S. market in 2004. The company also held an enormous share of nearly every major international market; as of 2000 it held a 47 percent share of the global carbonated soft drinks (CSD) market. PepsiCo ranked second, with about 11 percent of the global market in 2002 and 32 percent of the U.S. market in 2004. Cadbury Schweppes, the third largest soft drink company, captured 8 percent of the global market in 2000 and 14.3 percent of the U.S. market in 2003. Cott Corporation, the world's largest producer of store-brand carbonated soft drinks (CSDs), claimed 2 percent of the global market and 4.7 percent of the U.S. market in 2003. And while most country's local brands captured a significant share of their markets, few of these could match the manufacturing, marketing, and distribution prowess of Coca-Cola and, in some markets, Pepsi (which does business in international markets as Pepsi-Cola International(PCI)).

Some industry analysts believe the traditional concept of equating soft drinks primarily with carbonated beverages, particularly colas, must be revised to reflect the growing popularity of other ready-to-drink (RTD) beverages, such as teas, coffees, herbal beverages, juices, and sports and energy drinks. When viewed in this broader sense, another group of soft drink competitors emerge, most notably Proctor & Gamble in the United States, France's Danone, Switzerland's Nestle Beverages, and England's Unilever. The latter company estimated its share of the total nonalcoholic ready-to-drink (RTD) beverage market in 2000 at about 19 percent. As of 2004, Coca-Cola-trademarked RTD beverages accounted for 1.3 billion of the 50 billion beverage servings of all kinds consumed around the world each day.

ORGANIZATION AND STRUCTURE

Soft drink manufacturing is remarkably similar worldwide. Soft drink companies manufacture and sell beverage syrups and bases to bottling operations, a growing proportion of which are owned by the soft drink manufacturers themselves. The bottling operations add sweeteners and carbonated water to produce the final product and distribute it, usually in specific territories assigned by the soft drink manufacturers.

Global soft drink manufacturers usually develop local bottling operations in the countries in which they operate. They license bottlers to sell their products or buy local bottlers outright. While they might import ingredients, bottling is done locally. By the early 2000s, PepsiCo and Coca-Cola had company-owned franchised bottling plants in more than 120 countries that produced their respective brands. Some soft drinks, including mineral waters such as Perrier, have distinctive qualities that cannot be reproduced in local markets and thus are exported in bottled form to foreign markets.

In the bottling operation, incoming water is cleaned and clarified. Carbon dioxide gas, which provides effervescence, is supplied to bottlers either in solid form (dry ice) or under pressure in liquid form. To create a finished product, the flavoring syrup is diluted with water, and then cooled, carbonated, and bottled. The bottling process is highly automated, as is the washing of returnable bottles.

In the United States and overseas, major soft drink manufacturers such as Coca-Cola and PepsiCo (PCI) have acquired many independent bottlers and consolidated them into single enterprises. Coca-Cola Enterprises (CCE), for example, was the world's largest soft drink bottler in 2003, accounting for approximately 62 percent of case volume in Coca-Cola trademark beverages. CCE's net operating revenues in 2003, according to Coca-Cola's annual report, reached approximately US$17.3 billion. Pepsi bottling operations accounted for 52 percent of Pepsi's soft drink products in the United States. The same trend was evident in the company's overseas market, particularly in Latin America, where PCI was active in integrating various bottling operations.

Cultural Differences

Soft drink consumption varies widely by region and by culture. As a result, consumption does not necessarily coincide closely with population or economic development. For example, combined sales of Coca-Cola Co. products in Germany, Great Britain, Spain, Italy, France, and the Benelux countries (Belgium, Netherlands and Luxemborg)—some of the most highly developed economies in the world—were matched by sales in Mexico and Brazil, despite their developing economies

Soft drinks are available around the world in two forms: packaged and fountain service, where soft drinks are dispensed into cups. While packaged products account for the majority of soft drink volume in most countries, fountain sales grew faster in the early to mid-1990s as soft drink manufacturers aggressively sought additional outlets for their products. In the United States, Coca-Cola dominates the fountain business, with 65 percent of the market at the beginning of the 2000s, compared to 25 percent for Pepsi and 10 percent for Cadbury Schweppes.

Packaging and Vending

Most packaged soft drinks come in glass or plastic bottles and aluminum, steel, or plastic cans. While the majority of packaged soft drinks are sold in multi-packs in stores, a large proportion is sold from vending machines, which began in the early twentieth century as ice coolers. In the early 2000s, refrigerated vending machines dispensed soft drinks in cups, cans, or bottles.

The world-wide growth in vending continued in the early 2000s among nations with rising living standards and receding inflation levels. The high inflation rates in many countries were one of the main barriers to international vending because of the speed in which vending prices can become obsolete. However, as inflation came under control in most countries in the mid to late 1990s, vending operations took off.

Impact of Private Labels

While branded products are the heart of the soft drink industry, private label soft drink products (also referred to as "store brands" or "own labels"), sold exclusively by individual retailers such as supermarkets, garner a significant share of many of the world's markets. As supermarkets and general merchandisers have grown in size and influence around the world, they have become more aggressive in marketing their brands, including soft drinks.

Although consumers usually prefer advertised brands to private label products, they do look for bargains in their selections. During recessions, sales of private label soft drinks tend to rise. Major brands can respond by lowering their prices to compete with private labels, but at the cost of lower profits.

Still, private label products present strong competition for soft drink manufacturers. Most supermarkets, particularly those in Europe, carry an extensive array of private label products. Private label soft drink products were a hot trend in the mid-1990s, largely because of the spectacular success of Toronto, Canada-based Cott Corp. Cott adopted a strategy of offering top-notch quality for its private label products...

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