The 'revolution' is already under way

Over the next decade the global soft drinks industry is likely to undergo probably the most fundamental change in its entire history, according to a new report from Canadean, the international beverage research specialists. With its traditional focus mainly on carbonates, and notably colas, often involving complicated franchise systems, the soft drinks business is already in the throes of a major revolution which encompasses the very concept of a 'soft drink' as well as questioning the relevance of the franchise system that has served the industry so well for so long.

At the same time the competitive landscape is shifting dramatically, says the Canadean report. Once mainly the preserve of Coca-Cola and Pepsi-Cola, the carbonates market alone is seeing successful local players emerge to challenge the pre-eminence of the US multinationals, from Europe to South America. In the context of the wider definition of soft drinks, the competitive line-up now includes international majors such as Nestle, Danone, Unilever and Procter & Gamble.

"The report is essentially a think piece" says Kelsey van Musschenbroek, Canadean's Chief Executive, "which analyses a number of issues I believe will shape the future structure of the industry over the coming decade."

Pushing the boundaries further out

While Canadean has long promoted the idea of a wider soft drinks 'universe' to include not only carbonates, but also packaged water, fruit juices, still fruit drinks, iced teas, sports and energy drinks, the significance of that concept has only recently been recognised by the leading multinationals who are now pushing those boundaries further and further out. Dairy drinks, functional drinks, nutraceutical drinks, stimulation drinks - all of these are now to be found within a more all-embracing definition of 'soft drinks' which recognises the interplay between various product categories and has important strategic implications for the industry.

The West Europe Soft Drinks Universe

Since 1998 PepsiCo, for example, has pursued an aggressive acquisition programme which has brought Tropicana (fruit juices), SoBe Beverages (new age drinks) and most recently Gatorade (sports drinks) into its soft drinks portfolio. At the same time Pepsi has launched its successful Aquafina water brand in the US, while continuing to develop cold coffee drinks ( Frappucino ) and iced teas ( Lipton ).

Meanwhile, following its partial acquisition of Cadbury Schweppes soft drinks business, Coca-Cola now counts some 232 brands within its global portfolio which also includes ready-to-drink coffee (Georgia ), iced teas (Nestea), Minute Maid fruit juices and Bonaqua water (mainly Germany). Significantly, its biggest brand launch this year has been Dasani bottled water in the US. Coke's previous single minded focus on its three core brands (Coca-Cola, Sprite, Fanta) has now given way to a new philosophy, spelled out in its 1999 Annual Report: "The more choices we offer, the more we're the beverage of choice". Since then Coke has acquired Planet Java ready-to-drink coffees, announced the launch of 35 new local brands for 2001 in Asia alone as well the accelerated development of its 10-year old joint venture with Nestle, renaming it Beverage Partners Worldwide.

Having seemingly turned its back on the soft drinks business, Cadbury Schweppes has expanded again, both in the US with the purchase of Snapple Beverages (new age fruit drinks), and in Europe with the impending take-over of Orangina from Pernod Ricard. Only recently Cadbury's Dr Pepper/SevenUp subsidiary in the US paid nearly $17m for the Slush Puppie frozen soft drinks business.

Who will set strategy now?

Against this background the Canadean report spells out the sort of conflicts that could arise within the existing franchise system for soft drinks, consisting as it does of brand owners and brand bottlers, especially the more recently consolidated 'anchor bottlers' - now very large businesses in their own right. The whole ethos of the anchor bottler is based on achieving ever more efficient production built around fewer and fewer high speed filling lines. That implies constant product and brand rationalisation. On the other hand, a strategy which embraces the new wider definition of soft drinks implies product proliferation. So who will set the strategy agenda in the future? How are these two seemingly opposing strategies to be reconciled?

Pressures for lower concentrate prices

Moreover, the growing importance of anchor bottlers within the franchise system raises even more fundamental questions for the brand owners. In recent years both Coke and Pepsi have learned to their cost the need to stay close to local consumers, and are now reversing earlier strategies aimed at centralising their global operations, especially marketing. As they decentralise that role, and the 'added value' function of global marketing becomes increasingly superfluous, there will be growing pressure from anchor bottlers for the brand owners to pass on corporate savings in lower concentrate prices. That pressure is likely to become even more intense wherever it becomes apparent that brand owners' field operations are duplicating those functions already performed by anchor bottlers' local subsidiaries. The franchise system can no longer afford a multiplicity of brand managers 'responsible' for a single brand, for example.

Franchise/Bottler Profit Split
Is There Enough To Share?

Significantly reduced market growth (3-4% in the 1990s against 6%-8% in the 1980s), coupled with low inflation, hugely increased retailer customer buying power, as well as markedly lower entry costs for local soft drinks manufacturers have brought about an intensification of price competition. This has thrown into sharp relief the franchise system's dependence on sharing the total profit available - at a time when overall profitability is being eroded. So, sharing this smaller pie is bound to create even more pressures within the franchise system.

The relative performance of share prices - brand owners vs bottlers - has also underlined the significant differences that exist between the low capital intensity of the brand owners' balance sheets (reflected in a high return on capital employed) and the high capital intensity of the anchor bottlers which typically achieve half the rate of return of brand owners. Furthermore, the fact that Coke and Pepsi are still very substantial owners of anchor bottlers' shares may also mean they could be faced with a delicate fiduciary balancing act when it comes to decisions which directly affect bottler profitability.

Changing competitive landscape

Finally, the report explains how local companies have emerged to compete successfully with the US multinationals. Key factors working in favour of local players include the sharply reduced costs of market entry ranging from packaging to media; the widespread availability of technical know-how provided by flavour houses, filling equipment makers, packaging suppliers; the role of leading food chains in demanding higher quality and lower prices in return for extended supply contracts - an imperative which does much to explain the continuing focus on pruning overheads within such companies. Moreover, there is growing evidence that soft drinks manufacturers which operate within a single integrated system may be attaining a level of profitability which is greater than half the total profit pot which has traditionally been available to the whole of the two-tier franchise system.

For further information on "Strategic outlook for the soft drinks industry in 2010", including a full table of contents, visit: