Why is the soft drink industry so profitable? An analysis

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  • Why is the soft drink industry so profitable? An analysis

    Are you looking for a seriously profitable business?

    Listen!

    Breaking into the soft drink industry is one of the ideal options.

    In this article, we would like to provide you a general picture of this giant soft drink industry as well as the reason for the particular question:

    “Why is the soft drink industry so profitable?”

    A long history of the soft drink industry

    Have you ever wondered about the first version of soft drink?

    Back in the history of beverage, we can recall the first marketed soft drink in the late stages of the 17th century, in 1676. Being formed in Paris, it was mixed water, lemon juice, and sweetened condensed honey. At that time, this unique type of drink had witnessed monopoly sales in the market worldwide.

    For some years, the simple beverage formulation had existed then, adding the term “gas” into this beverage to diversify products in terms of carbonated or noncarbonated classification.

    Despite the long-time foundation, soft drink only gains rapid development after some decades of experience in the beverage industry. Not only expand ingredients of the supply chain, but the soft drink also increases in the horizontal market segment and sales revenue.

    How profitable is the soft drink industry?

    Along with the considerate progress of the food and beverage industry, the soft drink market also gradually asserts its position by massive growth in sales, especially in several years.

    According to the statistics in the beverage industry, the revenue of the soft drink segment makes up US$742,235m in 2021. Moreover, it is estimated to reach an annual growth rate of 5.41% (CAGR 2021-2025).

    Looking at the details, in comparison to the global scale, the United States generated the most considerable revenue for the soft drink, accounting for US$230,468m in 2021. As a  result, concerning total population figures, each person can create US$98.42 for the soft drink segment in 2021.

    How about the two biggest competitors in the soft drink industry: Coca and Pepsi?

    Starting by 3% in average growth since 1970, from 1975 to 1995, Pepsi and Coke obtained approximately 10% in average annual growth. Surprisingly, head-to-head, the competition reinforced their brand recognition of each other.

    In other words, Coke and Pepsi’s marketing strategy builds up more for the profits rather than defeat each other. It is noticeable that by the year 2020, two giant brands will have possessed almost 60% market share of the total soft drink market.

    Constant growth of soft drink market bring significant profits for beverage companies
    Constant growth of soft drink market bring significant profits for beverage companies

    5 reasons why the soft drink industry is so profitable

    What is the reason behind it?

    Everything has its own causes, and so does the successful development of the soft drink segment. So how? In what way?

    With the closely based foundation of 5 Porter’s forces, we have tried to analyze five leading causes for the profit-making ability of the soft drink industry. To be more specific, these common reasons below are contributed by the soft drink segment’s feature itself and even express the differences in the beverage industry’s manufacturing process.

    Soft drink market is generating more and more profit for beverage industry
    Soft drink market is generating more and more profit for beverage industry

    1. Bargaining power of buyers

    It cannot deny that the soft drink segment accounts for the largest share of the beverage industry, being worth 60 billion dollars. As you know, the soft drink market comprises most of the popular different drink flavors, including from the normal ones like soda or some particular segments with other additional flavors.

    Unlike alcoholic beverages and some functional products that aim at one specific feature of target customers, soft drinks are suitable for everyone, from children to the old. People have consumed soft drinks as a favorite beverage that brings them to the next level of unwinding and satisfaction.

    Thereby, soft drink owns the most diversified market segment regardless of ages, genders or social status. Each category has a mission to satisfy one target customer’s needs and wants with outstanding product features.

    Being considered one of the necessities for human survival, the soft drink industry is witnessing traumatic growth, making up large profits for stakeholders, significantly improving customer concerns.

    Bargaining power of buyers: the first factor contributing to the ability to make profits of soft drink industry
    Bargaining power of buyers: the first factor contributing to the ability to make profits of soft drink industry

    According to the latest statistics, in 2020, by time, nearly 8 billion people exist on the Earth.

    Let’s imagine!

    In America, a massive number of customers had an average consumption of more than 56 gallons of soda each year. So what is the amount of soft drink consumption in total worldwide? It must be a considerable number and lead to a substantial profit margin for soft drink entrepreneurs. To be honest, we cannot estimate the specific number due to the growth minute by minute of the constant rise of population.

    Since the soft drink market is highly competitive, it will have a big room for switching suppliers, and the price difference is relatively small. It partly depends on the food miles that are the distance of transporting this kind of soft drink.

    2. Bargaining power of suppliers

    The supply chain of the soft drink industry includes many segments, from the manufacturers to the distributors or wholesalers and retailers. This process takes place respectively according to the line:

    Manufacturers -> Distributors –> Wholesalers –> Retailers –> Consumers

    Participating in the soft drink market as one of these categories, you need to cooperate with a different supplier. As we can see, manufacturers play an important role in identifying the difficult level of access for this process. If the starting point is a smoothie, it can be a considerate motivation for subsequent conveniences of other partners.

    Fortunately, soft drinks are known as the segment requiring material cost and capital investment in the beverage industry. To become a drink manufacturer, you need to obtain basic labor, machinery, and overhead cost requirements.

    In general, it is not difficult to own these conditions in terms of both quality and quantity.

    Looking at more details:

    • Labor: Most employees are not required to access professional knowledge, but some experts work in the researching field. The training course is slightly simple and easy to achieve. Moreover, the soft drink industry hardly asks for any specific skills or aptitudes.

    As a result, we would say there are great little obstacles in finding your team.

    • Materials: Some commonly used ingredients to create a soft drink cup are water, sugar, flavor and some additives. These all are normal with the low cost of purchasing.
    • Machinery: Despite accounting for the biggest percentage of capital investment, the machinery and equipment of this industry are quite simple compared to other industries.
    • Overhead: Like other requirements above, the overhead costs are also not “overhead” due to the low cost from scratch.

    Besides, the manufacturer also adds concentrate flavors to drink for improving the customer experience. Of course, it is not expensive, just like natural flavors, caramel coloring, or caffeine.

    To come to the point, we would like to focus on the advantages of soft drink suppliers, making it convenient for generating margin profit.

    3. Barriers against new entrants

    Being different from other businesses, the soft drink industry has a high barrier to entry due to scale and brand loyalty. It is one of the significant factors that bring continuous earnings for soft drink companies.

    Let’s break down!

    • Scale

    It can be seen that there is a tremendous advantage for existing players in the soft drink industry to the new entrants. To be more specific, the soft drink market discourages the newbies by forcing them to get involved with the high level of scale. Because of the industry’s characteristics itself, your company is required to reach one specific volume to obtain the margin.

    • Brand loyalty

    According to the survey conducted in 2002, the respondents choosing the CDS due to its favorite brand made up nearly 40%. From these statistics, the company can realize the strength of a famous brand and unwillingness to buy from the new brand.

    Soft drinks are convenient products that customers can buy easily. With large scale, these well-established brands can distribute their products all along the side, making more and more awareness for clients.

    To sum up,

    • The new ones: due to the difficulties, your company should have a thorough preparation for all resources needed.
    •  The existing one: will get ease for generating more sales revenue by well-known brands.
    Threat of new entrants: the third factor contributing to the ability to make profits of the soft drink industry
    The threat of new entrants: the third factor contributing to the ability to make profits of the soft drink industry

    4. Threat of substitute products

    Discussing the most subjective way, we can easily see that the soft drink market includes many variable substitutes. These bring explicit threat to soft drink industry development in terms of non-alcoholic drinks, which can serve a similar group of clients like soft drinks such as water, fruit juice, milk or tea.

    By contrast, you know?

    Soft drinks can create unique feelings that are very “soft” with the soul. Another cannot replace the satisfaction and signature of one type of drink, soft drink, either.

    Besides, soft drink segmentation has countered the substitutes thanks to a massive marketing strategy with existing brand equity that most of the substitutes are focusing on.

    From that, soft drink companies can easily access the guest’s awareness, making more earnings in turn.

    Threat of substitute products: the fourth factor contributing to the ability to make profits of the soft drink industry
    The threat of substitute products: the fourth factor contributing to the ability to make profits of the soft drink industry

    5. The powerful effects of marketing channels

    Finally, the soft drink is considered one of the most profitable industries when it comes to having effective marketing channels with transparent and achievable objectives.

    As standard, the fifth force of Porter will deserve “Rivalry among existing players in the industry.” However, there is a truth that: “The soft drink industry has experienced the dominance of two giant men are Coke and Pepsi.”

    Being a new brand, you cannot take possession of their market share.

    But how can others survive with profound development and still get earnings?

    The answer to this question is that these soft drink companies pay more attention to marketing strategies by taking advantage of abundant marketing channels. Nowadays, the development of the worldwide internet also results in the growth in marketing methods and tools.

    It is not difficult to see advertising or some promotion programs for soft drinks thanks to the favorite beverage of many people. Therefore, the customers can buy them through the supermarket, commercial center, restaurants or even vending machines. It is convenient for customers to cope with their thirsty problem; then, the soft drink entrepreneur can easily get earnings.

    The powerful effects of marketing channels: the fifth factor contributing to the ability to make profits of the soft drink industry
    The powerful effects of marketing channels: the fifth factor contributing to the ability to make profits of the soft drink industry

    2 largest competitive soft drink brands in the industry: Coke and Pepsi

    Going deeply into the soft drink industry, let’s clarify two foundation brands that have the most significant impacts on the development of soda beverages. They are so famous that customers can take up the habit of renaming soda like Coke or Pepsi. It is an apparent success that any company wants to achieve when doing business, emerging their brand by replacing the product’s original name.

    Coca cola (founded in 1890s)
    Coca cola (founded in 1890s)

    Let clarify a case study to see how they compete with each other and how the soda war influences the soft drink industry.

    • Foundation year and marketing strategy

    Both two seniors had founded since many decades ago. In the 1890s, Coke was established, and almost 40 years later, Pepsi was started. It is reasonable that some people blamed Pepsi for imitating Coke. By implementing the effective marketing strategy, soon, Pepsi became the most significant leading factor contributing to the market share’s decrease of Coke.

    Pepsi (founded in 1930s)
    Pepsi (founded in 1930s)

    Looking at more details, Pepsi successfully applied the fifth causes above to create much more profit in the soft drink industry: “The powerful effects of marketing channels.” Outstanding compared to Coke, Pepsi tends to concentrate more on the packaging. From the start, it launched the products with some impressive slogans:

    • Pepsi hits the spot
    • Twelve full ounces. That’s a lot!
    • Twice as much for a nickel, too

    What are its effects?

    It witnessed a considerate transformation in market share from Coke to Pepsi.

    • 1966: Coke accounted for 33.4% in soft drink share while Pepsi is 20.4%
    • 2004: Coke made up 43.1% in soft drink share while Pepsi increase to 31.7%

    By choosing the most suitable marketing strategy, Pepsi has gained a big profit and assets their position in the soft drink market.

    Each soft drink brand has their own marketing strategy to maximize the profit margin
    Each soft drink brand has their own marketing strategy to maximize the profit margin
    • How does this competition affect industry profits?

    The constant war between Coke and Pepsi has adjusted operations as well as branding property in the soft drink industry. As we mentioned before, this competition raises awareness about soft drinks in general and soda in specific.

    Thanks to growth in marketing plans, the advertising budget has risen rapidly. The more customers acknowledge, the more sales they get and the more profit margin they gain.

    To shorten, we can summarize the effects in three key points:

    • Vertical integration: get closer engagement with the supply chain
    • Increase industry’s profit
    • Acquisition in the soft drink industry

    Conclusion

    In conclusion, this article has provided you with the development scale as well as the profit-making ability of the soft drink industry. Moreover, it also clarifies the deep secrets of this successful development. Hopefully by now, you’ve had your answer to the question of why the soft drink industry is so profitable. Thanks to this information, you can raise your desire to break into this potential segment for earring profit.

    Lilian Nguyen
    Lilian is an expert in oem, odm, private label beverage industry with 8 years of experience. I believe that it is crucial for companies to focus on the benefits which the product provides to their target customer and what does it mean to the community. When i am not working, i run a blog on making healthy snacks & drinks and join in a hiking club. Email: lilian.nguyen@tdfood.com.vn

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