Industry operations are subject to several factors that shape its attractiveness and determine its players’ success. Such factors determine individual firm’s operations and performance as well as the industry competitiveness. In that respect, this report presents an analysis of the energy and sports drinks industry in view of a possible introduction of a new product concept. Thus, the analysis covers the industry competitiveness that is done using the Porter five forces. In addition, the factors affecting the industry and their implications for the brand have been analyzed using the PESTLE model. Finally, the report summarizes the analysis noting the inherent threats and opportunities within the industry in addition to providing a description of a suitable product concept that suits the industry position.
- Industry overview
Sports drinks are marketed as being capable of improving physical performance as well as aid rehydration through electrolytes. On the other hand, energy drinks have a fresh and more youthful image than tea and coffee. (IBIS World, 2014b) The two have been supported by extensive marketing campaigns appealing to young consumers. The drinks were first sold in US in 1997 and have experienced robust growth with the market getting to saturation stage. However, a small portion of the Population consumes energy drinks on a regular basis. According to IBIS World report, only about 5% of consumers take the drinks five to seven times per month. In 2013, the US industry had about 92 businesses with an annual growth rate of 10.8% according to IBIS World report on the drinks production. (IBIS World, 2014a)
- Five Forces Model Analysis
Industry performance and competitiveness are shaped by a number of factors referred to as the Porter Five forces. The force determines an industry’s attractiveness and competition intensity which in-turn determines the individual players’ market share and sustainability. Those competitive forces include existing rivalry, new entrants’ threat, substitute’s threat as well as the buyers and suppliers bargaining power. (Porter, 1980)
- Existing rivalry
The rivalry defines the industry’s existing competition. Highly competitive industries like the energy and sports drink market tend to have low returns resulting from high competition cost. The high competition has resulted from a number of factors including.
- Increasing substitutes’ similarity is owing to beverages ability to serve the soft drinks’ purpose.
- Economies of scale in the industry considering that the industry operators are significantly large firms with multinational operations and market reach.
In that view, the existing businesses compete through strategies such as marketing campaigns, product differentiation, strategic pricing and cost management as well as product quality. (Porter, 1980)
Gatorade is the leading company in the industry where it commands a 32% share of the off-trade value sales according to Euro monitor’s 2013 report. However, the company experienced the share loss compared with the 33% it accounted for in 2012. The business was the first sports drink and has maintained its market lead by continuously introducing different formulations and flavors to attract more customers. (Euromonitor, 2014) The firms have been extensively spending on marketing campaigns including sponsorship and advertising with example of its practice of engaging sports personnel to advertise its brands. Other firms operating in the industry include Living essentials, Monster beverage Corp, Red Bull, Rockstar energy drink and Coca-Cola. (IBIS World, 2014a)
- New entrants
An industry with ease of entry has intense competition owing to the increasing number of new products and businesses. Entry depends on barriers like economies of scale, industry attractiveness and market innovation. In that view, the energy and sports drink industry is marked economies of scale barrier with the market being controlled by few large firms. However, technological advance is lowering market entry cost with more efficient product design and production systems offering new entrants opportunities to venture into the market. Thus, the new concept would take advantage of technological advance to enter the market and compete with the existing brands. (Sengupta, 2005)
- Substitutes
Substitutes offer competition with consumers having other choices to meet their needs. Thus, close substitutes can present significant competition. However, such competition depends on a number of factors
- Switching costs that are small for the industry as the substitutes closely serve the same purpose.
- High number of buyers in the market that present a significant market. In that respect, the move by some consumers in favor of substitutes has little effect on the brands.
- Customers’ price sensitivity
- Product’s importance to the consumer (Keller, 2012)
In that view, the decline in sales of energy and sports drink in 2013 can also be attributed to the substitutes’ pressure on the market. Those substitutes include beverages like coffee and tea. (Euromonitor, 2014)
- Buyers bargaining power
It refers to the pressure that customers can place on the industry players. Customers with much bargaining power lead to small trade margins and vice versa. The bargaining power in the industry is dependent on a number of factors including:
- The number of businesses in the industry that in this case are few large firms hence little power for consumers.
- High level of substitute’s availability in the industry that provides consumers with the ease alternative.
- Low switching costs which make it easier for customers to change brands,
- Products importance to the consumers is low hence, they can take time without consuming them. (Porter, 1980)
In view of the high buyers bargaining power, brands compete through pricing and value delivery and a new brand can easily attract customers based on its quality. However, the buyers’ power means that businesses have low-profit margins.
- Suppliers bargaining power
It refers to the pressure that suppliers are capable of placing on the business. Thus, for an industry where few suppliers have more power, businesses volumes and profit margins are negatively affected. The source of supplier power in the industry could be attributed to the following.
- High fixed costs for shifting suppliers owing to the stringent supply contracts.
- Resources scarcity that results to the firms having few choices hence suppliers having significant bargaining power.
- Switching costs are high for the firms owing to the nature of relationships that they have with their suppliers based on long-term supply contracts. (Porter, 1980)
In view of the suppliers’ power, the firms have low-profit margins and seek to enhance their competitiveness through establishment of strategic sourcing relationships. With that, they enhance their sustainability and get supplies at favorable terms.
- PESTLE Analysis
Businesses operating within an industry are subject to factors that are outside their control. Those factors are referred to as external forces and influence their performance as well as sustainability hence guiding their strategic planning and management. In that respect, the energy and sports drinks industry being a global market is subject to a wide range of those factors. Thus, the following is a summary of the political, social, economic, environmental, technological and legal factors and how they shape the industry. (Sengupta, 2005)
- Political
Political factors determine the industry competitiveness and entry through trade-related policies such as free trade policies. With globalization, countries are increasingly adopting free trade policies as markets get liberalized. In that view, it is becoming easier for multinational companies to venture to different countries hence increasing their market share, as well as competition to local firms. (Keller, 2012) In that view, it would be easier for the new concept to expand operations to foreign markets.
- Economic
Economic factors determine an industry’s profitability and cost factors. In that respect, variables like inflation and employment level play an enormous role in determining industry demand and sales. (Fred, 2011)
Inflation: Inflation as the rise in the general price determines consumers’ purchasing power. In that respect, an increase in inflation results to reduced purchasing power hence suppressing demand in the industry. On the other hand, decreasing inflation increases purchasing power hence demand in the market. In that view, the industry suffered a setback during the recession with high inflation reducing buying capacity. However, the market has been registering an increase in demand as inflation declines with economic recovery hence providing good prospect for a new brand.
Employment: Levels of employment in an economy determine the disposable income which in-turn determines demand for consumer products. In that respect, the industry suffered a setback during the recession and posted a recovery with the economy as the employment level rises. Thus, the industry has been experiencing growth in the past five years attributable to increasing in the level of disposable income in the primary market like US. That was marked by the recovery from the 2008 economic recession. (IBIS World, 2014b)
- Social
Social factors determine industry demand through their influence on tastes and preferences. In that respect, lifestyle changes, social class pressures and health issues have had a significant effect on the industry. (Fred, 2011)
Lifestyles: More people are increasingly changing their lifestyles with globalization increasing diversity. In that respect, as people in countries like US adopt the on the go lifestyle, they need more energy hence the growing demand for sports and energy drinks. That presents an opportunity to cater for the changing lifestyles with a new brand. (Kotler & Keller, 2006)
Health concern: Consumers’ awareness is increasing in regard to the effect that consumer products have on their health. In that respect, people are becoming more aware of their health and the adverse effect of the artificial ingredients used in the industry. Thus, customers are increasingly demanding healthier and safer products. The businesses in the industry increasingly face a difficulty increasing their appeal to more consumers in terms of healthy and safe drinks. That has been marked by a resulting decrease in sales as the off-trade values sales growth of 9% in 2012 decreased to 4% in 2013. In addition, volume sales grew by 2% in 2013 compared to a 5% in 2012. In that view, there was increase media coverage of the possible link between the drinks consumption and deaths in the year 2013. In addition, more health professionals are questioning the sports drinks consumption necessity. (Euromonitor, 2014) In that view, the concern can be addressed by a new brand concept that reduces artificial ingredients for health and safer drink.
- Technological
Technology advance plays an enormous role in shaping industry operations by availing new opportunities as well as presenting some challenges. Opportunities range from marketing communication and efficient production and services.
Marketing communication: Technological advance provides opportunities for brands to reach their targets elements more efficiently. That owes to development of more efficient marketing channels like company websites and the internet based social media where the youthful customers who form a significant market segment can be easily reached. (Kotler & Keller, 2006) In that view, the new brand can be easily marketed to the growing youthful segment through social media and other online platforms.
Efficient production processes: As demand increases and businesses are needed to be innovative, technological advance provides access to more innovative and efficient production processes that enhances industry operations. The technologies have been used by firms to design and produce differentiated products that enhance their competitiveness. (Sengupta, 2005) In that view, adoption of new production processes can be applied to deliver the brand at low cost and high quality.
- Environmental
In the face of increasing concerns over businesses effect on the environment, industry players increasingly have to make decisions relating to environment conservation. Thus, environment concerns and regulations have been a significant determiner of the nature of the firms’ operations in the industry. (Fred, 2011)
Raw materials sourcing: Sourcing for production purposes has been subject to environment concerns over the pollution involved with transportation and their production. In that respect, businesses in the industry increasingly seek to adopt more ethical and environmental friendly sourcing as a means of enhancing their sustainability. (Euromonitor, 2014)
Production process: Production processes have also been the subject of concern over carbon footprint with industries being required to adopt more environmental friendly production means. In that respect, the industry firms are increasingly pursuing more efficient production technologies to reduce their effect on the environment. (Keller, 2012)
- Legal & Regulatory
With increased globalization as well as industry activities, businesses increasingly find themselves subject to various regulations. In that respect operations ranging from production to marketing, have been shaped by legal and regulatory factors. (Fred, 2011)
- Industry prospects, opportunities and threats
According to Euromonitor, the off-trade values are expected to grow by 15% between the year 2013 and 2018. That will result to the market growing to a value of $17.9 billion while the volume trade will increase by 12% to reach 7.4 billion liters by 2018. However, the growth is still small compared with the 23% growth over the period from 2008 to 2013. (Euromonitor, 2014) Further, IBIS World researchers’ project that all industry players will introduce organic products and new all-natural products that do not contain artificial ingredients by the year 2019 owing to the health concerns. (IBIS World, 2014a)
Opportunities:
- Increasing demand of differentiated products with lifestyles change
- Increasing demand for healthy and safer energy and sports drinks
- Ease of international market entry with free trade policies
- Improving economy that enhances demand for the industry
- Technology advance that increasingly enhance production and marketing operations
Threats:
- Increasing competition with globalization and free trade in addition to increased new entrants
- Constantly changing customer needs that lenders products undesirable.
- Increasing the cost with constant technology advance that requires firms to adopt new systems and processes.
- Increasing health concern over the drinks safety and health effects.
- Increasing choices with increasing substitute products
- New concept
References
Euromonitor. “Sports and Energy Drinks in US” Country Report, May 2014. Web. 5
October 2014. http://www.euromonitor.com/sports-and-energy-drinks-in-the-us/report
Fred, R. D. Strategic Management: Concepts and Cases. 13th ed. New Jersey: Prentice Hall.
2011.
IBIS World. “Energy Drink Production in the US.” Market Research Report, April 2014.
Web. 5 October 2014a. http://www.ibisworld.com/industry/energy-drink-production.html
IBIS World. “IBIS World analyses the increasing Consumption of Functional Beverages.”
Market Research Report, 25 July 2014. Web. 5 October 2014b. http://www.ibisworld.com.au/media/2014/06/25/ibisworld-analyses-increasing-consumption-functional-beverages/
Keller, K. Strategic Brand Management: Global Edition. 4th ed. New York: Pearson
Publishers. 2012.
Kotler, P. & Keller, K. Marketing Management. 12th ed. New Jersey: Prentice Hall. 2006
Porter, M. Competitive Strategy: Techniques for Analyzing Industry and Competitors. New
York: Free Press. 1980.
Sengupta, S. Strategies for Competitive Advantage. Lake Town: Tata
McGraw-Hill Publishers. 2005. Print.
