Table of Contents

Executive Summary................................................................................................................................. 2 Introduction ............................................................................................................................................ 3 Objectives of Study ................................................................................................................................. 4 Data analysis for Indian Soft Drinks Industry .......................................................................................... 5 Industry Analysis ..................................................................................................................................... 6 (A) The industrys response to reform initiated by the government since 1991 ............................. 6 (B) Porters Five Forces Analysis of Industry Competitiveness ........................................................... 8 Findings and Recommendations ........................................................................................................... 11 Conclusion ............................................................................................................................................. 12 References ............................................................................................................................................ 13

Executive Summary
Indian soft drink industry in predominantly dominated by two players namely Coca Cola and Pepsi. With an annual CAGR of 4.5%, the industry is worth INR 60 bn. This industry primarily comprises of concentrate manufactures and bottlers. Concentrate manufactures have the command of the industry, since they are the ones who produce concentrates aligned to the tastes and needs of the consumers and bottlers merely use this concentrates to manufacture soft drinks. Soft drink industry has seen lots of Ups and downs since 1970. Coca-Cola was the first International brand to enter the Indian soft drink market, but due to stringent government tax regime and mandatory disclosure of cola recipe chose to leave the country .This paved a way for the local brand to flourish during that period. Parle took the advantage and launched several cold drinks like Thums-Up. Till 1990, Parle commanded a market share of 70% in the soft drink market. Post liberalization Coca-Cola re-entered the Indian market with acquisition of Thumsup. Post 1991 the PepsiCo and Coca cola took over the market .Despite high growth and attractive market arena, the industry has been marred by stringent government regulations. The high excise duty of 24% levied by the government has prevented the potential of market to grow at an efficient rate and soft drinks are still considered luxury products. In 2003 the carbonated soft drink sector suffered a major setback when the cola products were known to have presence of pesticides .This negative publicity resulted in a sales drop of nearly 40%. The Indian soft drink industry can also be characterized as a duopoly between Coke and Pepsi which have demonstrated extensive competitive rivalry by indulging in several price wars, product variant launches to beat the competitive product targeting the same customer segment As the competing firms no longer indulge in price wars in order to prevent declining of the profit margins, the buyers i.e. the customers though would not be much affected by the different prices of the products as the products show a small price variance but the lack of availability of established and popular brands restricts the bargaining power of the customers. The number of suppliers in the industry are also many to choose from, this produces a disadvantage for the suppliers and they enter into price wars in order to strike a deal with a prominent company in the soft drink industry. It is also difficult for any new entrant to enter this industry given the fact that two major players have the 95% market share and these players have achieved economies of scale. Despite the fact that Indian soft drink industry has seen a huge growth in past, the fact remains that soft drinks are still considered a luxury product. The 30% rural market share goes on to prove that the market penetration is low in rural areas due to the less buying power of the residents. In order to make soft drink affordable to rural population, it is imperative of the government to cut down duty and provide a favourable ground for rural penetration.

Introduction
The Indian soft drinks industry is worth INR 60 Billion and is currently growing at 5% per annum with a CAGR (compound annual growth rate) of 4.5%. The Indian soft drink industry is highly dominated by few very huge players namely Coca Cola and Pepsi. The two occupy a combined market share of close to 95% directly or via alliances, ventures and partnerships. The market can essentially be segmented into two types of products namely cola products and non-cola products. Cola products account for nearly 61-62% of the total soft drinks market. Popular brands in this category include Pepsi, Coca- Cola, Thumps Up, Diet Coke, Diet Pepsi etc. Non-cola segment which comprises 36% can be split into four categories based on flavours available, namely: Orange, Cloudy Lime, Clear Lime and Mango. The soft drinks category consists of water, carbonated beverage, sparkling water, soda, fizzy drinks. The substitutes to the soft drinks industry are tea, coffee, juices and hard drinks. Until recently the soft drinks commanded a high market share in the beverages segment but the media reports regarding the detrimental health effects of prolonged and high consumption of soft drinks has led to a decline in the sale of the soft drinks especially of the carbonated soft drinks. The Indian soft drink industry is a highly profitable and competitive industry. The soft drink industry broadly contains the concentrate manufacturers and the bottlers or packaging partners. It is the concentrate manufacturers that have the dominant power in the industry as each concentrate firm produces the concentrates keeping in mind the taste preferences of the customers. It is this concentrate that is bottled and sold to the customers. Hence, the bottlers mainly produce the same output and are dependent on the concentrate manufactures. Hence the bottlers and the packaging partners do not command the relationship.

Category

2008

2009

2010

20082010 % Growth 20.7 3.7 16.4 1.7 13.4 52 14.9

Bottled Water 3,878 4,739 Carbonates 2,041 2,121 Fruit Juice 453 532 Concentrates 164 167 RTD Tea 7 8 Energy Drinks 5 8 Total 6,549 7,575 Source: Euro monitor International

5,652 2,196 614 170 9 12 8,653

Figure 1 : India: Soft Drinks Market by Category (2008-2010)

Objectives of Study
The primary objective of this study is to analyse the Indian soft drinks industry. The study investigates the impact of the liberalization policy of 1991 i.e. the impact of globalization, liberalization and privatization on the soft drinks industry in India. It also investigates how the industry has evolved over the years and has responded to various government regulations. There is also a detailed analysis of the overall competitiveness of the Indian soft drinks industry which identifies the major market drivers, barriers and industry dynamics in the current situation and analyse the market opportunity for the soft drinks in India .This is followed by details of critical findings and recommendations that can help improve the present situation of the industry. This study does a detailed analysis of the situations that existed in the industry during license regime in Indian government and how it changed gradually with the advent of opening of Indian economy. This study also incorporates the Porters five forces analysis of the Indian soft drink industry and tries to understand the attractiveness of the industry for investment. Finally the study discusses the findings and recommendations pertaining to specifics of the industry.

Data analysis for Indian Soft Drinks Industry

The Indian soft drink industry saw a high growth in the years liberalization from 1991 till 1997. This was primarily due to the re-entry of Coca Cola by taking over Indian brand Thumbs-Up. Market Growth Rates Year 1990-91 - 1996-97 1996-97 - 2001-02 2001-02 - 2006-07 2004-05 - 2009-10 2009-10 - 2014-15 Sensitivity Coefficient Table 1 : Growth Rates of the Soft Drinks Industry in India Segmentation shows that Western part of India contributes to the highest market for the soft drink industry; whereas the eastern part of India has the lowest share .The urban population accounts for 70% of the market share for the soft drink industry Market Segmentation Segment North East West South Share (%) 24 18 32 26

Growth 9.40% 7.80% 6.50% 5.40% 3.50% 5.20%

Table 2 : Geographic Segmentation of the Indian Soft Drinks Market Post Liberalization the demand for the soft drinks have risen to more than 300% .The demand which hovered around 105 million cases in 1990-91 rose to 330 cases in 2005-06. Demand: Past & Future Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 million cases 105 115 125 135 150 165 180 194 209 225 243 Year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2014-15 million cases 262 279 291 310 330 359 373 388 403 479

Table 3 : Demand of aerated soft drinks in India

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Industry Analysis
(A) The industrys response to reform initiated by the government since 1991
(i) Pre-reform Stage

India has not only proved to be a lucrative but a tough market for the major cola giants. In early 1970s, Coca-Cola was the first international soft drinks brand to enter the Indian market. Until then, the Indian market was ruled by domestic brands. Limca was the largest selling brand. Cola drinks were the market leaders, with a market share of 40%, followed by lemon drinks (31%) and orange drinks (19%). The current state of the Indian soft drinks industry can be traced back to 1977. Thats when the Government, with a view to enhance the power of domestic companies, levied heavy taxes on all multinationals, making it difficult for them to operate in India. Till then, Coca-Cola was the most popular soft drink brand in the country. But due to the norms specified by the Foreign Exchange Regulation Act (FERA), Coca-Cola had to exit India. FERA mandated that Coca-Cola should disclose its secret concentrate formula and reduce its equity shareholding which was not something that the company agreed to. Thus Coca-Cola exited leaving India paving way for the growth of a large number of domestic brands. This made the soft drinks industry almost a cottage industry, with several regional players and underdeveloped distribution networks. Taking advantage of Coca-Colas exit, Pure drinks, Delhi, launched Campa-Cola and by the end of 70s, became the lone Cola drink manufacturer in the Indian market. In 1980, Parle, a key Indian player, launched ThumsUp, the most popular soft-drink brand in India till date. Despite numerous objections by pure drinks regarding ThumsUp being called a soft-drink, Parle led the Indian market for over a decade, with its market share peaking to 70% in1990. In the meantime, Pepsi tried to make the most of Coca-Colas exit from India by attempting to capture the 900 crore (then estimated) market of India. At that time, India was a strongly regulated market, and international trade comprised just 6% of its GDP in 1985. Foreign trade was regulated by import and export tariffs and quantitative restrictions. Foreign direct investment was restrained by barriers pertaining to upper limit equity participation, transfer of technology, export obligations and government approvals. Foreign investments of all kinds had immense political sensitivity. When PepsiCo began its negotiations with the government, the upper cap for equity holding in Indian companies was as high as 40%. This made PepsiCo realize that it will have to look for an alternative path to enter the Indian market. In its maiden attempt in May 1985, PepsiCo collaborated with the RPG group to form Agro Product Export Limited, to import Cola concentrate and sell soft-drinks with the Pepsi label. In return, PepsiCo offered to export juice concentrate from Punjab. However, the Indian government disapproved this proposal due to the use of a foreign name and import of the concentrate. After this failure, Pepsi proposed to invest $15 million in Punjab, establish an Agro Research Centre costing Rs 1.55 crores, a potato and grain based processing unit worth Rs. 8 crores and a fruit and vegetable processing unit worth Rs 5 crores. The benefits of the proposal included better market for farm produce in Punjab and creation of 25000 jobs in the state, and 25000 more in other areas. The government accepted this proposal in 1988. This marked the entry of PepsiCo as Lehar Pepsi in India. In 1991, Indian government liberated the economy due to acute foreign exchange crisis and Pepsi was freed from all commitments made during its entry. This marked the beginning of an inflow of multinational financial power into India.
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(i)

Post-reform Stage (1991 onwards)

Till early 1990s, the soft drinks market was in the hands of domestic players. But with opening up of economy and the entry of MNC players Pepsi and Coke, the market has been completely overtaken by these international giants. The government has helped to boost trade in this sector by adopting liberalized policies and promoting the Indian brands internationally. Although the presence of international brands is dominant in India, the local brands are being assisted by advertisements, good quality and low cost. A significant event was in the industry was the acquisition of Indias top brand, Thumps Up, by Coca-Cola in 1994. The Indian soft drinks industry witnessed outstanding growth of 151% in terms of volume between 1997 and 2004, with sales reaching 4.21 billion liters in 2004 in both retail and foodservice channels. In 2004, total volume sales expanded by 16%, which was higher than that in 2003, when the market grew by 14%. Despite strong positions in this highly lucrative land, multinationals have faced challenges from the operating environment in the past. In spite of reduction in excise duty from 32% to 24% in 2003, taxation on soft drinks can be considered considerably high compared to other drinks, such as tea. The high excise duty levied prevents manufacturers from exploiting the potential of the market effectively, as soft drinks still remain a luxury product to many Indian consumers. According to the Federation of Indian Chambers of Commerce and Industry (FICCI), 90% of total consumption in India can be attributed to the middle income group. Companies believe less rigid taxation norms would help stimulate demand, creating additional employment and resist the circulation of fake brands in the market. In developing markets, growth can be achieved by reaching out to new consumers by offering affordable products. In India this boils down to reaching the rural population which is 70% of the total population. The soft drinks sector is exempted from the provisions of industrial licensing under the Industries (Development and Regulation) Act, 1951. A manufacturer gets a one-time license from the ministry of food processing industries to operate, which includes a no-objection certificate from the government as well as the state pollution control board, and a water analysis report. No further environmental impact assessments or siting regulations are made. Thus, in the post reform stage, the sector has enjoyed immense support from the government. Unfortunately, the major foreign players were allegedly taking advantage of the weak regulatory norms in India. In 2003, the Carbonated Soft Drinks sector faced negative publicity over presence of pesticides in soft drinks. It was claimed that colas manufactured by The Coca-Cola Company and PepsiCo contained significant amounts of pesticides, leading to 35%-40% drop in sales of the products in the third quarter of 2003. The two soft drink giants however, denied the charges, and filed cases with the High Court in Delhi to resist the publication of a report in this regard. Simultaneously, tests conducted by the central and some state governments whose results were released in October 2003 revealed that the pesticide levels in the tested bottles were within required norms. Despite the upheavals in the sector and drop in sales of carbonates in 2003, the MNCs look resilient. Right after getting a clean chit from the government in the pesticide controversy, various new products were introduced in the market that went on to become quite popular.

The low income levels in rural areas have discouraged significant investment from bigger soft drinks players in such regions. A vibrant informal sector of unbranded or fake brands of soft drinks that are sold at very cheap rates has also proved to be a deterrent in this regard. Also, retail infrastructure is highly undeveloped. And even in the grocery stores serving the rural areas, refrigeration coverage is limited. Thus, strong investment in infrastructure holds the key to unlocking the true potential of India's rural areas by strengthening distribution networks. Without proper roads, the difficulty of product development is maximized and the incentives related to it, minimized. In case of alcoholic drinks where domestic companies and local governments protect the local industry by discriminating against foreign players, large multinational players dominate the soft drinks industry. Experts do not expect the continued liberalization of the Indian economy in view of the expansion of FDI norms to have any significant impact on the operations of the soft drinks industry and therefore the dominance of the established multinationals.

(B) Porters Five Forces Analysis of Industry Competitiveness

Porters five forces industry analysis will give the overall report of the Indian soft drink industrys competitiveness and attractiveness.

Threat of new entrants: Low

Bargaining power of suppliers: Low

Rivalry between existing firms: High

Bargaining power of buyers: Low

Threat of substitute products: Medium

Figure 2 : Porter's Five Forces analysis

1. Rivalry between the existing firms The Indian soft drinks industry is primarily dominated by the two largest players according to the market share - Coca Cola and Pepsi. The Indian software drinks industry is growing at 5% annually and has a CAGR (combined annual growth rate) of 4.5%. The two biggest players Coke and Pepsi have a combined market share of 95% directly and through various business alliances. In view of the aforementioned data, the Indian soft drink industry can also be characterized as a duopoly between Coke and Pepsi which have demonstrated extensive competitive rivalry by indulging in several price wars, product variant launches to beat the competitive product targeting the same customer segment. They have also competed on differentiation and advertising which at one point of time was aimed at maligning the image of the rival brand. The various players in the soft drinks industry indulge in intensive rivalry with the dominant players as well as players in the industry, as a result of which both Coke and Pepsi are finding it difficult to retain their market share. Some of the small players find it difficult to shut down business because of huge investment in fixed costs, advertisements, binding contracts with suppliers and distribution channels, hence in order to survive in the competitively intense industry, they also add to the competition fighting for the market share. 2. Bargaining power of buyers Coca Cola and Pepsi are the two major dominant players in the Indian soft drink industry. Both the firms command very strong brand equity and have huge brand loyalty. All the above combined with the lack of presence and awareness of other existing products and companies makes the switching power of customers even lower. The customers have a strong preference for the existing soft drinks and hence with the absence of any different and new product, the customer has to accept the product available at the price mentioned. As the competing firms no longer indulge in price wars in order to prevent declining of the profit margins, the buyers i.e. the customers though would not be much affected by the different prices of the products as the products show a small price variance but the lack of availability of established and popular brands restricts the bargaining power of the customers. The aforementioned leading brands have made it extremely difficult for the newer companies to gain market share and develop market presence resulting in customers unwilling to switch over to other lesser known brands. 3. Bargaining Power of Suppliers The suppliers of the soft drink companies are essentially the bottling partners that manufacture bottling equipment and other packaging material. Hence most of the suppliers provide the same product. A soft drink company will partner with a supplier that offers low cost service or who has a technological advantage. As most of the suppliers provide the same level of output, the company can easily switch between the suppliers and engage in business with the low cost supplier. The number of suppliers in the industry are also many to choose from, this produces a disadvantage for the suppliers and they enter into price wars in order to strike a deal with a prominent company in the soft drink industry.

In many cases the soft drink companies themselves own a part of the supplier companies to gain greater control on the management, cost and technology of the supplier. This further reduces the bargaining power of the supplier where the company itself dominates the activities of the supplier. The suppliers of basic raw materials like sugar, coffee, caffeine, etc. also do not have substantial bargaining power. Hence, the overall bargaining power of the suppliers is low in the soft drink industry. 4. Threat of new entrants The soft drink industry is dominated by few major players who have acquired 95% of the market share. This has a huge detrimental effect on the decision of entering into this industry as a new entrant. The existing companies have already heavily invested in manufacturing, equipment, setting up plants, setting up distribution networks, promotion and advertising. They have created strong brand equity for themselves in the mind of the customers. Theirs are the most preferred products by the customers in terms of the tastes and they identify the companies with their most popular products. The existing firms have economies of scale and generate profits and are in a position to enter into price wars and eliminate the new entrants in their infancy when the latter would have incurred huge investment costs. The technological process and the flavours and brands have already been patented. In order to further increase their market share, they have also experimented with the introduction of various product variants many of which have been successful and many have failed but due to the strong existing establishment of the company, it was able to withstand all. Creating market presence for a new company will require huge advertisement expenditure which will not be good for a new entrant. The major players already have a strong reputation and foothold in the suppliers and distribution channel segments. Hence the threat of new entrants in the soft drink industry is low. 5. Threat of substitute products The substitutes for the soft drink industry will be variants of tea, coffee, water, hard drinks, juices etc. When a customer goes to shop with a particular soft drink product in mind, due to his or her brand loyalty, taste preferences, he or she will want to buy only that product. In most of the occurrences, soft drinks become part of impulse purchases. Hence, if the customer is looking to quench his or her thirst, he or she will look for his or her most preferred soft drink product. In case, the required product is not available, the customer can buy water or any other drink variant for example juice, tea or coffee or any other similar tasting product. With the recent negative developments that report the detrimental effect of soft drinks on the health and the media reports of the soft drinks being unhygienic, the demand for soft drink substitutes has increased to a great extent. As many of the soft drink substitutes are also available in the same price range, some are even cheaper with health benefits; customers will easily buy the substitute product. Some of the soft drink companies have started offering substitutes themselves for example variants of packed fruit juices in order to regain the lost customer segment. Though the customers are prone to switching to substitutes, a majority of them have developed strong taste preferences and brand loyalty towards their favourite soft drink brand and is less likely to switch over to substitutes but the threat still remains. Hence, the threat of substitutes is medium.

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Findings and Recommendations

Although the Indian soft drinks market is not as developed as its Asian counterparts, favorable economic environment and the ever-growing population, with immense untapped potential especially in rural areas, have always drawn attention of international players. India has one of the fastest growing soft drinks markets in the world, and the potential remains immense thanks to the extremely low consumption base. Total per capita consumption of soft drinks is about 4 liters, the lowest in the world, and considerably lower than that of comparable Asian countries. In this booming industry, the multinationals have been the biggest winners in terms of market share. The Coca-Cola Company led market with a 42.8% volume share, followed by PepsiCo at 28.6% in 2004. Multinational soft drinks groups have built strong positions in the growing Indian soft drinks market, in spite of relatively high taxation and the setback of the pesticide row in 2003. And with a huge amount of untapped potential remaining, particularly in rural markets, industry analysts believe that majors will continue to dominate. As a matter of fact, the rural population of India substantially outnumbers its urban population, specifically by 816 million to 342 million in 2008. Despite accounting for just 30% of the total population, urban areas accounted for 83% of total branded soft drinks sales volume in 2008. This disparity reveals the greatest challenge before the industry, which is to make commercial beverages each the masses. The Porters Five Forces analysis reveals that threat of new entrants in the industry is low due to the fact that the industry is dominated by two major players .Similarly the Buying power of customer is low due to the fact that there are no other quality players in the market and the consumers end up buying one of the two products. Buying power of suppliers is also low, since there are only two major players and they can negotiate on the price they want to offer to their suppliers. The suppliers are huge in number and hence form a very competitive market. With the recent negative developments that report the detrimental effect of soft drinks on the health and the media reports of the soft drinks being unhygienic, the demand for soft drink substitutes has increased to a great extent. As many of the soft drink substitutes are also available in the same price range, some are even cheaper with health benefits; customers will easily buy the substitute product. Hence the threat of substitute is at a medium level. Coke and Pepsi which have demonstrated extensive competitive rivalry by indulging in several price wars, product variant launches to beat the competitive product targeting the same customer segment.

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Conclusion
India has one of the fastest growing soft drinks markets in the world, and the potential remains immense thanks to the extremely low consumption base. Coke and Pepsi established operations in India between 1993 and 1995 predicting growth. Although consumption volumes have risen by 40% since then, yet Indian soft drink industry has not reached its full potential. Promising products like sports and energy drinks, bottled water and fruit/vegetable juice are expected to drive growth in soft drinks in the coming years. Soft drink giants PepsiCo India Holdings Pvt Ltd and Coca-Cola India Pvt Ltd are focusing on strengthening their foothold in the rural segment to enhance their presence. The outlook for soft drinks looks very positive due to strong marketing activities and product innovations by the manufacturers. Rural areas are clearly the most lucrative channels for manufacturers, as modern retailers will also strengthen their foothold in these areas, thus complementing the objectives of the manufacturing companies. Soft drinks manufacturers in India face challenges in distribution. There is limited access to the 500,000 villages due to the poor road network. Inconsistent tax policies, the prevalence of fake brands, hefty packaging costs and the seasonal nature of the Indian markets are among the other factors resisting growth. From the competitive analysis of the industry, we found out that the Indian soft drinks industry is highly competitive with high competition and rivalry among the existing firms, thus discouraging new firms to enter the industry. Low bargaining power of suppliers and buyers not only adds to the attractiveness of this highly competitiveness of the industry, but also enhances the scope of increased profitability. Threat of substitute products is medium to high, which steps up the competition to retain the existing market share among the existing companies. The key proposition is that if the Indian government manages to set high standards in planning and execution in the field of infrastructure development, the opportunities for soft drinks growth are vast. In fact, the growth activity of the past five years barely scratches the surface of what can be achieved over the medium and long term, if the government policies are in tandem with the goals of the soft drink manufacturers. Our analysis of competition and attractiveness of the industry using Porters Five Forces model further strengthens the belief. India, therefore, is an attractive investment beacon for the soft drinks industry even in these gloomy times of economy.

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References
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