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Economic Analysis of

Carbonated Soft Drinks


Group 8 Team Members:
Arihant Jain (18P188)
Naman Jain (18P198)
Parv Pandey (18P208)
Rupinder Kumar (18P218)
Sonali Goyal (18P230)
Vivek Vikram (18P238)
Introduction - The Carbonated Soft Drinks (CSD) Sector

Who are the main players?


• Mature category in the beverages market
• The carbonated soft drinks market continues to be dominated by Coca Cola and PepsiCo, whose
globally strong brand values tend to keep less branded and cheaper value offerings at bay
• CSDs have relatively low price points and margins compared to some other consumer goods
categories, thus impacting on brand owner's inclination to add additional costs through
packaging innovation
Distribution Channels
• Direct Selling - Supply of the products to shops using own transport systems resulting in more
profit margin
• Indirect Selling – Via wholesale and agencies
Challenges faced by the industry

• Pressure remains on this industry from health lobbyists looking for improvements to
drinkers' diets, particularly when it comes to childhood obesity

• The sports drink market has grown significantly in recent times and is a threat to CSD's
'share of throat', particularly when considering the similar target audiences.

• There has also been a proliferation of functional soft drinks that offer energy solutions and
this has become far more sophisticated in terms of flavours, usage and packaging variants.

• Packaging remains a key weapon in the panoply with special editions and pack variants
being a conventional way of helping brands stand out and to build brand values.
What are the main drivers?

• The main driver of packaging change is related to reducing costs

• Sustainability is also on the agenda. Manufacturers need to be responsible and show it is high on

their agendas

• Functional attributes are important in carbonated soft drinks with preservation of quality a key

packaging feature

• Packaging remains a key weapon in the panoply with special editions and pack variants being a

conventional way of helping brands stand out and to build brand values
Determinants affecting Demand
• Price of relative goods: In case of Soft Drinks, there are only two major
competitors with similar goods that being Coke and Pepsi
• Income of the consumer: There is a direct relationship between
income of consumer and demand. Now coke/pepsi being normal goods,
if there’s an increase in income, the demand will increase and vice
versa
• Taste and preference: In case of consumers taste preferences, even if
price increases, hard core consumers will still prefer a particular brand

• Seasonal Variations: Demand of soft drinks increase during festive


seasons and during summers
• Government policies: As we will see later, the effect of government
policies may inversely affect the demand of soft drinks
Determinants affecting Supply

• State of technology: Due to change in the state of technology in the production process, the
cost of production will reduce; as a result supplier will be able to supply more at the same
price

• Number of Consumers: In case of soft drinks, brands keep on entering new markets with
larger number of consumers and as result they need to increase the supply as well

• Price of inputs: Includes labour cost, machinery etc. In a country like India, cheap labour is
available easily, therefore the costs for these factors reduce and as a result the producer is
willing to supply more products at the same price
Price Elasticity of Demand and Effect of Tax
on CSDs
• According to a review conducted by Robert Wood Johnson Foundation, US in 2012,
elasticity of demand for soft drinks as a whole was about 0.88. While elasticity of demand
for regular CSDs was greater around 1.25, since tax on CSDs would cause some to switch
diet drinks
• Effect of Tax on soda drinks:
• If consumption of a good harms other people, it is said to have a negative externality, popularly
known as ‘social cost’ or ‘spillover effect’
• If social cost were included along with private cost of production, the supply curve for the good
would shift upward
• Since, consuming CSDs contributes to obesity, which in turn raises health insurance costs for
everyone, it is said to have a negative externality
• If the tax imposed is equal to the negative externality, the deadweight loss of the tax would be
offset by the reduced burden of social cost, so that the tax would actually improve efficiency
• The effectiveness of tax depends, in part, on price elasticity of demand
I. The more elastic demand, the greater is the reduction in consumption
II. The less elastic demand, the greater the revenue raised by a given tax
• However, soda taxes are considered regressive as they place greater burden on people with lower
incomes
Influencing factors on CSDs – Government
Regulations
Case 1:
• In a government body report from October 2016, it was alleged that carbonated
bottles had toxins
• This resulted in consumer backlash which affected sales
• Coca Cola and PepsiCo refuted any such claims and said their drinks are
completely safe for consumption
Externalities
Case 2:
• High taxes imposed on soda by the governments around the world, making soft
drinks expensive for the consumers
• Governments move to cut down sugar
Influencing factors on CSDs – Government
Regulations contd.
Case 3:
• Imposition of tariffs on imported aluminium in 2018
• As a consequence, Coke raises prices of soft drinks

Case 4:
• In August 2014, Indian Government increased 5% excise duty on Cola drinks Externalities
• A decision by PM Modi exhorted beverage companies to mix at least 5% fruit
juice in aerated drinks to help distressed farmers around the country, forcing
the companies to adopt and adapt
• As a result, there was impact on the prices of such drinks
Influencing factors on CSDs – Changes in
Consumer Perception
• The soft drink market has reduced over the years as the health conscious customers have
increased

• High sugar and calorie content leads to obesity

• It is therefore specifically advised to avoid giving these to children below 12 years of age

• Regular consumption of sugary drinks is linked to numerous other health problems including
diabetes, heart disease, asthma, COPD

• As a result of this, health issues prove to be the major driver for the declining growth of
carbonated drinks market in India and aglobally
Influencing factors on CSDs – Pricing

In case of bigger bottle sizes, transportation costs would be higher

Cost for a 1 lt. bottle: as they are heavier


~17% Packaging material
There are other costs like Production (which may include power
~5% Water (purified
mineral or spring water) and fuel, depreciation on machinery) and License fee
~15% Warehousing &
Production  Marketing  Distribution
Transportation Here, Production and other costs are not
~45% Middlemen much significant.
~18% GST Major costs include marketing expenses
which may include signing expensive brand
ambassadors for endorsements.
Role and effect of Competitors

Coca-Cola vs PepsiCo
 Major Brands: Coke, Diet Coke, Thums Up,  Major Brands: Pepsi, Mountain Dew, 7UP,
Fanta, Limca, Sprite, Maaza, Minute Maid Slice, Tropicana, Gatorade
 Pepsi has more sugar, calories and caffeine
 Coke has more Sodium than Pepsi than Coke
 New products introduced: Coke Zero,  More sweeter than coke
Coke Zero Sugar  New Products introduced: Pepsi Black (zero
calorie content

Prices of all the competitors (including Coke & Pepsi) are nearly the same but still Coke is
the market leader because of better brand awareness among the consumers due to
continuous efforts in building relationships and communications with them
Role and effect of Competitors - Contd.

Diversification
• Owing to shrinking soda-loving population, brands diversified into other liquid consumables
namely Fuze Tea, VIO, ZICO, Schweppes Tonic Water, Kinley, Aquarius(by Coca-Cola) and
Duke’s, Aquafina (by PepsiCo)
• Brands like Dabur, Parle, ITC coming up with innovative, healthy beverages, thus pushing
cola giants to innovate and spend more on R&D
Introduction of PaperBoat
 PaperBoat introduced in 2013, produced by Hector Beverages
 Its products consists of traditional, indigenous, Indian drinks such as Aam Panna, Jal Jeera,
Case Aam Ras, Nimbu Pani and also includes milk based beverages
Study  Its marketing strategy revolves around nostalgia, childhood and innocence and has managed
to get premium consumer mindspace
 Paper Boat has used differentiation as the cornerstone of its brand strategy
 Its ‘No preservatives added’ tag makes it more desirable than most other carbonated drinks
Opportunities for packaging innovation

• In the coming years to 2020, product innovation will be focused on brand extension that offer
flavour derivatives, sugar-free and healthier permutations.
• This means plenty of new flavours, new and improved recipes as well as new textures.
• Focus will continue on PET bottles for stand out and differentiation.
• There will be opportunities to create premium products in this sector and take a cue from other
beverage markets.
• The aluminium bottle has been used successfully as a value added enhancer in the beer industry.
• It plays well on consumer benefits both emotional and perceptual and makes the whole experience
seem more refreshing and premium and the perception that the product stays cooler for longer.
• It is also quite eco-friendly from a sustainability perspective. Reclosable ring pull cans could meet a
consumer need for resealable packaging, particularly for higher volume.