I’m taking the fifth course, called Business Strategy, of Strategic Leadership and Management Specialization from the University of Illinois on Coursera. This course is taught by Deepak Somaya, Professor of Business Administration.
This is a four-module course, one module per week, and at the end of each module, we have an assessment: to write a case study analysis about a given topic. In the first week, I had to write a hypothetical memo to the CEO of Uber, suggesting a new mission statement. The second week, that I just finished, I had to write a hypothetical memo to Warren Buffet to suggest to increase or decrease the investments on Coca-Cola Company. Both assignments were hard to write and demand a considerable amount of time to get it done, and, the first one I couldn’t get it right in the first attempt and had to resubmit my assignment. For the second one, I’m now waiting for a review of my peers. Anyway, I think it would be good to share it here to gather some feedback if it might occur.
Write a memo to Warren Buffet – the billionaire investor and Chairman of Berkshire Hathaway –and make a recommendation on whether he should increase or decrease his investment in CocaCola (Berkshire Hathaway currently holds a little under 10% of Coca Cola’s stock). Within the memo please conduct a short industry analysis of the soft drink industry using the 5-Forcesframework. Based on this analysis provide your evaluation of how profitable (relative to other industries) you think the soft drink industry will be in the medium term (say the next 5-10 years).
To: Warren Buffet
From: Daniel Salvagni
Subject: Soft-drinks Industry Analysis
The purpose of this report is to analyze the current market share from Coca-Cola and the industry trends, evaluating the impact of the five forces in the industry.
Industry Analysis and Trends in the Industry and Consumers’ Behavior
The market share for non-alcoholic beverages is dominated mainly by Coca-Cola and Pepsico, which, together, holds 60% percent of the world’s market. According to the article from Investopedia¹, Coca-Cola is responsible for 40% and, consequently, 20% is under Pepsico domain.
The habits and behaviors of soft-drinks consumer have changed in recent years due to two main reasons: Change of consumers-lifestyle that prefer healthy and environmentally conscious brands; and the rise of substitute products, such as juices and bottled water.
However, lately, Coca-Cola is underperforming in Wall-Street in comparison with PepsiCo². In the last five years, PepsiCo has grown almost double more than Coca-Cola. In fact, both companies had underperformed which might be a sign of a change in the industry, although, Coca-Cola still holds the sixth position in the rank of the most valuable brands.
Bargain Power of Customers
Consumers in the age from 18-34 years old, also known as the Millenials generation, are engaged in different values than the previous generation, the Generation X and Baby Boomers. While targeting Millenials, the markets must consider a change in what the audience would expect from the company and the product. This generation would value more the impact on health and in the environment in spite of the brand of the product. Which means that branding and quality products are not enough for this generation.
Threats of Substitutes
The trends in the industry and consume includes the seek for innovation. Millennials like to try new products and they would spend more doing so³. Moreover, this trend includes social awarenesses and health consciousness and the main factors to decide which product to buy³. Finally, Millennials are drinking less alcoholic beverages⁴ and the market shows a grown in the sales of non-alcoholic beverages.
To conclude, a beverage company to succeed in this new scenario must offer a diversity of healthy beverages along with a social and environmental consciousness. Those would be substitutes to regular carbonated soft drinks.
Threats of New Entrants
Every country has its regulations in regards to the beverage industry, which suggests that there’s not a global regulation barrier for new entrants, besides capital to invest, obviously. Although, with the mentioned trends in the industry, millennials⁵ are constantly in seek for authenticity, and authenticity is a huge change, according to Andrew Geoghegan, Diageo’s global consumer planning director.
This particular trend is a threat for big corporations as Coca-Cola once consumer behavior is shifting to look and choose for local producers over big brands. An immediate consequence is that supermarkets⁵, aware of the trend, gives now more space in the shelf for small brands.
Along with the new habits of consumption, the rise of small brands is threating big corporations.n Even though they are not currently competitors, they might become in the future if Coca-Cola does not act fast to this movement.
Bargaining power of suppliers
Should Coca-Cola shift the target and focus on the desires of this new generation, it must reevaluate its supply chains at least partially. Since Millennials want to know the origin of the ingredients and also would definitely choose the brand that uses ethical and healthy ingredients.
This trends might turn the alert lights on in regards on suppliers of such ingredients, although it should be fine while Coca-Cola has its supply chain under control for most of its products.
What to expect for the next years
There’s no way we can predict the future, however, with enough information and the understanding of the trends in industry and consumption behaviors, we can prepare ourselves to act and react fast to the environment changes.
It’s important to note that even in developed markets, such US, these changes are not happening so quickly⁵ according to Jorge Paulo Lemann, the Brazilian investor behind both AB InBev and 3G Capital. And, besides it’s clear the grew of small business towards this market, they are not Coca-Cola competitors. In reality, it’s a good thing to have new entrepreneurs in the market to test the trends before big brands dive into it.
Finally, Coca-Cola still has the potential for more investment, and, as a solid and well established in the market, would react with no time and efficiently to the market changes. Even though the net revenue has dropped in the past year, it was not related to the new trends in the industry as we can see that the organic revenue grew 5% in the same period⁶.
The soft drinks industry is changing and, although it sounds like threats, it also shines as opportunities. Coca-Cola Company have a strong base and can take advantage of these opportunities in the market to increase the revenue in the next five to ten years, at least.
¹ Much of the Global Beverage Industry Is Controlled by Coca Cola and Pepsi https://www.investopedia.com/ask/answers/060415/how-much-global-beverage-industry-controlled-coca-cola-and-pepsi.asp
² Pepsi Beats Coke, Again https://www.forbes.com/sites/panosmourdoukoutas/2019/07/13/pepsi-beats-coke-again/#4eba1d0f2bad
³ Millennials think before they drink: fewer rounds, less carbs, more variety https://www.nielsen.com/nz/en/insights/article/2017/millennials-think-before-they-drink-fewer-rounds-less-carbs-more-variety/
⁴ Sales of nonalcoholic booze are on the rise — and it reveals a dark truth about social-media surveillance culture https://www.businessinsider.de/millennials-gen-z-drinks-less-drags-down-alcohol-sales-2019-2?r=US&IR=T
⁵ How millennials’ taste for ‘authenticity’ is disrupting powerful food brands https://www.ft.com/content/09271178-6f29-11e8-92d3-6c13e5c92914
⁶ Coca-Cola Reports Strong Results for Fourth Quarter and Full Year 2018 https://www.coca-colacompany.com/press-center/press-releases/coca-cola-reports-strong-results-for-fourth-quarter-and-full-year-2018