Alternative beverages such as sports drinks energy drinks and vitamin-enhanced beverages developed

Alternative beverages such as sports drinks, energy drinks, and vitamin-enhanced beverages developed into an important competitor for the beverage industry and saw rapid growth in the mid-2000s. Alternative beverages compete on the basis of differentiation from each other in the market and traditional drinks, such as carbonated soft drinks and fruit juices. The largest sellers of alternative beverages are the global food and beverage giants, such as Coca-Cola and PepsiCo. , that have already built respected brands in snack foods, carbonated soft drinks, and fruit juices prior to joining the alternative beverage industry.

Along with these global giants, companies that utilized the blue ocean strategy, such as Red Bull GmbH and Hansen Natural (now known as Monster Beverage), were able to develop respected brand images and a decent share of the alternative beverage market. Success in this industry is based on companies that exploit innovation, capitalize on consumer trends, and have brand loyalty. IDENTIFICATION When the U. S. saw an economic recession starting in the year 2008, the premium-priced alternative beverage market was hit hard.

While the alternative beverage segment of the beverage industry provided opportunities for bottlers, the poor economy decreased demand for higher-priced beverages, with sales of sports drinks declining by 12. 3 percent and flavored and vitamin-enhanced water declining by 12. 5 percent over 2008 and 2009 (Gamble, 2011, p. 264). A great deal of the industry’s growth was stunted in these years but the industry is projected to grow at a rate of 5. 88% on average for the next five years (Appendix 1).

Industry analysts believe that “carbonated soft drinks would remain the most consumed beverage but would continue to see a decrease in annual sales due to a consumer preference for bottled water, sports drinks, fruit juices, vitamin enhanced drinks, ready to drink tea, coffee, and other beverages,” suggesting that the alternative beverages are likely to keep growing in the maturing beverage industry (Gamble, 2011, p. 264). Global beverage companies, such as Coca-Cola and PepsiCo, have struggled to reverse the decline in carbonated soft drinks consumption in the U.

S and have relied on the alternative beverages in order to maintain volume growth in mature markets where consumers were reducing their intake of carbonated soft drinks due to consumer health concerns, such as diabetes and obesity (Esterl, 2013). Coca-Cola, PepsiCo, and other companies expanded the alternative beverage market through introducing energy drinks, sports drinks, and vitamin drinks into international markets. In addition, companies, such as Hansen Natural Corporation and Red Bull GmbH, have seen high profits as well through their development and sales of alternative beverages.

Sports drinks are most frequently purchased by those who engage in sports, fitness, or other strenuous activities, where vitamin enhanced beverage are mostly purchased by the adult consumers interested in increasing their intakes of vitamins. While the profile of the energy drink consumer is presented as teenagers, in earlier years, teenagers were the face of carbonated soft drinks’ traditional target market (Gamble, 2011, p. 266) Today’s youth are “often turning to water, energy drinks and coffee instead” of carbonated soft drinks (Esterl, 2013).

Of the five competitive forces, the strongest in the alternative beverage industry is the competitive force associated with rivalry among competing sellers to attract customers. With many competitors fighting for market share, competition between rivals has become fierce. This rivalry, mixed with many different substitutions – which include bottled water, carbonated soft drinks, etc. – drive the alternative beverage industry. The weakest of the five competitive forces is competitive pressures stemming from buyer bargaining power.

While there are numerous substitutes, strong brand loyalty keeps customers from switching to lower-cost substitutes. The quality can be judged via taste preferences, the effectiveness of the drink (i. e. the amount of energy the consumer gains from the energy drink), or what certain companies endorse (i. e. Monster and Red Bull endorse extreme sports and Coca-Cola endorses healthy lifestyles). These preferences help support an extremely loyal consumer base making the market hard to enter and gain market share from other established companies.

This combined with the already higher costs of alternative beverages – energy drinks costing nearly 400 percent higher by volume than equivalent carbonated soft-drinks – leads to weak competitive pressures from buyer bargaining power. ANALYSIS AND EVALUATION One of the most important factors for success in the alternative beverage industry is innovation. As Gamble mentions in the case, “Product innovation had been among the most important competitive features of the alternative beverage industry since the introduction of Gatorade in 1967. ” (Gamble, 2011, p.269).

This is certainly still the case, as companies who come up with new, innovative ideas are usually rewarded with large market share as seen with products like Red Bull, Gatorade and Five Hour Energy shots. Each of these products holds a commanding market share as copycat products fight for the scraps. In 2009 Red Bull held a 40% of dollar sales market share for energy drinks in the US; the next closest competitor, Monster, held only a 27% market share (Gamble, 2011, p. 268). Gatorade holds a staggering 75% of the $1. 57 billion US sports drink market and Five Hour Energy holds a monstrous 85. 5% of the $578.

6 million energy shot market. The dominating market shares held by innovative products in the alternative beverage industry makes the market very attractive for new entrants who can provide an innovative product to consumers. Some companies in the alternative beverage industry have found success on capitalizing on consumer trends. The different types of beverages are affected differently with certain trends. For example, a recent consumer trend is health consciousness. With this trend, people are veering away from sugary, high caffeinated drinks and turning to healthier substitutes, such as vitamin-enhanced beverages and fruit juices.

The beverage that was the hit the worst was carbonated beverages. As stated above, carbonated soft drinks consumption has been declining for the past couple of years. There was even a legal ban for companies to sell carbonated soft drinks in containers of thirty-two ounces or larger. This ban was overruled in New York but it is still a sign of how important this health consciousness is to the people. (Barr & Hajela, 2013) The giant conglomerates of carbonated soft drinks are trying to turn the spotlight somewhere else by expressing exercise and active lifestyles through marketing campaigns to combat obesity in the U.

S. rather than banning soft drinks from the people. Energy drinks have a different problem only because of the nature of the product. The stimulant drinks have established the reputation as being too sugary and having too much caffeine. The amount of caffeine in energy drinks is causing consumers are expressing concern with energy ingredients, which is forcing companies like Monster Energy to put warnings on its products, and Red Bull to come out with a zero calorie, zero sugar energy drink. Although the alternative beverage industry is a relatively new industry, competition is very fierce.

There are many companies trying to gain an early foothold on large market shares in this new industry and some companies, like PepsiCo, Coca-Cola and Red Bull, are doing just that. Companies like PepsiCo and Coca-Cola gained these market shares from already established brand images from the snack and carbonated soft drinks industry, while Red Bull was the first energy drink and implemented the blue ocean strategy capturing and maintaining large portions of the market. These three companies alone account for 45% of the worldwide market share of alternative beverages. (Gamble, 2011, p.268).

While growth has declined for the overall U. S. Beverage industry by 3. 1% in 2009 compared to the previous year, energy drinks saw a 0. 2% growth. Energy drinks, along with ready-made ice tea were the only beverages to see a growth in consumption during 2009. The three industry titans – PepsiCo, the Coca-Cola Company and Monster Beverage Corporation (formerly known as Hansen Natural Corporation) are each doing fairly well from a financial standpoint. In the last three years, 2010-2012, each company has posted profit margins ranging from 14% by PepsiCo as the low and 39% by the Coca-Cola Company in 2010 as the high.

Some interesting numbers surfaced after collecting the select financial ratios for each company (see appendix #2-4 for full tables). PepsiCo has posted a consistent 14% profit margin in the last three years, which is by far the lowest of the companies; however, they also have posted the highest Earnings Per Share out of any of the companies at around $4. 00/share each year. Monster Beverage Corporation had a surprising debt-to-equity ratio of 0. 00 as they have no total debt and are financed exclusively by equity.

This leads to higher than industry average liquidity, as they posted Current Ratios in 2010 and 2011 of 4. 97 and 4. 44 respectively. Despite having the lowest profit margin of the three companies, PepsiCo has the strongest financials out of any of the other companies, including strong Net-Asset Value, high Earnings Per Share, and an industry leading Inventory Turnover ratio. RECOMMENDATIONS and CONCLUSION The rising alternative beverage industry has a couple of concerns that hurt the industry as a whole and need to be answered by each company in their own unique way.

Besides the major concerns like health issues, changing consumer demand, and low priced substitutes; distribution, innovation, and discretionary income remain the most potent concerns for the industry. The products of the alternative beverage industry are purchased in supermarkets, convenience stores, wholesale clubs, etc. making distribution a key factor for any company planning on entering this rising market. The most viable option for companies to take to minimize distribution costs is to merge with companies with established distribution activities.

Energy drink companies like Monster, NOS, and Full Throttle all use Coca-Cola as a distributor and Rockstar, Amp, and DoubleShot use PepsiCo. The only energy drink company that is independent is Red Bull. This method creates a platform for a more efficient and effective supply chain management activities. A key factor to stay above the competition in the alternative beverage industry is innovation. Consumers of alternative beverages require everything from product innovation to marketing campaigns to be new and exciting.

Products like Gatorade, Red Bull, and 5 Hour Energy are prime leaders of innovation and are rewarded with high market shares. The concern of any new entrant is to be able to be innovative enough to capture market share from the industry giants and to maintain that innovation as to not lose the previously gained market share. The recommendation to this concern is to implement a high percentage of income to product research and development and marketing campaigns. A key figure to watch for on Research & Development and marketing campaigns is return on investment.

The last major concern with this rising industry is the fact that most products are subject to discretionary income. Because many firms use the differentiated strategy and charge premium prices, total sales will move up and down with the average discretionary income. A solution for this concern will be for companies to enter into a fiercer price competition causing the average price for alternative beverages to fall. As firms become more efficient and reduce cost either through distribution, suppliers, or production, firms should translate those reductions to the consumers.

The lower the prices for these premium goods the less subject the alternative beverage industry will be to the ups and downs of the economy. The overall state of the alternative beverage industry is growing. With economic environment improving coming out of the recession and consumer preferences changing away from carbonated soft drinks to alternative beverages, the projected outlay for this industry is extremely high. The blue ocean products like Red Bull, 5 Hour Energy, and Gatorade are seeing increased competition in the industry forcing more product and marketing innovation in the industry.

The only main concern for the alternative beverage industry is the health issues involved with energy and relaxation drink. However, these issues are being addressed by the FDA and other concerned parties persuading industry leaders such as Red Bull and Monster to put cautions and warnings on the products as well as monitor the amount of inputs producing caffeine. Appendix 1. Projected Percent Growth for Alternative Beverage Industry Year Dollar Value ($billions) Percent Change 2009 40. 2 2010* 42. 8 6. 47% 2011* 45. 5 6. 31% 2012* 48 5. 5% 2013* 50. 8 5. 83% 2014* 53. 5 5. 3% Average Percent Change = 5. 89% 2.

Select Financial Ratios for PepsiCo 2010-2012 Ratios 2012 2011 2010 Profit Margin –((Sales Revenues – COGS)/sales revenue) 14% 14% 14% Return On Equity – (After Tax Income/equity) 28% 31% 30% Liquidity – (Current assets/current liability) 1. 10 0. 96 1. 11 Debt to equity – (total debt/total equity) 1. 27 1. 30 1. 18 Inventory Turnover – (COGS/Inventory) 8. 74 8. 26 7. 88 Net-Asset Value – ((Assets-Liabilities)/Shares Outstanding) 37. 27 34. 97 33. 06 Earnings Per Share – ((After Tax Income)/Shares Outstanding) 4. 00 4. 13 4. 01 3. Select Financial Ratios for The Coca-Cola Company 2010-2012 Ratios 2012 2011 2010.

Profit Margin –((Sales Revenues – COGS)/sales revenue) 22. 45% 21. 86% 39. 13% Return On Equity – (After Tax Income/equity) 27. 15% 27. 13% 38. 09% Liquidity – (Current assets/current liability) 1. 09 1. 05 1. 17 Debt to equity – (total debt/total equity) .995 .903 .755 Inventory Turnover – (COGS/Inventory) 5. 84 5. 89 4. 79 Net-Asset Value – ((Assets-Liabilities)/Shares Outstanding) 18. 08 6. 99 6. 76 Earnings Per Share – ((After Tax Income)/Shares Outstanding) 2. 02 1. 90 2. 58 4. Select Financial Ratios for Monster Beverage Corporation 2010-2012 Ratios 2012 2011 2010 Profit Margin –((Sales Revenues – COGS)/sales revenue).

27% 26% 25% Return On Equity – (After Tax Income/equity) 53% 29% 26% Liquidity – (Current assets/current liability) 2. 89 4. 44 4. 97 Debt to equity – (total debt/total equity) 0. 00 0. 00 0. 00 Inventory Turnover – (COGS/Inventory) 4. 90 5. 20 4. 07 Net-Asset Value – ((Assets-Liabilities)/Shares Outstanding) 3. 89 5. 62 4. 65 Earnings Per Share – ((After Tax Income)/Shares Outstanding) 2. 05 1. 64 1. 19 5. Market Share Data and Tables (2009-2012) A. Beverage Industry Market Share Carbonated Soft Drinks 48. 2% Bottled Water 29. 2% Fruit Beverages 12. 4% Sports Drinks 4. 0% Ready-to-Drink Tea 3. 1% Flavored or Enhanced Water.

1. 6% Energy Drinks 1. 2% Ready-to-Drink Coffee .30% B. Sports Drink Industry Market Share Gatorade Perform 50% Powerade Ion4 16. 2% Gatorade 10. 6% Gatorade G2 10. 3% Powerade Zero 4. 5% Gatorade Cool Blue 1. 4% Gatorade Frost 1. 4% G2 1. 2% Powerade 1. 0% Powerade Zero Ion4 .80% C. Energy Drink Industry Market Share Red Bull GmbH 39. 8% Monster, Monster Energy, and Java Monster 29. 9% Rockstar and Rockstar Recovery 9. 2% Nos 3. 5% Amp 2. 1% Full Throttle 1. 4% References Barr , M. , & Hajela, D. (2013). Judge strikes down NYC ban on supersized carbonated soft drinks. Wall Street Journal.

Retrieved from http://online.wsj. com/article/AP2994ae4cfc42475d93e82c5e0b45319a. html Beverage industry. (2012, July 18). Retrieved from http://www. bevindustry. com/articles/85656-2012-state-of-the-industry–sports-drinks Esterl, M. (2013, January 18). Retrieved from http://online. wsj. com/article/SB10001424127887323783704578245973076636056. html Gamble, J. , Thompson, A. , & Peteraf, M. (2013).

Essentials of strategic management. (3rd ed. , p. 265). New York, NY: McGraw-Hill/Irwin. 2012 state of the industry: Energy drinks. (2012, July 15). Retrieved from http://www. bevindustry. com/articles/85655-consumers-seek-out-energy-boosts.