Macro-view: Some growth figures from recent years
As you can see from the graph below, the industry as a whole has seen growth from 2012 through to 2017. However, it's interesting to note the relative growth for different soft drink categories in that period. Notice that the growth of carbonated soft drinks has been relatively weak, clocking just 9.4% CAGR from 2012 to 2017. For comparison, in the same period bottled water grew by 28%. Although carbonated soft drinks remain an important revenue stream in absolute terms, the trends reveal that its growth rate year on year is in decline. The most significant mover is bottled water, given its relatively large absolute share of the market. Other segments are growing faster than bottled water; but in terms of revenue generation, bottled appears to be the key in coming years.
Breaking the numbers down by region, we can see in the second graph below that - unsurprisingly perhaps - the major movers have been emerging markets, particularly the Asia Pacific region. China in particular has registered huge growth since 2012. Latin America continues to see healthy growth, despite mixed fortunes in the economic outlooks of countries within the region. However, in the mature markets of Europe and North America, soft drink growth has slowed considerably. The vast reduction in consumption of sugary carbonated soft drinks (CSDs) has contributed to that slowdown. It should be noted, nevertheless, that health-conscious consumers are increasingly a feature of emerging markets too, and the discriminating consumer is not unique to already industrialised nations.
There are some interesting nuances within this broader trend of CSD declines. While it is true that these drinks have notoriously high sugar contents, it is worth noting that many other categories typically perceived as healthier options contain just as much sugar per litre as CSDs. Even "natural" fruit juices typically contain huge amounts of fructose sugars, which from a health perspective can be just as detrimental. The importance of health perception versus objective health characteristics may be crucial from a marketing and overall strategy point of view. This fact is reinforced if we look at patterns even within the CSD sector. Consider the graph below. Notice that of all listed CSDs, Sprite has had by far the most favourable outcomes compared to the others. And undoubtedly, this is due in large part to the perception of clear, more "water-like" beverages instilling an association of health in the minds of consumers. Notwithstanding the fact that Sprite's sugar content is just as high as other CSDs!
Government and regulatory pressures
One of the most immediate and obvious threats to the soft drinks industry comes from governments, particularly in mature markets where the negative health effects of CSDs have long been established and widely publicised. Increasingly we're seeing soda taxes being touted as the most effective means to reducing rates of diabetes, obesity and other sugar-related ailments. There are several reasons why the soda tax has broad appeal. For a start, it is a "sin" tax, whereby government is penalising people for things that they should not be doing anyway. As such, it is an easier political "sell" compared to other taxes. Moreover, it is a politically saleable way of raising extra revenues in a context where many governments are still in austerity-mode from a fiscal point of view, and struggling to find ways of balancing the budget without alienating the electorate. For that reason, we've already seen a sugar tax successfully pushed through in Britain with George Osborne's 2016 budget.
Companies have been dealing with the looming threat of soda taxes and more stringent health regulations in a number of ways. Apart from the obvious but perhaps less marketing-friendly approach of lobbying governments directly to discourage soda taxes, some soft drinks companies have been attempting to pre-empt such taxes (in the US in particular) by voluntarily adopting certain health-focused commitments and targets. Recently, both PepsiCo, Inc and the Coca-Cola Company have agreed to comply with what's called the Children’s Food and Beverage Advertising Initiative (CFBAI), which aims to establish "ethical marketplace standards" amongst soft drinks manufacturers, as well as other food producers. Among the provisions listed, the CFBAI requires signatories to "devote 50% of their advertising directed at children ages 12 and younger to messages that encourage good nutrition and healthier lifestyles"; "to better define nutritional criteria so that products promoted as 'better for you' are consistent with established scientific and government standards"; and to "reduce third-party licensed characters in advertising directed primarily at children ages 12 and younger". How soft drinks manufacturers can balance such pledges with the need to maintain their margins is a live and vital strategic question for such companies. Especially given the fact that it has been established that consumer loyalty in the soft drinks sector tends to be established in childhood and adolescent years.
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