India’s Soft Drinks Industry Essay

1. 1. 1 INDIA’S PHYSICAL RESOURCES India is a country rich of raw materials, resources and land. For this report, we will focus on those physical resources that are essential for the soft drinks industry – water, sugar, aluminium, power sources. With a land space of over 2. 9 million square kilometres (sq km) and a population of 1. 22 billion people, India has only 314,070 sq km of water (CIA World Fact book, 2012). Even though the Indian government has done many things do improved the situation by building water plants and water piping in the urban and rural areas, there are still about 18. 5% of the population (226 million) that lack access to clean, drinkable water (CESS INDIA, 2004) With a sophisticated water purification installed in our soft drinks plantation, A. G. Barr are able to process the unclean water into safe, drinkable water and use it for the basis of the final products. Hence, A. G. Barr will be able to offer an alternative drinking source for the citizens with our soft drinks products. Next, with a total arable territory of about 1. 2 million sq km, agriculture is the biggest industry and plays a major role in the socioeconomic growth of India (Maps of India, 2012). According to Food and Agriculture Organization of the United Nations (FAO) (2012) and the Maps of India (2012), India is the 2nd biggest world producers of sugarcane (sugar) with about 453 sugar mills located all over India. INCLUDEPICTURE â€Å"http://faostat. fao. org/DesktopModules/Faostat/Images/T20/ChartPic_3nemzw945otecriq01oo. png? 3f2841b2-add0-4841-9dc7-5707a2a011f0† * MERGEFORMATINET Table 1: Top Production – Sugar cane 2010 Source: FAO Thirdly, for aluminium, India is the fifth biggest producer in the world after Australia, Guinea, Brazil and Jamaica (Maps of India, 2012). Finally, to obtain vast economic growth and a flourishing industrial sector, the Indian government has invested and given top precedence to the power sector of the nation and as of the 21st century, India is able to generate about 90% of its own energy through (Maps of India, 2012): Thermal/Coal Power Hydro Power Renewable Resources Power Nuclear Power With most of the raw materials and resources readily available in India, the price for these materials will be relatively standard and low. Hence, this will lower the cost of production. This is a key factor in venturing into the India market as A. G. Barr require a huge amount of clean water and sugar to produce the soft drink products. 1. 2 THREATS 1. 2. 1 INFRASTRUCTURE The infrastructure in India is one of the most problematic and unreliable in the world. As stated previously, even though India is able to generate 90% of its power, due to the poor financial position of many power supply companies, the power supplies are always inconsistent and frequently being cut-off (‘India: Risk overview’, 2011). Hence, companies, offices and industrial plants need to have their own back-up power facilities to ensure no interruption to the production processes (‘India: Risk overview’, 2011). The road and railway system in India is still undependable and many traffic congestions are resulted due to the inadequacy. Pan (Asiamoney, 2010) notes that while the Indian government are investing US$1 trillion in infrastructure from 2012 to 2017, political bureaucracy and lack of good projects are hindering the developments of infrastructure. At the same time, Roy (Euromoney, 2010) reports that while Mr. Rajiv Lall, chief executive of state-run lender Infrastructure Development Finance Company believes India infrastructure has been slowly improving, the dependable relationship between the public sector and the private sectors in infrastructure will lead to corruption and thus may hinder the progression of big infrastructure projects. Therefore, any company that wish to venture into India soft drinks market will need to spend a sizeable amount on power generator and water purification facilities. This huge expenditure will put a dent on the initial capital investment and A. G. Barr need to take this into account and plan on how much of the expenditure to be transferred over to the final consumers through the products. 1. 2. 2 EDUCATION AND LABOUR According to several organizations; CIA (2012), US Department of State (2011) and WEF (2011), India’s literacy rate is only at 61%. The education level in India is low as many of the population live in poverty or the slump and unable to afford going school. Moreover, the Indian government lacks of provision of education is hindering its people to learn and receive knowledge. This result in a low skilled workforce and the unemployment rate for youth age 15 to 24 in India is high at 10. 5% (CIA World Fact Book, 2012). While a soft drink company with high technology facilities and processes requires employees with minimal skills, it is still essential for these workers have a basic understanding and motor skills to operate the high-tech, expensive machineries. Another end of the spectrum is those highly educated Indians where the information technology (IT) sector is booming. These IT personnel and engineers are viable to our company as they able to manage, supervise and suitable of the higher ranking jobs. Hence, to ensure the workers hired have the essential skills, A. G. Barr will need to frequently conduct training programs, skills development workshops and have simple instructions which are easy to follow. 2. DEMAND CONDITIONS With the relaxation of the Indian government policy on FDIs and foreign companies, the soft drinks industry had change tremendously. As the US and EU markets are highly saturated, companies are looking into the Asian markets to expand and gain more revenues. Apart from China, Japan and South Korea, India is the 4th leading Asian soft drinks market and the market is still growing and has yet to reach its saturation point. In 2010, there is a substantial demand for soft drinks as the market has grown by 10. 4% (Datamonitor, 2011). Datamonitor (2011) even predicts that by 2015, the Indian market will grow to a value of $5. 8 million. Table 2 shows the growth of India soft drink market from 2006 to 2010. Table 2: India soft drinks market volume: million liters, 2006–10(e) Datamonitor (2011) also reports that as of 2010, the soft drinks industry has generated total revenues of $3. 8 billion and with 50% of the total revenues, carbonates sale is the most profitable category. Table 3: India soft drinks market segmentation: % share, by value, 2010(e) It is essential to note that currently there is a growing trend of â€Å"vitamin water† or â€Å"nutrient water† in the world as many people are becoming more health conscious. The Times (London) (2012) reports that even India is not spared from the trend as PepsiCo, together with Tata Global Beverages, intend to market the â€Å"nutrient water† to India’s urban, middle-class consumers where a bottle of such product will cost slightly higher than a standard bottled water. Hence, this could greatly affect the retail sales of carbonates. A. G. Barr has already altered its products to regular variants to low calorie and no added sugar variants in accordance to the gradual shift towards healthly living in the UK (A. G. Barr, 2012). For example, its popular porduct, IRN-BRU now comes in a sugar free variation, the ‘IRN-BRU sugar free’. Thus, the â€Å"nutrient water† market is another sector A. G. Barr could develop into not only in UK but also in India. 3. India has huge supporting industries for the soft drinks market and the availablity of the main components for a soft drinks company in India is high. There are 453 sugar mills in India and the top 6 growing states are located in the Northern, Southern and Western regions of India (Maps of India, 2012). Noteably, the Indian government has been extentsively investing in the agriculture sector to ensure that the process of the sector from raw materials to warehousing and merchandising flow smoothly. And as for the aluminium industry, India has a sizeable number of aluminium plants located mainly in Northern and Southern regions. 3. 2 BARGAINING POWER OF SUPPLIERS As inputs are readily available, suppliers are unable to provide their services or sell their products at a higher price than their competitors as it is of no loss to the soft drinks company since the company is able to get the same or better services and products from other suppliers. A. G. Barr is able to obtain the primary inputs for its products through several sources in the region or state. Thus, the bargaining power of suppliers such as the packaging producers and raw materials and soft drinks ingredients producers are relatively low (Datamonitor, 2011). 3. 3 BARGAINING POWER OF BUYERS The power of the retailers and distributors in this market is weak as most soft drinks manufactures work closely with the local bottling companies to distribute the ready for sale products to buyers within a certain region or sector (Datamonitor, 2011). Datamonitor (2011) also reports that with 46. 3% of the total market volume, the independent retailers such as the small family mart shops are the main distribution channels for soft drinks but this could change with the introduction of super and hypermarkets. Thus, consumers will have a wider range of soft drinks brands to choose from. In order to gain relatively significant market share, A. G. Barr needs to do plenty of advertising and promotion. One of the strategies A. G. Barr could adopt is to set their soft drinks at a lower price than the main competitors, TCCC and PepsiCo in the rural areas while maintaining the same price in the urban areas where most of the middle-income and high-income classes have high consumer purchasing power. 4. FIRM STRATEGY, STRUCTURE AND RIVALRY 4. 1 CULTURAL IMPACT ON FIRM STRATEGY AND STRUCTURE A. G. Barr core strategic focus is based on the following 7 platforms (A. G.Barr, 2012): Core Brands and Markets Portfolio development Route to market Partnerships Efficient Operations People Development Sustainability To ensure these strategies and structure is maintain in other country, A. G. Barr has to train its overseas employees, make them understand and cultivate the A. G. Barr working culture. However, this will be a tough challenge in India due to the poor education and different socio-culture. Thus, A. G. Barr needs to accommodate its Western working culture with India working culture, however without losing its main mission and strategy. To ensure this is excuted properly, A. G. Barr needs to obtain a specialist in the Indian market and culture. 4. 2 RIVALRY AMONG EXISTING COMPETITORS In India, the soft drink market is dominated by three main players – The Coca-Cola Company (TCCC), PepsiCo and Parle Bisleri Ltd – securing 74. 1% of the total market volume (Datamonitor, 2011). Table 4: India soft drinks market share: % share, by volume, 2010(e) BBC News (2011) reports that TCCC planned to invest $2 billion in India to boost its market share and expected India to be in its top five markets by 2020. Meanwhile, PepsiCo intend to launch a new product, â€Å"nutrient water† with Tata Water targeting at the young urban consumers to gain more market shares (Pagnamenta, 2012). This shows how competitive the rivalry in the India soft drinks industry where the two major market shares are actively investing and developing new products to gain more shares. 4. 3 THREAT OF NEW ENTRANTS The big players of the India soft drinks industry are actively improving themselves and distinguishing their products through various methods. Furthermore, TCCC and PepsiCo are renowned world soft drinks brands which have been existing in the India market for many years. Though new companies in the industry may have difficulty competing with the existing players, it may accomplish small success by using different production method or focusing on the lesser ventured catergories of the soft drinks markets such as health drinks and energy drinks (Datamonitor, 2011). This could be a major break through for A. G. Barr as its most popular products; the IRN-BRU; is low in sugar and contains additional benefits of an energy drink. In addition, the Rockstar series which are designed to target those who lead active lifestyles may be able to attract the young, urban consumers. With several advertising accolades, A. G. Barr has the knowledge and is able use the power of media to attract potential consumers and gain more market shares. 4. 4 THREAT OF SUBSTITUTES The main substitutes for soft drinks markets are traditonal tea and coffee, homemade juices and fresh water from the water plants or piping system. As A. G. Barr and other leading soft drinks companies have diverse products to cater to the different needs of the consumers – carbonates, bottled water, juices etc – this will narrow down the threat of substitutes. However, the threat is still relatively moderate as retailers and distributors may give more shelf space for traditional tea and coffee products as they may be stored at room temperatures (Datamonitor, 2011). 5. GOVERNMENT BBC News (2011) reports that India is ranked 95th out of 183 nations in the Transparency International Corruption Perceptions (TICP) list. Due to the high corruption scandals among its government officials, low or invisible legislative work, red tape and bureaucracy, India has dropped from 87th in 2010 to 95th (BBC News, 2011). Despite its numerous intervention, corruption in India is an issue which is very difficult to get rid off since most of the political members and officals have their own agendas and are resistant to change (‘India: Risk overview’, 2011). Hence, foreign companies will faced many setbacks when they venture into the India sectors. 6. ROLE OF CHANCE The role of chance plays a small part in factoring the soft drinks industry as most of the technology are at it most advanced state. The only main issue currently is the Iran oil crisis. As India still refuses to cut Iranian oil imports, this may lead to a huge setback if USA decides to attack Iran and ignore India’s relation with Iran (CBS News, 2012, Kennedy, 2012). With a potential strain relationship with USA, this could lead to severe freeze in the trade and foreign direct investments. Furthermore, the other two traid nations, EU and Japan, may follow suit USA’s decision to cut ties with India for refusing to withdraw the purchasing of Iranian oil. CONCLUSION In conclusion, the soft drinks market in India is huge though it is predominately hold by 3 major key players. To venture into this territory, a new company need to set itself apart from the majpr players through unique advertising, differentiated production method and diverse product offerings. New companies may set an initial low price of its products to attract consumers however; this should not be a long term strategy. Companies need to have a huge capital investment to counter the corruption, trade policies and poor infrastructure. Thus, expenditures and initial start-up cost will be high and companies will have to redistribute part of the cost to its final consumers in order to gain profits. PART B: CRITICAL EVALUATION OF PORTER’S NATIONAL DIAMOND MODEL Michael E. Porter is a well renowned economic strategist whom has writen 18 books and over125 articles (HBS, 2008). With a core field in competitive strategy, Porter has written and developed a number of strategic frameworks such as the Porter’s National Diamond model and Porter’s 5 Forces analysis. Since the model was based on eight developed countries and two industrialized countries, an analysis on developing, growing countries such as India is flawed. This is because these developing countries are not on the same economic level as the 10 countries. Thus, though the Porter’s National Diamond (PND) model analysis almost every aspect of India’s profile, it still lacks in-depth analysis and companies should not base their analytical evaluation on the PND model alone. As supported by Van Den Bosch, and Van Proojien (1992), both authors believed that PND model provide limited analysis on the control of national culture on the competitive advantage of nations. Similar to the EU countries, India too has a diverse set of culture which plays significant role in the management of the country’s economy, laws, trade policies and governance. There are limited sources on India and the soft drinks market due to the lack of legistative work from the government officals. Furthermore, some of the reports or statistics may not be entirely accurate due to the high corruption level. For example, reports may state that India is able to generate 90% of its power but the power plants are inconsistent and supplies are frequently distrupted. Also, to what extend is the literacy rate of India is correct? The literacy rates may be higher than stated as with 1. 22 billion people, India officials may have a tough job collecting the accurate datas. Moreover, with high poverty and low income, most of Indian citizens have the ‘thrifty mindset’ whereby they prefer things which are basically free even though it maybe harmful such as drinking untreated water. These are the pros of the PND model for India: Analysis different aspect of the country profile Takes into account the role of Government which is the most essential for India These are the cons of the PND model for India: Limited credible sources for analysis Little depth as India is a huge country with various swinging factors. Limited analysis on the cultural effect on a country’s competitive advantage Ways to improve the PND model for India: Supporting the model with other analysis model such as PEST, SWOT, Porter’s 5 Forces and Fons Trompenaars’ Seven Cultural Dimensions. Intentsive research on the market and the growth of the market. REFERENCES A. G. Barr (2012) About Us. Available at: http://www. agbarr. co. uk/agbarr/newsite/ces_general. nsf/wpg/about_us-our_strategy (Accessed: 22 March 2012). BBC News (2011) Coke plans $2bn India investment in bid to boost growth. Available at: http://www. bbc. co. uk/news/business-15731884 (Accessed: 20 February 2012). BBC News (2011) India Transparency International corruption index blow. Available at: http://www. bbc. co. uk/news/world-asia-india-15979646 (Accessed: 01 March 2012). CBS News (2012) U. K. : Attack on Iran has â€Å"enormous downsides†. Available at: http://www. cbsnews. com/8301-202_162-57380838/u.k. -attack-on-iran-has-enormous-downsides/? tag=mncol;lst;1 (Accessed: 20 February 2012). India. CESS (2004) Right to Drinking Water in India. Available at: http://www. cess. ac. in/cesshome/wp%5CWater. pdf (Accessed: 22 March 2012). CIA (2012) South Asia, India. Available at: https://www. cia. gov/library/publications/the-world-factbook/geos/in. html (Accessed: 20 February 2012). FAO (2012) Faostat. Available at: http://faostat. fao. org/site/339/default. aspx (Accessed: 01 March 2012). HBS (2008) Harvard Business School Faculty & Research. Available at: http://drfd. hbs. edu/fit/public/facultyInfo. do? facInfo=bio&facEmId=mporter (Accessed: 10 April 2012). ‘India: Risk overview’ (2011) Business Asia, 43, 14, pp. 10-11, Business Source Premier, EBSCO [Online]. Available at http://searchebscohost. com (Accessed: 22 March 2012). Kennedy (2012) US Pleas for Asia to Cut Iranian Oil Imports Fall on Deaf Ears, Oilprice. Available at: http://oilprice. com/Latest-Energy-News/World-News/US-Pleas-for-Asia-to-Cut-Iranian-Oil-Imports-Fall-on-Deaf-Ears. html (Accessed: 20 February 2012). Maps of India (2012) India Agriculture.