Create an Economic and Management Accounting Plan

To completely understand the soft drink industry, certain aspects must be considered. These aspects include the dominant economic elements in the market, the five forces analysis, the trends in the industry and the critical factors in the industry. From this analysis, some recommendations can be made.

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A microeconomic analysis of the current state of the soft drink market in the U.S. and how any recent developing trends may affect the demand for this product

Three economic factors can be used in evaluating the soft drink industry: growth rate, overall profitability, and market size. The size of the market for soft drinks has been changing. In the non-alcoholic drink industry, the consumption of soft drinks has a market share of 46.8 per cent. In 2004 the total market value of the soft drink industry reached $307.2 billion. The market value was forecasted to reach $367 billion in 2009. Furthermore, the volume of soft drinks in 2004 was 325,367 million litres. This shows that the soft drink industry has a potential for high profits; however, there are obstacles to these promising lucrative profits (Murray, 2006).

The fast growth rate has been criticized due to the market saturation of soft drinks in the United States. A Datamonitor (2005) report stated that despite the constant consumption of soft drinks, the global market is expected to decrease slightly due to stagnant market prices. This change results from other economic sectors of the non-alcoholic industry, which are also growing, such as bottled water, coffee, and tea. Energy drinks and sports drinks are projected to experience increased growth because competitors are expected to start the production of new products. The returns of the soft drink industry will remain solid. However, the market saturation has made analysts foresee a slight decrease in industry growth. Because of this, the leaders in the soft drink industry have started establishing alternative markets such as bottled water, confections, sports drinks and snacks. Softoft drink companies should diversify their product offerings to continue realising profits and maintain growth.

The geographic scope of economic rivalry explains some of the financial features in the soft drink industry. Three major players dominate the soft drink sector, according to Barbara Murray (2006). She details that the king of the soft drink empire is Coca-Cola, boasting a global market share of approximately fifty per cent; PepsiCo follows with a share of about 21 per cent and Cadbury at 7 per cent (Cadbury Schweppes, 2004). Other than the three leading players, other smaller companies, such as National Beverage Company and Cott Corporation, occupy the remaining market share. All mentioned companies make some of their profits outside the U.S. border. The United States does not hold the most significant soft drink market share, so the companies must expand outside their borders to compete globally.

Coca-Cola has many distributions in Asia, North America, and Europe. On the other hand, PepsiCo has most of its profits from the U.S. (PepsiCo Inc, 2004). Cadbury has a better global presence than PepsiCo due to their international mix (Cadbury Schweppes, 2004). The smaller players are also striving to establish a global company, as can be shown by Cott Corporation. The saturation of the U.S. market has made the leaders in soft drinks increase their expansion in the worldwide market to maximize profits.

The ease of entry and exit does not cause competitive pressure in the industry. This is because it is tricky for the new entrants to compete with the already established brands, capital investment, and distribution channels. Leaving the market is also hard due to the loss of money associated with distribution channels, advertisements, fixed costs and contracts invested in creating a brand name. Due to the industry’s good establishment, it isn’t easy to compete successfully unless the product offering is differentiated and can appeal to the customers. Such is the product offering that will be offered by the company, which is all-natural with only 25 calories, 5 grams of sugar and no preservatives or chemicals. The trends below show that the new product has a fighting chance in the market.

Trends that may affect demand

Several trends in the U.S. soft drink industry have been witnessed, which are at odds with each other. Trends in health have raised concerns about all soft drink corners contributing to the reduction of artificially and naturally sweetened beverages. These trends have heavily weighed on the performance of concentrates, juice, and carbonates. At the same time, it has allowed the prosperity of naturally healthy drinks such as bottled water and tea.

Sugar turns increasingly sour for consumers in the U.S

Trends focusing on anti-sugar have continued to sweep the soft drink industry in the United States. Cities in the U.S., such as Philadelphia and Chicago, have imposed taxes on beverages that have been sweetened. These taxes in Chicago were, however, overturned later.

Major players are losing their sales share.

The prominent players in the market, Pepsi and Coca-Cola, continued experiencing a decline in sales in 2017. In 2017, Pepsi recorded a more significant decrease in sales than its sales figures in the previous year. Pepsi attributed this decline to its low-calorie offerings.

Pepsi and Coca-Cola diversify beyond Sparkling.

Major players in the market have diversified their offerings to incorporate healthier options. At the same time, they have not alienated the consumers who prefer legacy brands with high-sugar content. Coca-Cola made various moves in this direction, the most notable being the big push into RTD coffee. They realized this by releasing a branded coffee called Dunkin’ Donuts which would soon be followed by coffee branded McCafe.

Bottled water to surpass soft drinks in the coming years

It has been forecasted that bottled water is expected to remain the growth driver both in value terms and volume. Bottled water growth will be more significant in the book than soft drinks and contribute to most of the soft drink value growth.

A macroeconomic analysis of the state of the U.S. economy and the impact this may have on the demand for this new product.

The soft drink industry is very competitive for all the involved players, with much of the competition coming from rival sellers in the market. All companies in this market should focus on the pressures from rival sellers, new entries, buyers, suppliers and substitute products.

Rival sellers pose the most significant competition in the soft drink industry. The three primary players, Cadbury Schweppes, Pepsi Co., and Coca-Cola, have globally established brands and exert the most significant competition within the industry. Four of the top five drinks brands are owned by Coca-Cola; these include Sprite, Coca-Cola, Fanta and Diet Coke; despite this, Coca-Cola recorded lower sales in 2005 than PepsiCo. Globally, Coca-Cola had the highest sales compared to PepsiCo. PepsiCo dominated North America’s sales with 22 billion dollars, while Coca-Cola only had approximately 6.6 billion dollars. Much of Coca-Cola’s sales came from overseas. Coca-Cola’s main competitor is PepsiCo; both companies’ brands have struggled for power for many years.

Another competitive pressure is loyalty to the brand name. A Brand Keys’ Customer Loyalty study showed the brands with the most significant customer loyalties. Diet Coke had the 36th position, while PepsiCo ranked 17th as having the most loyal brand customers. The trend of competition between sellers in a rivalry is to create soft drink varieties, to entice new customers and keep the existing ones boosting sales.

A new entry into the market is a relatively weak force in the industry. This is due to the existence of companies that are dominating the industry with established brand names and distribution channels. Moreover, the soft drink industry has little growth and is fully saturated. Because of this, it is tough for new companies to enter the market due to the extreme competition from established companies. Secondly, entry into the market is difficult due to the high fixed warehouse costs, labour, economies of scale and trucks. It is difficult for new entrants to compete successfully without economies of scale. Due to the heightened capital requirements and market saturation, it’s tough for companies to enter the soft drink market (Deichert et al., 2006).

Substitute products are those offered by competitors outside the soft drink industry. Such substitutes in the market include bottled water, tea, coffee, sports drinks, and water. Sports and water are the most popular drinks with a touch of health consciousness. Increasing sports drinks and water varieties entice customers’ tastes and are healthier. Beverages like tea and coffee are worthy competitors as they provide some consumers with much-needed caffeine. Customers who are used to soft drink intake may opt for coffee as a substitute to reduce carbonation and sugar. The increasing number of Starbucks stores has increased the coffee flavours which appeal to the consumer market. Consumers can cheaply shift switch from soft drink products to substitute products. Therefore, the threat is a significant one in the industry.

The suppliers do not exert much competitive pressure in U.S. soft drink industry. The suppliers in the industry are the manufacturers of bottling equipment and the secondary supply packaging. Coca-Cola does not carry out bottling, but it owns the largest share of Coca-Cola enterprises, the world’s largest bottler. The suppliers do not hold much bargaining power in the industry. Many equipment suppliers are in the market, making the supply of the needed equipment easy to find and reducing switching costs. This makes the suppliers have little bargaining power.

Healthier soft drinks can succeed in the industry despite the entry barriers into the market. If the latest trends are anything to go by, customers are now switching to healthier drinks. The major players in the market are experiencing lower sales as a result of their offerings, which are rather unhealthy. Additionally, bottled water and healthier drinks are forecasted to surpass the legacy high-sugar beverages. From this analysis, the product advertised as a healthier alternative to other artificially flavoured drinks has a real chance of succeeding in the industry.

A list of essential management accounting practices that the company must put in place to support its planned expansion. Each item you list must be fully explained to the management group so they understand how and why the practice is necessary to manage the growth that will come with the expansion of the product to different states. Be sure to consider that the company will need outside financing and may even consider the possibility of going public to sell its stock on an exchange.

Better management of working capital

This may seem like an odd finance source, but business organizations often sit on cash reserves that have not been discovered. This strategy can allow cash to be unlocked and released back into the business, leading to self-financed growth. This strategy focused on the credit procedures, which look at granting the credit terms and how the outstanding payments are chased. Another area of better management is ensuring that stocks are kept at an optimum level through efficient inventory management; this way, cash can be released to finance growth and support expansion (Workspace, 2018). A good look into managing inventory can identify where finances are trapped. Adequate working capital management bases its analysis on control of stock and debtors and maximizing the creditors’ terms. The business’s cash position can be impacted positively by taking advantage of the supplier’s terms. Efficient management of working capital can release enough cash for self-financing growth plans.

Asset Finance

This strategy focuses on speeding up access to cash or preserving it. Asset finance comprises discounting the invoices and funding the purchased assets while factoring the same. This has been an existing finance source for businesses for many years, although it is gaining more recognition today. The amount of finance provided by members of an industry association increased by approximately nine per cent. In an industry and market where cash is king, asset financiers can help preserve the cash by financing the purchase of assets the company needs, such as machinery, equipment, and vehicles (Workspace, 2018). The benefit of this finance scheme is that the financier vies the underlying assets as security; therefore, there is no need for additional collateral. The organizations that offer asset financing help speed up the business’s cash flow.

Consequently, it allows fast access to cash tied up in the book of debtors. Invoice factoring and discounting will enable the company to access up to 80% of the invoice rather than waiting for the agreed-upon terms. The result is that there will be a speedy cash flow within the business. Therefore, the company can have a faster growth and expansion rate.

Going Public

This will mean that the company will undergo an initial public offering, becoming publicly traded and owned. The main aim of going public is to raise capital to expand. The initial public offering starts by contracting an investment bank and deciding on the number of shares and the price. The goal is to sell the company shares to the public for an amount that is more than that paid by the original company owners (Workspace, 2018). The deals between the issuing company and the investment bank can have high values of a hundred million dollars and sometimes hit one billion dollars. There are, however, positive and negative impacts of going public that must be considered. The main advantage of going public is the increased strength of the capital base, which makes it easier to make acquisitions, diversify ownership and increase prestige. The downside of going public is that it puts pressure on short-term growth, makes the former business owners lose decision-making control, makes it necessary to disclose the financial information to the public, puts more restrictions on the management and increases operating costs.

References

Murray, Barbara. (2006). The Coca-Cola Company. Hoovers. Retrieved February 13, 2006, from http://premium.hoovers.com/subscribe/co/factsheet.xhtml?ID=10359

Cadbury Schweppes. (2004). 2004 Annual Report. Retrieved February 17, 2006, from http://www.cadburyschweppes.com

Datamonitor. (2005, May). Global Soft Drinks: Industry Profile. New York. Reference Code: 0199-0802.

PepsiCo Inc. (2004). 2004 Annual Report. Retrieved February 17, 2006, from http://www.pepsico.com

The Coca-Cola Company. (2004). 2004 Annual Report. Retrieved February 17, 2006, from http://www.cocacola.com

Workspace. (2018). Alternative sources of business growth finance. Retrieved from https://www.workspace.co.uk/community/homework/business-finance/alternative- sources-of-business-growth-finance

Deichert, M., Ellenbecker, M., Pesarchick, L., Klehr, E., & Ziegler, K. (2006). Industry analysis: Soft drinks.

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Question

Week 8 – Signature Assignment: Create an Economic and Management Accounting Plan

Instructions

Create an Economic and Management Accounting Plan

Assume that you have just been hired as a financial consultant to a startup company that plans to introduce a new beverage to the soft drink market. Your company’s product is advertised as a healthier alternative to soda and other artificially flavoured drinks. The all-natural sparkling beverage has only 25 calories, 5 grams of sugar, no chemicals or preservatives, and has four fruit flavours: orange, pineapple, apple and grape.

Two years ago, the product was introduced in Florida. A phenomenal growth in sales since its introduction demonstrates that the development and its marketing possess tremendous potential. Accordingly, the company wants to explore possibly expanding product sales to the rest of the U.S. market.

Although the company has been highly profitable, the management group has little financial experience. Most decisions have been made based on ‘does it feel right’ instead of rigorous, data-based financial analysis. The company has no system of financial oversight, and the managers of the company have a limited understanding of sound management accounting practices.

You have been asked to give the company a general analysis of this proposed project. Your specific task is to produce a report discussing the following key aspects of this expansion project:

A microeconomic analysis of the current state of the soft drink market in the U.S. and how any recent developing trends may affect the demand for this product.
A macroeconomic analysis of the state of the U.S. economy and the impact this may have on the demand for this new product.
A list of essential management accounting practices that the company must put in place to support its planned expansion. Each item you list must be fully explained to the management group so they understand how and why the practice is necessary to manage the growth that will come with the expansion of the product to different states. Be sure to consider that the company will need outside financing and may even consider the possibility of going public to sell its stock on an exchange.

Based on the quality of your report, the management group will decide whether or not to hire you to help them develop a complete capital budgeting plan for this project. Because you would like to do this, mainly because capital budgeting consulting pays exceptionally well, you want to ensure your report is well-written, organized, professional and convincing.

Length: 6-8 pages, not including title page and references

Your response should demonstrate thoughtful consideration of the ideas and concepts presented in the course and provide new thoughts and insights relating directly to this topic. Your response should reflect scholarly writing and current APA standards.