Microeconomic factors influencing the soft drink industry

Management Accounting

Microeconomic Analysis

In delineation, microeconomics takes into account factors of resources accessibility and usage that influence individuals as well as businesses. For any firm, understanding the key microeconomic factors influencing the business is imperative as it facilitates the planning and groundwork, in addition to longstanding business strategy development. The microeconomic factors that have an influence on just about every business include employees, competitors, media, suppliers and shareholders. To begin with, the most significant competition that soft-drink companies face in their industry is that of rival sellers. In the contemporary, the main players in the industry include Coca-Cola, Pepsico, and Dr. Peppers. More so, the competition is significant as they not only have business operations set up within the nation, but also around the world. However, regardless of their dominance in the market, these companies face considerable competition from new companies that offer more innovative and healthier products to the consumers. The implication of this is that the company has a chance to increase its market share as a result of its natural and healthier product offering (Deichert et al., 2006).

The buyers of soft drinks are largely major discount stores, restaurants and grocery stores. The soft drink companies undertake distribution of these beverages to the retail stores for resale to consumers. Buyers within the industry have significant bargaining power. Large-sized grocers and discount stores purchase large capacities of the soft drinks, permitting them to purchase at lower prices. Nevertheless, with the number of persons drinking soft drinks diminishing, the bargaining power of buyers could start increasing as a result of declining buyer demand (Deichert et al., 2006). Another aspect in the microeconomic environment encompasses the brand name of the products. One of the key reasons for the dominance that key players such as Coca-Cola enjoy is owing to brand name loyalty. Therefore, it is imperative for the company to expand its operations in other states in order to market its brand name and improve the loyalty of its consumer base. The new rivalry between competing sellers is to generate new varieties of soft drinks, with the main purpose of maintaining an increase in sales and appealing new consumers (Deichert et al., 2006).

The entry of new firms into the soft drink industry is not just difficult but at the same time does not present strong competitive pressure. Not only do the major companies dominate the soft drink industry as a result of their strong brand name and comprehensive channels of distribution, the soft drink industry is effusively saturated and the growth rate is very minimal. Therefore, this makes it challenging for new entrants within the industry to begin competing against the prevailing companies. What is more, the companies face barriers in the form of high overheads for warehousing, labor and also transportation expenses. These high capital necessities and market satiety make it exceptionally challenging for businesses to enter and easily expend in the soft drink industry (Deichert et al., 2006).

Another element to consider in the microeconomic environment of the soft drink industry is substitute products. Bottled water products and healthy variants of tea have become increasingly popular with the consumers as they go on being inclined on leading healthy lives. There are increasingly more variations in the water and sports drinks that attract dissimilar consumers\' tastes and preferences, and at the same time appear healthier than soft drinks. What is more, coffee and tea act as competitive substitutes for the reason that they provide caffeine. The consumers who frequently buy plenty of soft drinks may substitute them with coffee and at the same time be able to get rid of carbonates and sugar (Deichert et al., 2006).

Recent developing trends may have an impact on the demand of the all-natural sparkling beverage. One of the driving trends in the setting continues to be that of health. Varying societal concerns, outlooks, and standard of living are significant trends. In the United States and Europe, the consumers are becoming more apprehensive of leading a healthy lifestyle. In particular, health concerns with respect to the ingredients within and the nutrition of beverages continue to be persistent. Consumer mindfulness of health issues emanating from obesity and sedentary ways of life characterize a severe risk to the carbonated drinks segment. In turn, this trend is instigating a change in the business setting of the industry, as more and more firms are diversifying and distinguishing their products so as to increase the sales and revenue generated in the market. Consumer awareness and cognizance of sugar content has gone on to steer a decline in the volumes of juice and carbonates. For instance, it is with this regard that consumers have largely opted for bottled water, owing to their natural ingredients that are neutral. Customarily, carbonated drinks are not perceived as healthy products, and the recent trend is that more and more consumers are apprehensive of the use of artificial condiments and largely processed ingredients like corn syrup. Therefore, with consumers continuing to pay more courtesy to the ingredients employed in the products they purchase and consume, there is an increasing demand for products that are made from ingredients that are natural and identifiable. Therefore, this implies that the growing trend has a positive impact on the business with an increasing consumer base for its all-natural sparkling beverage (Diechert et al., 2006).

Another trend within the industry is that of the entry and exit of firms and this is bound to influence the company. More precisely, merger and consolidation have become predominant and prevailing aspects in the soft drinks industry, instigating a number of companies to exit the industry and subsequently re-enter the industry yet again. Numerous top firms have been seeking to steer growth in revenue generated and increase market share by means of the augmented economies of scale obtained through mergers and acquisitions (Deichert et al., 2006). A good illustration is through the acquisition of Quaker Oats by Pepsico, in the purchase of Gatorade, a product that is bound to expand the market share and dominance of Pepsico in the energy drink market segment (Datamonitor, 2005). In particular, this trend affects the firm in the form of increased rivalry as the companies continue to diversify their products and also branch out.

In recent years, there has been low growth in the soft-drink industry. This has become an aspect of great worry for companies within the industries, prompting several of them to come up with new strategies to tackle the low rates. In turn, this underlines the increasing trend of preferences for differentiated products from the consumers. Taking into account that soft drinks have been in the market for a lengthy period of time, consumers presently demand innovation and differentiation in the products they purchase and consume. In the contemporary, being ordinary does not cut it for companies. This influences the company as the main solution for this problem is to have products that are differentiated. The implication of this is that it is necessary for the companies in the soft-drink industry to offer consumers products with a variety of tastes (Deichert et al., 2006).

Macroeconomic Analysis

A macro environment delineates the situation that is existent in the economy and not simply the condition in a particular industry, sector or expanse. This encompasses trends in the level of spending, rates of inflation, employment, gross domestic product, economic growth and monetary and fiscal policies. The position and viewpoint of the soft drink industry in the United States has slowed down, an indication of the pressure and stress owing to the changes in consumer behavior. According to research undertaken, there was a projected increase in the volume of soft drink manufacturing at about 1.4% every year (National Policy and Legal Analysis Network, 2012).

The economic growth of the United States has been improving in the past few years rising from 1.5% in 2013 to 2.4% in 2015. The indication of this is that the industries are projected to improve their performances. Therefore, it is expected that there will be an improved level of performance and growth in the soft-drink industry. In addition, the domestic demand has increased in the past three years from 1.3% in 2013 to 3.0% in 2015. This has seen an increase in the annual consumption level in the United States to increase from 1.7% in 2013 to 3.1% in 2015. This increase in the annual consumption level indicates that the soft-drink industry is projected to see a rise in the demand for more products and consumption level for the products (Focus Economics, 2016).

Whereas it is projected that the carbonated soft drink demand will temper as consumers turn out to be more health conscious, this mindfulness will instigate a variation in behavior that steers more customers to purposeful beverages and bottled water, giving rise to the projected increase in profitability. The level of consumption from a volume standpoint is projected to increase because of an estimated increase in consumer spending as the recession culminates, above-average growth of the age groups that are 55 years and older, lifestyles that are fast paced that demand convenience products, and increasing demand for purposeful beverages (National Policy and Legal Analysis Network, 2012).

Whereas the industry is projected and anticipated to face a considerable growth steered and instigated by more innovative products and fluctuating demographic trends, the definite growth rate of the industry is projected to lag behind the gross domestic product (GDP) growth. It is anticipated that growth will be sluggish in this post-recession economy, prevailing demand patterns are anticipated to change as the consumers grow into being more health conscious, in the switch from sugar-sweetened beverages to diet drinks or purposeful beverages. In addition, rivalry amongst the industry leaders is estimated to remain forceful and have an impact on profit margins (National Policy and Legal Analysis Network, 2012).

In spite of facing challenges domestically in conjunction with an increasingly changing global setting, the economy of the United States continues to be the biggest and most significant in the world. The economy of the United States is presently emanating from a period of substantial mayhem. The U.S. economy has been slowly yet unequally recovering from the recession period. In addition, the economy has obtained additional support through expansionary monetary policies. Despite the fact that the labor market has recovered considerably and employment has reverted to its levels prior to the recession, there is still extensive discussion concerning the health of the United States economy. What is more, despite the fact the worst effects of the recession are presently declining, the economy continues to experience a variability of substantial challenges in the forthcoming periods (Focus Economics, 2016).

Management Accounting Principles

There are key management accounting principles that the company must put in place to support their planned expansion. Effective management accounting principles are imperative for a company during expansion as they can enhance decision-making within the organization through acumen and analysis that is engrossed on the future together with other aspects. Through the application of such management accounting principles, a company is able to make better decisions, suitably to the risks that the company faces, and also safeguarding the value generated (Bramwell, 2014). The following section outlines the management accounting principles that the company must put in place as it seeks to expand its business operations to other states.

One of the principles that the company ought to put into place is that of profitability improvement. A company must perceive enhanced profitability as its most significant mission. In order to enhance and have increased profitability, it is not only imperative to increase the number of sales, but at the same time increase the added value of the products and services rendered by the company. In order for the company to increase the added value of the company, it is imperative to come up with product offerings that have greater market value through the use of fewer resources. The improvement of profitability is the precondition and necessity that facilitates the company to enhance the standards of living of its personnel and also generate significant contribution to the advancement and progression of the social order through corporate activity (Inamori, 1998).