Portuguese Beverage Industry

Sumol & Compal Sumol and Compal is a Portuguese beverage company, created through the merger of soft drink company Sumol and juice company Compal. The company also produces beer, canned vegetables, and it has distribution rights to a handful of other products. They have a relatively strong presence in the domestic Portuguese market but a limited presence in other European markets, despite having barrier-free market access through the European Union. This paper will analyze Sumol + Compal, and provide an overview of the soft beverages industry in Europe.

Beverage Industry Overview The soft beverage industry is a general category for all non-alcoholic, prepared and packaged beverages, including juice, soft drinks, water and energy drinks. Because Sumol + Compal competes in the industry's two largest segments, it can best be understood in the context of this industry. The industry's size is projected out to be $78.646 billion by 2017, with a growth rate of 2.2%. Cola is the leading product within the industry, accounting for 36.9% of the total soft drinks market, with fruit-flavoured sodas accounting for 35.7% of the soft drink market.

The UK is the biggest market in Europe, worth 18.7% of the industry's total value (Dijkhof, 2013). Portugal has a very small share of the market, projecting out to $2.5 billion in 2017 (Roales, 2013). The overall market leader is Coca-Cola, which competes in all categories of the industry and has the industry's top-selling product. This company has a 50.8% share in Europe. Pepsico has a 15% share. Two smaller players are Suntory (OranginaSchweppes) at 3.8%, and Britvic (Britvic, licensed brands) at 2.3%. The remaining 28.1% is spread among dozens if not hundreds of small, fragmented players.

In Portugal, carbonated drinks are the lion's share of the market at 54.7%, and juices represent just 10.7% of the total soft drinks market in the country. Coca-Cola is not nearly as dominant in Portugal as it is elsewhere in Europe, and only holds a 17.9% share. Sumol + Compal holds a 10.9% share, Sociedade de Cervejas e Bebidas has a 10.7% share and PepsiCo is the #4 company 8.9%. The remaining share -- 51.6% is split among other players, indicating that the Portuguese market is more heavily-fragmented than other European soft drink markets.

Distribution is a key source of competitive advantage, and the company's that control the major distribution channels have sustainable competitive advantage over companies that do not have the same level of access. Thus, the industry conditions favour larger companies. The biggest channel is on-trade, at 31%. This differs significantly from the EU market, where on-trade is worth 27.4%. In Portugal, supermarkets/hypermarkets account for 27.5% and independent retailers 22.9%. Supermarkets dominate the EU market, however, at 40.6%, while independent retailers are worth 11.2%.

Vending machines, at 5.6% share in Europe, are much less important to the Portuguese retail market. Major Competitors Coca-Cola is the major competitor, both in the EU and in Portugal, though it is much less powerful in Portugal. However, should Sumol + Compal wish to expand operations more into Europe, it will need to compete against Coca-Cola more frequently and aggressively. Coca-Cola has access to most distribution channels and it tends to flood these channels with its full range of products, including random brand extensions, leaving little shelf space for other companies.

This is a barrier that Sumol would have to overcome in order to expand its presence. It is also worth noting that there remains a high level of fragmentation in the industry. This means that there are many smaller, regional and local players who have strong loyalty within their limited areas. Consider that one such player, Britvic, is the fourth-largest soft drink maker in Europe, despite having barely any presence outside of the UK and Ireland.

When competing with its flagship orange soda, for example, Sumol would come into competition with local orange sodas in many countries, especially in southern Europe. This presents a barrier to market entry. Britvic is not a competitor for Sumol. They compete in entirely different markets. Suntory is more of a competitor, but clearly they are not a player in the Portuguese market. A more important competitor is Sociedade Central de Cervejas e Bebidas.

This company is a direct competitor in Portugal, and holds the same market share more or less as Sumol + Compal. They have a much larger beer business than does Sumol + Compal, which makes them a bigger company overall and thus gives them more resources. Its products in this category are the Luso brand of water, some of which are fruit-flavoured. The company also competes for shelf space, and has the same local knowledge that Sumol has, which makes it as formidable a competitor as Coca-Cola. The smaller competitors are numerous.

In a fragmented market, each smaller competitor will seek out its own niche, and in that way will try to avoid challenging the market leaders head on. Sumol + Compal may face some competition from smaller competitors in individual niches, and will still need to combat them for shelf space. Among the smaller competitors, only PepsiCo is known to have significant resources for competition, and they compete more with Coca-Cola for the supermarket business.

A shift from consumers away from off-sales to supermarket sales will represent a significant challenge for Sumol, and the company needs to build its capabilities and relationships within the supermarket business, because over time it will need to engage Coca-Cola and Pepsi more in this business in order to maintain its market share. Thus, while Coca-Cola presents a challenge to market expansion for Sumol + Compal, at least the company can develop one strategy to deal with Coca-Cola and use that strategy across Europe.

When dealing with minor local players, there is much more challenge because the terms of competition are different for each one, and in many cases they are local brands with connections to the regions in which they are sold, again a barrier to Sumol entering those markets. This leaves Sumol as a regional player itself, focused almost solely on the Portuguese market. Sumol + Compal only has factories in Portugal (and Mozambique), indicating that it is a regional player itself.

It would be available more as an import or specialty item in most markets, where its brand has little value. Indeed, Sumol is not really big enough to start thinking about competing against Coca-Cola in Europe, just in Portugal. Domestically, Sumol has good access to distribution channels, and it also has a marketing apparatus. This allows it to challenge Coca-Cola, Pepsico and other international players. The Portuguese consumer also seems to be somewhat less loyal to major brands.

Distribution is a challenge for the larger companies in the country, as there is less emphasis on large supermarkets as a distribution channel. Local companies seem better equipped to get the product into the smaller stores and restaurants where a lot of consumption takes place. In this respect, Sumol + Compal has an advantage that it has leveraged to secure the #2 market position, though if the country trends more towards supermarkets that will help Coca-Cola.

Sumol is going to be challenged, however, outside of Portugal, where this advantage will no longer apply, and neither will.