Energy Drink Industry in South Africa

EXECUTIVE SUMMARY

1.1.Business Description

The business will operate under the name Power Natural Drink Inc. and will be situated in Cape Town due to the availability of infrastructure, raw materials and labor. It will operate as a company and will focus on selling energy drinks made of natural products to reduce the health effects.

1.2.Marketing Plan

The business will target the youth, particularly teenagers and those in their 20s. The promotion strategy will include the use of social media, word of mouth, company website and posters. The products will aim to attract sports personalities, hip-hop lovers and will be associated with motor racing, outdoor climbing and clubbing.

1.3.Operational Plan

The company will use a just in time inventory system with an aim of reducing costs associated with storage. The storage facilities will be leased for ten years after which the renewal negotiations will begin. Before Commencement of the business, the company will ensure that it has adhered to all the legal formalities required in South Africa.

1.4.Organization and management plan

The company will be managed by personnel on different levels. The head of the company will be the chief executive officer who will be in charge of strategic management. The general managed with be tasked of overseeing the day-to-day running of the company. There will also be other departments that include human resources, purchases, quality assurance and control as well as the store departments that will coordinate to ensure that the objectives of the business are met.

1.5.Financial Plan

The business is expected to be financially sound given the growing market of energy drinks in South Africa. The growth of sales is expected to be 15% minimum and profits to range between 20-25%. The company also expects to have liquid cash that can be used to pay for its short-term obligations.

2. BUSINESS DESCRIPTION

2.1.Description of Organization

Power Natural Drink Inc is a start-up company that intends to develop, design and market energy drinks for the South African population. Due to the busy lifestyles of South Africa’s population, we are looking to towards being the energy booster during the last couple of hours at work and training sessions. We are also looking forward to being the alternative to the popular energy drinks that have become common in the market today through our natural energy product that is health conscious of what individuals consume.

2.2.Organizational Mission

We are dedicated to providing a healthy natural energy drink that optimizes energy. Energy drinks are becoming common products for athletes and individuals who desire to boost their energy for different purposes. In a fast-paced society like today’s, people are seeking various ways to increase their stamina and endurance due to lack of energy to get through difficult days. Power Natural drinks aims at being a healthy alternative to boosting energy that lasts for hours.

2.3.Vision

Our vision is to bring a new alternative to the energy drink production industry by producing drinks that make us leaders in the industry.

2.4.Long-term Objectives

To achieve considerable brand image and goodwill

To open an additional bottling plant within two years of operations

To double the number of employees within the first two years of operations

To double revenue by the end of the current fiscal year

Achieving 95% positive customer reviews with regards to Power Natural Drink and the services offered by the company

Building the company’s name within the community through various community outreach programs (Van Aardt and Bezuidenhout 2014, p. 323)

Increasing the web traffic of the company’s website by over 50% by the end of the second year and 80% after three years of operations.

Capturing a market share of about 35% within three years of being in operations

A profit growth of at least 16% within the first three years of being in business

Expand into overseas countries such as India, China and the United Kingdom within three years

2.5.Industry Description

Sales of energy drinks have over the years increased significantly with South Africa being one of the leading consumers in the world. Energy drinks include sports drink, tea, vegetable and fruit juices, coffee, bottled water, carbonated beverages and beverage concentrates among others (Heckman et al. 2010, p. 308). Within the industry, there is a trend where consumers have reduced their consumption of soda in favor of energy drinks. The people of South Africa are consuming less of soda every day. Meanwhile, sales on energy drinks have been on the rise considerably in South Africa. The biggest companies in the energy drink sales that have a presence in South Africa include:

Monster

Monster is based in California and was formerly known as Hansen Natural Corporation. It was founded in 1990 but started selling the energy drink in 2002 after its launch of another product to compete with Red Bull failed. Monster has a strong promotional strategy where it not only promotes itself as an energy drink but also as a lifestyle. It has associated itself with partying, music and sports which has greatly attracted the youth (Heckman et al. 2010, p. 312). Monster energy drink has 36 varieties that range from coffee flavored, no calorie, protein enhanced, double strength and other varieties. The main ingredients used in its products include inositol, panax ginseng, L-Carnitine, carbonated water, glucose and sucrose among others.

Red Bull

Red Bull is the first energy drink that made the industry prominent in 1997. The owners of the beverage are Red Bull Australian company. The introduction of the beverage in Australia in 1987 was the onset of the rise of the energy drink industry. Red Bull is packed in small cans and has a variety to choose from such as Total Zero, sugar free, original and editions among others (Heckman et al. 2010, p. 305). The main ingredients of the drinks include B vitamins, carbonated water, caffeine, glucose, taurine and glucose among others. Red Bull has its presence in 167 countries where it has experienced strong sales every year. The advertising strategy of the company include buzz marketing, sports sponsorships and television ads among others.

MoFaya

MoFaya energy drink is the first and only 100% black owned beverage brand in South Africa. The brand was launched in late 2014 and has continually experienced growth in the South African market. The company also has distribution deals in other African countries such as Ethiopia, Democratic Republic of Congo, Swaziland, Lesotho, Zimbabwe and Mozambique among others. MoFaya has a range of products that range from the ultimate sports drink to the Carb O and premium energy drink. The premium energy drink has a stimulating and energizing effect that boosts performance and enhances endurance. The ultimate sports drink contains carbohydrates, minerals and electrolytes that promote fluid replacement. MoFaya Carb O is meant for individuals that are health conscious. It replenishes lost micro-nutrients and optimizes rehydration.

Other energy drink companies in South Arica include Bing, Score Burn and other Coca Cola energy drinks such as Full Throttle, Power Play, Mother and MOs among others.

Energy drinks are the fastest growing section of soft drinks in South Africa. Stacey et al. (2017) state that the annual quantity of energy and sports drink sold increased from 97.7 million liters to 167.7 million liters between 2009 and 2014, which indicated a rise of two to three liters per capita in only five years (33). The increased consumption of energy drinks has been a great concern due to health risks. Excess intake of caffeine can result in hypertension, nausea, metabolic acidosis, hypertension, palpitations and convulsions among others. Energy drinks recent high sales in South Africa are attributed to significant branding and advertising activities by manufactures. Energy drink advertisers have targeted televisions advertising to capture the attention of the younger audience (Stacy et al. 2017, p. 34).

2.6.Competitive Analysis

The competitive nature of the South African energy drink industry can be analyzed based on Porter’s Five Forces Model. The model analyzes five competitive forces that shape each industry and determines the strengths and weaknesses. These forces include the potential entrants, threat of substitutes, entry barriers, power of customers and suppliers and the competition.

Potential Entrants

Entry into the South African energy drinks industry is not easy unless the company has an innovative idea that can make it stand out and challenge existing company within the industry (Ryall 2013, p. 82). There are strong entry barriers that make it very difficult for small and start-up companies to enter the market. The existing players have over the years developed their brand names and have diversified their products to meet the various needs of consumers. A new entrant would have to heavily invest in promotions as well as research and development to stand a chance of surviving in the industry (Van Aardt and Bezuidenhout 2014, p. 201). Additionally, establishing economies of scale would take time. Existing companies such as Red Bull and Monster have captured the majority of the market share through their products that have a global presence. Grabbing a market share from these global brands is quite a difficult task for a start up such as Power Natural Drink Inc. Price wars within the industry are also another barrier. Red Bull and other players often engage in price wars to attract more customers. These companies are able to offer their products at low prices due to the economies of scale and significant resources (Van Aardt and Bezuidenhout 2014, p. 189). Start-ups are not able to survive in such an industry. Market saturation and high capital invests are also other examples of barriers that make the industry quite difficult to venture. Hence, the entry barriers are high.

Threat of Substitute Products

Substitute products within the energy industry in South Africa are high. They include tea, coffee, water bottle, fruit juices and soft drinks. Today, consumers have become more health conscious and are likely to prefer natural products such as fruit juices, and water bottle over energy drinks that may have additives added on them for preservation and performance enhancement. Tea and coffee are also competitive due to the presence of caffeine that are present in energy drinks. Consumers who take a lot of energy drinks may substitute it with energy drinks if they want to maintain caffeine but lose the sugar. Specially blend coffee has also increasingly become common due to the increasing presence of coffee shops that offer a variety to consumers. The threat of substitution is also high because fruit juices, bottled water and coffee are healthier and cheaper.

Power of Buyers

The power of buyers is dependent on the volume of purchases (Ryall 2013, p. 84). Energy drinks are majorly purchased by discount stores, large grocers and restaurants in large quantities. This group of bulk buyers have a high bargaining power in the industry because they largely influence the sales of manufacturers such as Red Bull, Monster and others. Individual buyers do not enjoy a high bargaining power because they only purchase a few units of energy drinks that do not greatly impact on the sales of manufacturers. However, there a number of energy drink products available in the market that they can turn to in case a manufacturer increases prices or does not offer quality and variety (Prasad & Warrier 2016, p. 8). Hence, the bargaining power of buyers is relatively high.

Bargaining Power of Suppliers

The power of suppliers in the energy drink industry in South Africa is high. The presence of different firms in the industry means that suppliers can switch clients at will (Ryall 2013, p. 85). All energy drinks manufacturers use tin and aluminum mix cans for packaging their products which are not easily available. Thousands of companies use tin and aluminum for packaging, which implies that suppliers are on high demand and the commodity is scarce. Switching suppliers within the industry also comes at a cost that most manufacturers would not like to incur. Manufacturers would have to incur the costs of interruptions and delay that are associated with switching from one supplier to another (Prasad & Warrier 2016, p. 11). However, manufacturers such as Red Bull have numerous suppliers to avoid depending on one.

Competitive Rivalry

The competitive rivalry in the industry is high due to a large number of companies such as Red Bull, Monster, Rock Star, Full throttle and MoFaya among others. Red Bull has captured majority of the market but other firms are fast growing and catching up. There are increased advertisements to increase the brand awareness of several companies. According to Ryall (2013), the vast distribution channels in the country also means there is intense competition (86). Different manufacturers are trying to reach and capture different markets in South Africa. The growth of the energy drink industry is also playing a major role in intensifying competition. Competitors are becoming more innovative and diversifying their products and businesses to capture more markets and reduce the influence of Red Bull. Price wars among the large companies are an indication that competition is high in the industry (Van Aardt and Bezuidenhout 2014, p. 260). Energy drinks are also not differentiated within the industry. Most of the companies offer products with almost similar ingredients, making it difficult to differentiate them. In fact, the only difference of the products is the packaging. The low differentiated of products greatly enhances competition as most of the companies strive to achieve brand loyalty. The exit barriers within the industry are high. Ceasing operations would mean that a company would suffer significant losses (Prasad & Warrier 2016, p. 8). Investments in machinery, branding, research and development would all go to waste. Firms would do anything in their power to avoid exiting the industry. These actions that firms undertake to survive intensifies competition. Hence, the competitive rivalry within the industry is high.

2.7.Key Success Factors

Success in the energy drink industry, like any other industry, does not occur overnight. It requires long term investments both in terms of efforts and finances. Research of different industry participants is important to identify the strategies that made the predecessors successful. The key success factors in the energy drink industry in South Africa include:

Consumer knowledge: For any starting business, knowledge on consumers is vital. Failure to identify the target consumers makes marketing of the energy drinks difficult. The business should have knowledge of consumer background and demographics to help in the planning of marketing strategies.

Research and Analysis: The business needs to conduct a market research and analysis to recognize important aspects of the market (Buys & MBewana 2007, p. 358). The business can learn the source of materials as well as the supplier that sells quality raw materials. Such information helps in making necessary adjustments and also experiments the with the firm’s product. Research will have a great impact on the longevity of the business.

Goal setting: The success of any endeavor depends on the set goal. Without any goals, all efforts are fruitless. The business has to set goals and outline how they are to be achieved in order to be successful.

Product Innovation: The company should develop a differentiated product that meets the needs of consumers.

High investment in capital: The company has to invest heavily in trucks, warehouses and labor in order to be successful in the energy drinks industry.

Price: Consumers in the industry are price conscious and those who are not loyal to any particular brand will choose the product with the most competitive price (Buys & MBewana 2007, p. 356).

Brand Loyalty: Brand loyalty is a significant issue in the energy drink industry. Most consumers only buy energy drinks of a particular brand and rarely purchase others. Power Natural Drink Inc will have to ensure that it invests heavily in advertising and marketing to create an emotional relationship with customers.

Global Expansion: Global expansion is crucial to success in the industry. In order to maintain growth, the organization has to move into a global space where there is a greater market for its products (Buys & MBewana 2007, p. 356).

Health issue: Health consideration is important due to increased levels of obesity. The Power Natural Drink will only use natural ingredients in its products to avoid any health complications.

Size of the organization: The size of the organization is important in making large purchases at low costs and negotiating with suppliers (Buys & MBewana 2007, p. 357).

2.8.SWOT Analysis

2.8.1. Strengths

Customer Satisfaction

Power Natural Drink is sweet and is made from natural ingredients to give customers high energy levels with low health implications. The product is able to satisfy both the social and physical needs of the consumer. First, the product contains caffeine that is found in tea and coffee. It accelerates performance and improves one’s speed of reaction and concentration. The social satisfaction of the Power Natural drink will also play a major role in its success. It will be associated with young culture, extreme sports and adventure. Its target consumers will be generation Y, who are people born after 1980. Consumers in this age group will prefer to associate with the products because it provides them with the social benefits that none can.

A fashionable and Strong brand identity

The company will avoid the traditional marketing strategies and instead go for a more modern approach. It will utilize a variety of strategies such as buzz marketing and social media that is preferred by the youth. The brand image will be connected to the youth through some extreme programs such as motor racing, clubbing and even outdoor climbing.

Attractive Can Design

Power Natural Drink will not use the normal cans that are used by all other players in the energy drink industry. Instead, it will design a fashionable and attractive can that will clearly differentiate it from other energy drinks. The cans will also come in different capacities to accommodate clients who cannot afford the normal half liter cans.

2.8.2. Weaknesses

Small Product Base

During the initial stages of the business, it will only offer one version of the natural energy drink. The lack of variety in its product line makes it less competitive because it does not have the capacity to meet the different needs of its target customers. Customers often prefer various flavors of energy drinks. However, the company plans to improve its product line by increasing its product categories.

Higher Price

The product of Power Natural Inc will be priced higher due to low quantities of raw materials purchased that deny the company economies of scale. The higher prices will also be due to natural ingredients that will be used to make the energy drink. The price will be higher than those of substitutes such as soda water, fruit juices and bottled water among others. The higher prices may lead to lower sales because customers in the market are price conscious.

Inability to attract and retain customers

The company will be targeting generation Y customers when it starts. Individuals in this age group will grow up and prefer other products that suit their ages. The company will lose these consumers and may experience difficulty in attracting new ones due to the significant brand loyalty to other manufacturers such as Red Bull and Monster.

Limited Distribution Model

Power Natural Drink will have limited distribution channels. The company will not have retail outlets all over South Africa where its products will be sold to consumers or wholesalers. All the company’s products will be sold from one point. The distribution will be highly dependent on wholesalers and retailers who will sell them to the final consumers. The company will also not have distributors to distribute its product to varied locations on its behalf.

Lack of mass media advertising

The marketing strategy of the company will not involve mass media advertising. Nieman and Nieuwenhuizen (2014) state that the company would not be able to reach majority of its target market as it will miss out on the reach that is associated with mass media such as television and televisions (302). Brand establishment may also take time because it may not gain much exposure quickly as it would with mass media.

2.8.3. Opportunities

Emerging Markets

The market for energy drinks are constantly emerging. Power Natural Drinks Inc will not only be limited to South Africa but expand to other geographies that are embracing the consumption of energy drinks. Additionally, more members of the population are increasingly using energy drinks. Initially, they were majorly used by the youth and people in the middle age. In future, it may be used even by the old who may put great emphasis on natural products to eliminate any health effects.

Extension of Product Lines

Offering new product formats and flavor will be beneficial to the organization. It will be able to improve its market share through the satisfaction of the different needs of consumers (Finch 2013, p. 58). Offering a variety of products also makes the company more competitive in an industry where there are global players.

New Production Facilities

Power Natural Inc should consider building other production plants in future in emerging countries. Most of upcoming countries in Africa are cheap sources of raw materials and labor that can play a great role in reducing the cost of production as well as pricing. According to Nieman and Nieuwenhuizen (2014), building production sites in continents such as Asia where the population is high would expand the company’s market that would significantly lead to economies of scale (178).

2.8.4. Threats

Competition

The energy drinks industry is one of the fast growing in South Africa and in the world. The high growth rate means that the industry is attractive and firms are increasingly entering the market to share in the profits. Furthermore, there is already stiff competition with Monster and Red Bull engaging in massive advertising campaigns to create brand awareness. The high level of competition could lead to Power Natural Inc exiting the market due to high costs that it has to incur in to sustain its operations (Nieman and Nieuwenhuizen 2014, p. 214).

High Costs of Marketing

Players in the energy drinks industry in South Africa continuously engage in aggressive marketing campaigns that are expensive to sustain. Additionally, there are already recognized brands that have established brand relationships with consumers. Creating awareness of its brand would require significant resources to be channeled towards marketing that may adversely impact on the profits of the company.

2.9.Growth Potential

2.9.1. Identification of Potential Strategies

Acquisition Strategies

Acquisition is a technique Power Natural Drink Inc can grow. In such a strategy, the company purchases another company with an aim of expanding its operations. The strategy can particularly be useful in entering new markets and expanding the product line (Van Aardt and Bezuidenhout 2014, p. 371). A company has to be aware of what it wants before using the strategy due to the significant investment required.

Diversification Strategies

Diversification is where the Power Natural Inc sells its new products to new markets. Marketing research is essential to determine if the new products will be appealing to the new customers (Sawhney 2017, p. 2).

Product Expansion

The expansion strategy is where the company expands its line of products or adds new features for it to be attractive to customers (Nieman and Nieuwenhuizen, 2014, p. 134). When product expansion is employed, the company will continue selling its products to the existing market. In most cases, it works well where there is a change in technology.

Market Expansion

The strategy is also referred to as market development and involves selling the current products in new markets (Van Aardt and Bezuidenhout 2014, p. 367). In most cases, it is employed where competition is too much that it is almost impossible to grow in the current market. Failure to find new markets in such industries means the business will not be able to increase its profits or sales (Sawhney 2017, p. 5).

2.9.2. Evaluation of Potential Strategies

The potential growth strategy of Power Natural Inc will be evaluated based on the Ansoff Matrix. According to the Ansoff Matrix, growth strategy is dependent on four growth areas such as market development, market penetration, diversification and product development (McDonald, Ward & Smith 2007, p. 174).

The Ansoff Matrix (McDonald, Ward & Smith 2007, p. 174)

Market Penetration

The four main objectives that market penetration strives to achieve include:

Domination of markets

Increase the use of products among existing customers

Driving out competitors through aggressive promotional campaigns and unattractive price strategies (Nieman and Nieuwenhuizen 2014, p. 247).

A strategy to penetrate a market promotes the usual activities in operations (McDonald 2015, p. 2). Organizations focus on products and markets they know so well. It is unlikely that the strategy requires significant investment in research and development.

Market Development

An organization sells its existing products to new markets in market development (Van Aardt, I. and Bezuidenhout 2014, p. 149). The possible ways Power Natural Inc can approach the strategy include:

New product packaging or dimensions

New channels of distribution

New geographical markets

Different pricing for different markets

Marketing development is riskier compared to market penetration because it involves new target markets (McDonald 2015, p. 4).

Diversification

Diversification involves a business selling new products to new markets (Nieman and Nieuwenhuizen 2014, p. 147). The strategy is often unsuitable because organizations often have little or no experience in the new markets.

Product Development

Product development involves supplying new products to the current market. The strategy may require that Power Natural Drink Inc develops new competencies and develop modified products that are appealing to the target market (McDonald 2015, p. 7).

After a thorough evaluation of the four strategies, the best growth strategy for Power Natural Inc would be product development. Differentiating its products in such a way that it promotes health would make the company quite competitive in the industry (Strydom and Nieuwenhuizen 2012, p. 59). The business would however have to be keen on innovation, research and development and information into the needs of customers and taking the lead role in marketing.

Business Plan

3. Marketing Strategy

3.1.Promotion

One of the long-term objectives is to increase the brand awareness for increased sales. In order to achieve this goal, Power Natural Inc, will use the following promotional strategies:

Posters

The company will use posters that will be placed in strategic areas such as men’s and ladies’ locker rooms, colleges and universities, recreation centers, clubs and malls among others. The posters will contain information of the products such as its ingredients, benefits and areas where they can be found. The posters will be designed in a manner that is attractive to the youth who are majorly the target market.

Word of Mouth

The company will highly rely on word of mouth. Employees and customers will be encouraged to spread the word about the product to those in their social circles. Personal nature of communication between different people helps in providing a greater level of credibility about the energy drink (Nieman and Nieuwenhuizen, 2014, p. 87). Consumers are also likely to believe word-of-mouth compared to other formal promotion methods because they get information from those who have had a first-hand experience with the product.

Social Media

Social media is one of the most effective communication tools. Most youths have signed up for social media platforms such as Facebook, Twitter and Instagram. The rise of smartphones has also made these platforms easily accessible. The company will take advantage of these platforms to advertise its product. There will be a section that will specifically deal with advertisements and queries on social media that will be responded to in less than six hours. Social media is beneficial because the company will not have to incur any costs in posting.

Website

The digital nature of business today makes it imperative that the company has an active website. The website will contain information on the product on offer, prices, contact information, and location among others (Strydom and Nieuwenhuizen 2012, p. 114). The website will be easy to navigate and will have a section where queries can be raised.

3.2.Place

Power Natural Drink Inc will focus its marketing campaigns on densely populated areas. These include cities such as Cape Town, Soweto, Durban and Johannesburg. The products will also target other small cities and rural areas as a way of attempting to reach its target customers all over the country.

3.3.Product

Power Natural Drink will be a product that will be made from majorly natural products. Among the natural ingredients that will be used include Korean Ginseng, green tea, vitamin B6, riboflavin, vitamin B12, potassium, niacin, healthy sweetener and pantothenic acid among others. The ingredients will play a major role in boosting metabolism, help in the reduction of fatigue, increase stamina and endurance and help in the mobilization of fats to be used as fuels.

3.4.Target Market

The product will target generation Y. These are people who are born from 1980 and above. More specifically, the product targets male teenagers as well as those in their 20s. The advertisements will target specialized groups such as hip-hop crowds, extreme sports enthusiasts and gamers who have a focus on maintaining stamina while being healthy.

3.5.Pricing Strategy

The pricing strategy of the natural energy drink will depend on various factors such as the running and overhead costs as well as the price of competitors (Nieman and Nieuwenhuizen, 2014, p. 312). The industry is intensely competitive and failing to set the right price can lead the business to fail even before it takes off. Despite our energy drinks being different from the ones being offered in the market, we know that gaining awareness will be difficult and that we will have to charge higher prices to position it as a premium. Charging slightly higher prices above that of other competitors within the first six to twelve months will help the business to attract more customers into buying the unique natural products and referring others.

3.6.Distribution Strategy

The business will employ both direct and indirect distribution strategies (Strydom and Nieuwenhuizen 2012, p. 43).

Direct Distribution

The business will open an outlet at its headquarters where consumers will be able to sell the natural energy drink directly to its customers. The outlet will be beneficial because it will give the company an opportunity to interact directly with consumers and get insights into their needs (Van Aardt, I. and Bezuidenhout 2014, p. 175).

Indirect Distribution

The business