With summer in full swing, the competition within the soft drink industry is intensifying. Recent reports indicate that newer brands have managed to secure a market share of approximately 6-7% in the last fiscal year, a notable increase from just 2% in fiscal 2024. This change highlights how these emerging players are tapping into impulse purchases with strategically priced offerings, such as 10 and 20 rupee bottles.
“In India, taste is deeply regional and cultural. What works in one state may not work in another. As a homegrown brand, we understand the nuances which multinational companies often struggle to replicate at scale,” said Prabhu Gandhikumar, founder of food and beverages maker TABP.
“We are seeing strong traction and gaining market share across key regions and in a market as diverse as India, being local is both an advantage as well as our core strategy,” he explained.
Despite the rising competition between established multinational brands and newcomers, soft drink bottlers are anticipated to see revenue growth return to its long-term average of 15% this fiscal year, following a subdued previous year. This growth is expected to be driven by the hot summer months, which account for approximately 40% of total sales, coupled with deeper penetration into untapped domestic markets, according to the Crisil report released on Tuesday.
A sharp rise in crude oil prices, attributed to the conflict in West Asia, has led to increased packaging costs. This trend may negatively impact the industry’s profitability by up to 250 basis points (bps).
However, bottlers with a nationwide presence are likely to face less impact due to their superior pricing power and economies of scale. Their cash flows are expected to remain strong, ensuring stable credit profiles. Crisil’s insights are drawn from analyzing 13 bottlers in the non-alcoholic beverage sector, including carbonated soft drinks (70% of the market), juices (12%), and packaged water (18%).
Shounak Chakravarty, Director at Crisil Ratings, noted that “players have not only increased their bottling capacities by 30-35% over the past two fiscals, but they have also expanded their distribution networks and cold chain infrastructure. This will facilitate robust double-digit volume growth. The increase in volume, coupled with a 2-4% price hike in a competitive environment, will help businesses revert to their long-term revenue growth trajectory.”
Rucha Narkar, Associate Director at Crisil Ratings, added, “Intensifying competition, which is leading to reduced pricing flexibility amid rising crude-linked packaging costs (20-22% of overall cost), will cause a moderation in profitability this fiscal year. However, minor price hikes and a growing focus on zero-sugar variants may limit the overall impact to 200-250 bps, thereby keeping margins steady at 15-16%. Furthermore, bottlers with pan-India presence are anticipated to negotiate favorable pricing terms with suppliers and distributors through bulk raw material purchases and high-volume orders, partially offsetting the impact on profitability.”
Overall, the cash flows within the sector will likely remain healthy, allowing players to continue investing in expanding bottling capacities and enhancing visi-coolers at retail locations, keeping capital expenditure (capex) intensity high. However, the capex intensity, which surged last fiscal year due to acquisitions, is expected to be lower this year. Consequently, the overall
debt/Ebitda and interest coverage ratios of players may improve to 0.9-1.0 times and 10-11 times, respectively, this fiscal year, compared to 1.1 times and 9 times in the previous fiscal year.
Key Takeaways
- Emerging brands are capturing 6-7% market share in India’s soft drink sector.
- Regional tastes influence product success; local brands thrive in this landscape.
- Revenue growth for soft drink bottlers is projected to reach 15% this fiscal year.
- Rising crude oil prices are driving up packaging costs, impacting profitability.
- Established players benefit from economies of scale and better pricing power.
- Stronger cash flows enable ongoing investments in capacity and infrastructure.
FAQ
What factors are driving competition in the soft drink market?
The competition is being driven by emerging brands targeting impulse purchases and offering competitively priced products.
How important are regional tastes in India’s beverage market?
Regional tastes play a crucial role, affecting the success of products across different states, making local brands more adaptable.
What impact do rising crude oil prices have on the beverage industry?
Rising crude oil prices increase packaging costs, which may negatively affect profitability for many players within the industry.
What is the expected growth rate for soft drink bottlers this fiscal year?
Soft drink bottlers are expected to see revenue growth return to a long-term average of 15% due to seasonal sales and market expansion.
How are bottlers managing increased costs due to competition?
Many bottlers are increasing their bottling capacity and distribution networks, allowing them to maintain healthy cash flows and manage expenses more effectively.
