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Price war among soft drinks manufacturers hurts profits

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Plastic soda bottles going through

Plastic soda bottles going through a production line. FILE PHOTO  

By  FARIDAH KULABAKO

Posted  Tuesday, April 29   2014 at  01:00

In Summary

The beverage industry has seen some tight competition with the entry of new players in the market.

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The days of wild growth and huge profits for Uganda’s carbonated soft drink manufacturers could be over as competition pressures, which have resulted in a price war, continue to intensify.

This follows the entry of three new players; Riham, Fizzy and Azam soda manufacturers early last year, which broke the duopoly of Century Bottling Company (commonly known as Coca-Cola) and Crown Beverages (Pepsi).

Although Coca-Cola and Pepsi had underestimated the impact the new entrants (Riham, Fizzy and Azam) would have on their sales, they were later forced to discount their prices to appear cheaper than the competition so as to appeal to price sensitive consumers, a market that was getting more competitive.

For instance, the 320ml Riham plastic bottled soda products, which were cheaper and convenient (then retailing at Shs1,000,) were quickly gaining an edge over Coca-Cola and Pepsi whose cheapest 300ml returnable glass bottled products were also selling at Shs1,000.

Price cuts
Refraining from price cuts would cause sale volumes of the former duopoly to plunge even further than had been experienced, given the low per capita consumption of carbonated soft drinks in Uganda, which is estimated at only 23 bottles, compared to Tanzania’s 35 bottles and Kenya’s 40 bottles.

Coca-Cola, for instance, reduced the price of its 300ml glass bottled soda from Shs1,000 to Shs800 while the 350ml plastic-bottled Ka-Mini soda was cut from Shs1,500 to Shs1,000.

Both Coca-Cola and Pepsi cut the prices for the 500ml and one-litre plastic bottled sodas from Shs2,000 to Shs1,500 and from Shs3,000 to Shs2,500, respectively.

Not to appear as an expensive brand, Riham, which ignited the price war also later slashed the price for its 320ml soda brands from Shs1,000 to Shs800 and from Shs1,500 to Shs1,200 for the 500ml sodas.

Although price cuts are an advantage of consumers who are now paying relatively lower prices for sodas, it is a disadvantage to manufacturers as it affects their profitability, which also in turn reduces taxes to government.

Coca-Cola is said to contribute more than Shs100 billion in form of direct and indirect taxes annually while Pepsi is said to be contributing about Shs70 billion in taxes per year.

Although there are no readily available figures, consumption trends show that the former duopolies no longer sell as much as they used to before the entrance of new players.

Reasons for constrained growth
Century Bottling Company managing director Norton Kingwill, however, dismisses reports of a price war, saying price cuts witnessed in the market are a result of the sluggish growth seen in the carbonated soft drinks industry over the past few years, forcing players to lower prices to boost consumption and stimulate growth.

Mr Kingwill attributes the constrained growth in the carbonated soft drinks market over the years to slow economic recovery from the lag effects of the 2011 economic challenges, coupled with price increases for sodas.

He, however, adds that the lower contribution of carbonated soft drinks to the Non-Alcoholic-Ready-To-Drink (NARTD) category presents an opportunity for industry growth, and that soda manufacturers have invested immensely in capacity to allow them meet the expected increase in demand.

Coca-Cola invested in a $26.7 million (about Shs67.3 billion) plastic bottle production line last year that is expected to boost its production capacity and lower production costs.

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