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The Canadian Soft Drink Industry

This sub-sector is part of Standard Industrial Classification 1111, which includes two distinct components: bottled water and soft drinks. This profile describes the soft drink component of SIC 1111. Soft drink establishments make non-alcoholic, carbonated, flavoured beverages as well as concentrates and syrups for the manufacture of carbonated beverages. This profile does not include establishments primarily engaged in manufacturing fruit juices and non-carbonated fruit drinks or those primarily engaged in bottling water.

Introduction

The soft drink manufacturing industry makes and bottles non-alcoholic carbonated beverages, including fruit-flavoured beverages, colas, ginger ales, ginger beers, root beers, soda waters, tonic waters and other mixers. This industry does not include bottled water or sports drinks.

This industry was historically based on a franchise system which characterized the soft drink industry worldwide. The system provided a soft drink bottler with a defined market area and exclusive manufacturing and distribution rights within that area. The bottler was restricted to purchasing the proprietary formula concentrates and/or syrups from a single source – the franchise company (franchisor) which held the registered trademarks of a number of soft drink brands. The franchiser established pricing policies and provided overall marketing and brand promotion support.

However, during recent decades, the major brand-owning soft drink firms have been buying their former franchisee-bottlers, so that few independent bottlers remain.

As well, the Canadian soft drink industry has undergone significant change during the last decade including responding to the Canada-United States Free Trade Agreement (FTA), government regulations and guidelines to reduce or recycle packaging waste, a shift to PET (plastic) bottles and metal cans, consolidation in both the brand holding and bottling functions in the industry and the adoption of high fructose corn syrup (HFCS) as an alternative sweetener in place of sugar in non-diet soft drinks.

The industry continues to serve primarily the domestic market. Statistics Canada data show that in 1988, 99.7% of shipments were for the Canadian market while the remaining 0.3% (9.6 million litres valued at $6 million) were exported. Since the implementation of the Canada-U.S. Free Trade Agreement, beginning in 1989, exports have increased somewhat to 6.3% of shipments in 1997 (207.6 million litres valued at $165 million). Free trade, combined with opportunities for private label and co-pack sales to the U.S., has resulted in the growth of export sales. Under the Free Trade Agreement, imports have actually declined as a percent of the Canadian market from 0.6% in 1988 to 0.4% (12.6 million litres valued at $9 million) in 1997.

According to Statistics Canada, in 1988 annual per capita soft drink consumption in Canada was about 97 litres. By 1998 per capita consumption had grown to about 114 litres, and it would appear that there is still potential for growth in the domestic market, given that in the U.S. soft drink consumption has surpassed that of tap water and has reached 212.3 litres. (Note: data for Canadian consumption includes bottled water.) The Canadian Soft Drink Association (CSDA) has data that show per capita consumption of soft drinks alone, with no bottled water included, growing from 93 litres in 1988 to 116.8 litres in 1998. In Canada, about 20 to 25 percent of soft drinks sold are diet drinks; most soft drinks sold are regular (non-diet) products (A.C. Nielsen Beverage Study, 1999).

Structure

The industry is highly concentrated. Three of the four major manufacturers (sales over $100 million) are subsidiaries of foreign-based multinationals and account for the overwhelming majority of industry shipments. A very small number of soft drink manufacturers supply niche products.

Major soft drink companies have embarked on a diversification strategy to become total beverage companies by offering a range of products (soft drinks, juice, and bottled water).

In 1997, there were 167 soft drink facilities across Canada employing some 6571 people. Manufacturing is located in major cities in Canada, with a large number of distribution warehouses located across the country. There are also some small and medium-sized niche product Canadian-owned firms. Production facilities range in size from small, 35-person, operations, to large plants employing up to 450 people.

Powdered concentrates (flavours) are brought into bottling plants where sweeteners are added to make syrups. Then water and carbon dioxide are added and the resulting drinks are bottled. Some syrups are sold to foodservice operators for “fountain” sales.

Key commodity inputs needed to make soft drinks include concentrates, sugar, glucose/fructose, aspartame, acesulfame-potassium, caramel colour, sodium benzoate, phosphoric and citric acids, caffeine, seasonings and specially treated water. (Glucose/fructose is a generic term for high fructose corn syrup or HFCS.) The industry uses about 20 times as much HFCS as it does sugar as the sweetening agent. Except for the water, the bulk of raw inputs for this industry are imported, mostly from the U.S. However, a small portion of corn syrup is supplied domestically.

The cost of inputs for soft drink manufacturers varies depending upon the type of drink produced. Packaging costs for the industry are estimated to represent 35% of production costs while syrups/concentrates account for almost 30%. The soft drink industry purchases 95% of the aluminum cans, 55% of the rigid polyethylene terephthalate (PET) plastic containers and 15% of the glass bottles consumed by Canadian manufacturing industries.

The majority of soft drinks are sold in aluminum cans and PET plastic bottles. They are also sold in bulk through soda fountains. Bottles, most of which comprise PET plastic, account for 41.5% of sales, cans make up 41.6%, and fountain sales account for 16.9% of sales (CSDA, 1999). Only a very small portion of soft drinks are still packaged in glass bottles, due in part to the late 1970s problem of exploding glass bottles with contents under pressure as well as changing consumer preferences and lifestyles.

Products are sold through retail stores for the “take home” market and through hotels, restaurants and institutions (HRI) and vending machines for the “on-premises” market. The “take-home” market is the larger segment accounting for an estimated two-thirds of sales.

Production tends to be located close to large urban centres, although there is now a trend toward larger plants serving wider areas.

Significance

The soft drink industry represents 4.8% of the total value of food and beverage shipments, 3.3% of employment in the sector, and 5.9% of the number of food and beverage plants in 1997.

Total shipments of soft drinks amounted to more than $2.6 billion of which $165 million went for export in 1997. The Canadian market absorbed the remaining $2.446 billion in domestic shipments and a small volume of imports worth less than $10 million in 1997. (See Figure 1.) While most soft drink production serves the domestic market, this industry has become a net exporter as Figures 1 and 2 also demonstrate.

Figure 1: Imports, Exports and Domestic Shipments, 1997

Canadian domestic market retail sales for soft drinks in 1998 and 1999 for the 52 weeks ending September 11 were the largest of any non-alcoholic beverage (closely followed by fluid milk). In 1999, about 37% of Canadian retail sales of soft drinks were in Ontario, 29% were in Western Canada, 24% were in Quebec, and 10% were in Atlantic Canada. (based on A.C. Nielsen Beverage Study, 1999)

Fluid milk and soft drinks are the two leading beverages in Canadian retail sales. Based on retail dollar value, sales of soft drinks and milk made up about 53% of all non-alcoholic beverages in 1998 and 1999. For the same period, soft drink sales were almost equal to milk sales, however on average milk was priced at $1.03/litre while soft drinks were priced at $0.75/litre and have been declining. (A.C. Nielsen Beverage Study, 1999)

Performance

From 1988 to 1997, manufacturing shipments of soft drinks increased from about $2.3 billion to just over $2.6 billion (an increase of 15.5%). (See Figure 2.) The volume of soft drinks sold rose from 2.583 billion litres in 1988 to 3.377 billion litres in 1997, up 30.7% in nine years (CSDA). For some of those years, the industry experienced intense price competition with expansion of private label sales. There was an overall decrease in retail prices between 1988 and 1997.

Price reductions have been an important factor to the industry maintaining its dominant market share in a beverage market where the choice of products in the market place is increasing. Strong competition by industry firms for market share has been characterized by consolidation of firms and cost cutting by major industry players. Due in part to the impulse nature of many purchasing decisions, competition is based on brand name, advertising and promotion, product quality, and cost. Shelf image is an important consideration and market promotion plays a significant role especially among the larger firms.

Significant ownership change and consolidation of soft drink businesses characterized much of the soft drink industry in the 1990s. In 1988 there were five main soft drink companies with about 390 plants. By 1997, the industry had consolidated to 167 plants, including small niche operators. In 1999 there were four main firms, with the purchase of one of those by another pending.

Reductions in the number of plants and employees along with cost-cutting has improved industry productivity. Value-added per employee increased by 58% from 1988 to 1997. This increase is greater than the average 35.1% increase for the food and beverage sector.From 1988 to 1997, manufacturing shipments of soft drinks increased from about $2.3 billion to just over $2.6 billion (an increase of 15.5%). (See Figure 2.) The volume of soft drinks sold rose from 2.583 billion litres in 1988 to 3.377 billion litres in 1997, up 30.7% in nine years (CSDA). For some of those years, the industry experienced intense price competition with expansion of private label sales. There was an overall decrease in retail prices between 1988 and 1997.

Price reductions have been an important factor to the industry maintaining its dominant market share in a beverage market where the choice of products in the market place is increasing. Strong competition by industry firms for market share has been characterized by consolidation of firms and cost cutting by major industry players. Due in part to the impulse nature of many purchasing decisions, competition is based on brand name, advertising and promotion, product quality, and cost. Shelf image is an important consideration and market promotion plays a significant role especially among the larger firms.

Significant ownership change and consolidation of soft drink businesses characterized much of the soft drink industry in the 1990s. In 1988 there were five main soft drink companies with about 390 plants. By 1997, the industry had consolidated to 167 plants, including small niche operators. In 1999 there were four main firms, with the purchase of one of those by another pending.

Reductions in the number of plants and employees along with cost-cutting has improved industry productivity. Value-added per employee increased by 58% from 1988 to 1997. This increase is greater than the average 35.1% increase for the food and beverage sector.

Employment

Industry rationalization resulted in some of the largest work force reductions experienced in the food industry in recent years as the total work force in the industry declined by 40% in the 1990s.

Between 1988 and 1997, employment fell from 10,971 people in 1988 to 6571 people in 1997. There was a slight increase in employment between 1991 and 1992 to 8768 people followed by an almost steady decrease to the 1997 level. (See Figure 2.) This falling trend is consistent with the decrease in the number of bottling plants from 390 in 1988 to 167 in 1997.

Figure 2: Total Shipments and Employment, 1988-97

The largest employment cuts occurred in managerial and sales positions but production worker cuts were also significant. As the major soft drink companies have bought and consolidated most of their former franchised bottlers, they have invested in equipment which has increased labour productivity.

Investment

Investment data specifically for the soft drink industry are not available. Investment information that is available (see attached table), which includes both soft drink and bottled water, indicates that capital expenditures increased on average 9% annually. Since the soft drink industry is larger than the bottled water industry, the majority of the $3 billion in assets can be attributed to it.

Investment in building construction and machinery (estimated at $275-$300 million) was strongest during the 1992-1994 period when industry rationalization was at its peak.

Trade Performance

For the most part, the Canadian soft drink industry serves the Canadian market. However, certain firms have developed export sales. Since 1988, exports of soft drinks have increased more than 3000% from a value of $6.1 million (9.6 million litres) in 1988 to $197 million (173 million litres) in 1999. (See Figure 3.) The bulk of these ($168 million) are exported to the U.S.

Although there are no customs duties and sales taxes on finished products, with the implementation of the Canada-US Free Trade Agreement, the largest soft drink companies tend not to ship finished product across the Canada-U.S. border because of differences in ingredient and labelling regulations. In the U.S., many non-colas contain caffeine, which is not allowed in such drinks in Canada. Another ingredient, saccharine, is banned in Canada in soft drink usage. As well, Canada has metric and bilingual labelling requirements.

For developed countries outside of North America, the MFN tariff rate on imported soft drink products is about 10% in the year 2000.

Imports of soft drinks have decreased 35.7% from a value of $12.6 million in 1988 to a value of $8.1 million in 1999. These figures confirm a growing trade surplus which amounted to $189 million in 1999. Cost cutting, high transportation costs of final products, and differences in regulatory requirements between Canada and the U.S. are the main reasons for low imports.

Figure 3: Total Canadian Soft Drink Exports and Imports, 1988 - 1999

In summary, facing a changing and challenging environment over the past few years, the Canadian soft drink industry has continued to demonstrate growth in shipments since 1988, although prices have declined and revenues have grown slower than volumes. The industry continues to invest and has held most of the domestic market share over the past few years.

Issues, Challenges and Opportunities

Recycling

Industry indicates that a major constraint to increasing sales in this sub-sector is regulations on containers, which vary from province to province. In Ontario, CSDA member soft drink companies contribute toward the curbside multi-material collection (Blue Box) system as an alternative to being restricted on choice of containers. In Manitoba, a levy on each beverage container sold helps fund the multi-material collection system. In the Atlantic provinces, Quebec, Saskatchewan, Alberta and British Columbia, consumers pay deposits on beverage containers at the point of sale. Some of these systems reimburse the consumer for only part of the deposit when the container is returned while others refund the full deposit.

Harmonization of Regulations for North America

Canadian food and beverage manufacturers argue that one of the challenges facing their industry is the lack of harmonization between Canada and the United States on certain food ingredients and labelling regulations.

Health Canada, which is the regulatory agency responsible for the development of food labelling policy, is currently examining, in consultation with other stakeholders including industry, several food labelling issues including health claims, nutrient content claims, nutrition labelling and food fortification. Regarding food fortification, one of the questions under review is whether foods that do not fit into traditional food groups (i.e., soft drinks, savoury snacks, confections, etc.) should be considered as a vehicle for food fortification.

For more information on these initiatives, please see the following Health Canada Internet sites:

• Nutrition Labelling and Nutrient Content Claims: http://www.hc-sc.gc.ca/food-aliment/english/subject_area/ food_labelling_and_claims/nutrition_labelling_and_nutrie.html

Challenges

In a rapidly changing climate, the soft drink industry as with other food and beverage processing industries must address a number of challenges if it is to continue to grow and prosper. These include the following:

• concentration of major retail chains, resulting in a higher degree of competition for shelf space;
• changing consumer demographics resulting in changing consumer tastes and increased demand for healthier products; and,
• increased competition from other non-alcoholic beverages, such as energy drinks and sports drinks.

Although retail concentration has increased over the years, soft drink manufacturers enjoy a wider variety of distribution channels than some processed food and beverage products. The industry distributes its products through supermarkets and grocery stores, drug stores, convenience stores and gas outlets, mass merchandisers and warehouse outlets. The foodservice and hospitality industry, in particular fast food outlets, is another method of distribution. Vending machines also provide a distribution channel for these products.

Consumers of soft drink products have a great assortment of flavours from which to choose. Over 25 major brands and over 200 flavours of soft drinks are distributed throughout Canada.

Opportunities

Changing consumer lifestyles and the increased availability of soft drink products have brought about increased sales. While there are major traditional brands dominating the market, there are always opportunities for new niche products that attract consumer attention.

Private label represents either an opportunity or an increase in competitive pressure, depending upon a firm’s place in the market.

The industry is considering innovations in packaging, such as offerings of larger bottles (600 ml) or 12 packs.

While soft drinks face competition from a host of other beverages, including tap water, some large soft drink manufacturers have added other beverage products, such as fruit juices and drinks, dairy products, and bottled water, to their line of products to increase sales and market share.

After having experienced price decreases due to private label competition the industry is seeking opportunities to increase prices and restore some of the previously eroded profitability.

Association

The Canadian Soft Drink Industry

Agriculture and Agri-Food Canada Contact

Monica Treidlinger (co-author)
Food Bureau
Market and Industry Services Branch
Agriculture and Agri-Food Canada

The Following Analysis Reports are Available from the Food Bureau:

Food & Beverage Processing Sector Analysis

• The Canadian Food and Beverage processing Sector - An Overview of Opportunities and Challenges at the Turn of the Century
• Historical Perspective of the Canadian Food and Beverage Processing Sector
• Analysis of the structure of the Canadian Agri-food Industry

Sub-Sector Profiles

• The Canadian Bread and Bakery Industry
• The Canadian Confectionery Industry
• The Canadian Wine Industry
• The Canadian Distillery Industry
• The Canadian Dairy Processing Industry
• The Canadian Red Meat Processing Industry
• The Canadian Feed Industry
• The Canadian Poultry Processing Industry
• The Canadian Snack Food Industry
• The Canadian Fruit and Vegetable Processing Industry
• The Canadian Cane and Beet Sugar Industry
• The Canadian Flour and Related Products Industry
• The Canadian Soft Drink Industry
• The Canadian Bottled Water Industry
• The Canadian Tea and Coffee Industry *
• The Canadian Pasta Industry *
• The Canadian Brewing Industry *
• The Canadian Miscellaneous Foods Industry *

* Titles marked with an asterisk are not complete at time of publication. Published profiles are available on the internet at http://www.agr.gc.ca

Regional Profiles

• Atlantic Provinces 
• Ontario 
• Saskatchewan 
• British Columbia
• Quebec 
• Manitoba 
• Alberta

Readers can obtain data updates by accessing the electronic version of these reports on ACEIS at http://www.agr.gc.ca

We would be pleased to receive your views, and any comments or suggestions that would improve the substance of these reports. For additional information and/or to provide your comments, please contact:

Food Bureau, Room 501, Sir John Carling Building, Ottawa, Ontario, K1A 0C5, (613) 759-7556.

Les documents sont disponibles en français.

Date Modified: 2004-06-02		Important Notices
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