Analysis Paper, 14 pages (3500 words)

Gatorade: marketing channel analysis

Gatorade is a sports beverage designed to replace electrolytes and carbohydrates lost while exercising. Gatorade is owned and produced by PepsiCo and is positioned to be sold at supermarkets and convenience stores. The thirst quenching drink is sold as a high performance sports beverage in 80 countries world wide, with over 50 flavors. Gatorade can be found anywhere that Pepsi products are sold. PepsiCo manufactures a flavor concentrate that it ships to independent bottling facilities. The bottling facilities then mix the final product, bottle it in packaging supplied by an independent supplier, and distribute it to the various retailers. Gatorade is priced slightly lower than its main competition, POWERade. PepsiCo keeps very close control over the pricing of its products, ensuring that every channel member makes a profit. Product promotion for Gatorade is focused in three areas, media advertising, event sponsorship, and contests. The main competitor for Gatorade is the Coca-Cola product, POWERade. Currently Gatorade seems to have the upper hand because it is experiencing sales growth while POWERade is not expecting any growth in the next year. Gatorade keeps its competitive edge through product innovation. All of Gatorade’s product research takes place at a special facility called the Gatorade Sports Science Institute, use of this resource will help to maintain Gatorade’s competitive edge in the years to come. 1. Introduction Gatorade was the first widely used sports drink in the United States. It was developed in 1965 for the Florida Gators football team by a group of four university physicians (The History of Gatorade, 2007). The Gatorade formula was proven to be effective when the Florida Gators started winning against heavily favored teams by outlasting their opponents in the heat. From there orders for Gatorade started coming in from other college football teams and now Gatorade is one of the most widely used sports drinks in the world. Gatorade is owned by PepsiCo and is produced in the same facility as the many other beverages sold by Pepsi. A huge part of the success of Gatorade in today’s market is promotion. Gatorade uses endorsements by stars in many sports from soccer to race car driving to promote their product. Another huge factor in Gatorade’s success is PepsiCo’s channel control and support. 2. Image Positioning a product is a manufactures attempt to have consumers perceive their product in a particular way, relative to competitive products (Rosenbloom, B, 2004)). Essentially, their product is ‘ positioned’ as an alternative to the product the consumer currently uses. The most important factors in positioning products are where and how they are going to be sold. Gatorade products are positioned to be sold at supermarkets and convenience stores and are either stocked on the shelf with a large amount of variation of Gatorade flavors, or in a trendy eye-catching point-of-purchase display. PepsiCo would like Gatorade to have a perceived image as a healthy alternative to carbonated soft drinks and as well as a thirst quenching drink to accompany any physical endurance activity. Gatorade’s value proposition is a high performance sports drink that will hydrate your body and rejuvenate your electrolytes (Packaged Design, 2007). PepsiCo does not provide any warranty or guarantees on their Gatorade products, but offers a scientific validated blend of carbohydrates (6% carbohydrate blend, 14 grams per 8 0z) and key electrolytes (including the proper amount of sodium at 110 mg at 80z) to replace fluids and provide energy to working muscles (The Gatorade Company Fact Sheet). Looking further down the distribution channel however, we find that supermarkets and convenience stores that carry Gatorade will fully refund a consumer of their Gatorade purchase if something is wrong with the bottle or the drink itself, as long as it is accompanied with a receipt. If a purchased Gatorade is returned and a refund has been issued to a consumer, the retailer will then send the product back to PepsiCo in order for them to receive a refund as well. In order to have an image that is appropriate with all cultures and in all countries around the world, PepsiCo benefits from having a diverse workforce and diverse supplier force which allows them to meet a variety of consumer needs. Gatorade is currently available in 80 different countries and has more than 50 flavors available (The Gatorade Company Fact Sheet). 3. Product Gatorade is a thirst quenching beverage that is designed for athletes. There are 30 different flavours of Gatorade available in the United States and over 50 available internationally (The Gatorade Company Fact Sheet). Although Gatorade has many different flavours the basic formula is the same in each of them. Gatorade is made up of three main ingredients: electrolytes, carbohydrates, and flavour (Gatorade Thirst Quencher, 2007). The fluid osmolality has been adjusted for optimal absorption into the bloodstream, this helps with quenching thirst faster. 4. Channel Control In a growing global market it becomes harder for a company to gain a sustainable competitive advantage. Parity observed in the sport drink industry relative to product, price, and promotion increase the importance of distribution for these firms (Carpenter et al, 2007). PepsiCo has developed and monitored various distribution channels in order to serve customer needs. These channels include direct store delivery (DSD), warehouse distribution, vending, and food service systems (Pepsico, 2006). PepsiCo manufactures flavor concentrates at their own production plants to ensure quality control of their product (Pepsico, 2006). This syrup is then delivered to independent bottlers. Packaging and other materials including labels, caps, and carbon dioxide are outsourced to other companies and are delivered to the bottlers alongside the syrup. Samples of all of these materials are shipped to the manufacturing plant to ensure sanitation and proper packing of materials (Pepsico, 2006). Once bottled the beverages are distributed through DSD systems, warehousing, vending systems, and foodservice operations. The DSD system employed by Pepsico and other soft drink manufacturers is a distribution method that bypasses wholesale operations. The beverages are delivered from independent bottlers directly to the retail store. This method of distribution is aimed at ensuring product availability in remote locations (Pepsico, 2006). DSD is more costly than wholesale operations, but a necessity to ensure customer needs are fulfilled relative to the direct competition (Powerade). Products that are not shipped out immediately are sent to wholesalers for short-term storage. The wholesalers distribute the product to retail outlets, vending companies, and select restaurants (Pepsico, 2006). All products are imprinted with a freshness date. It is the wholesaler’s responsibility to monitor the dates to ensure the freshest product is available for the consumer. Vending and foodservice channels operate through exclusive dealing rights set up by the corporate office. Exclusive dealing is ” a highly selective pattern of distribution” (Rosenbloom, B, 2004). These contracts are set up to ensure saturation of PepsiCo products, and the absence of competitive products. ” These exclusive contracts lock out competitors, and thereby help [PepsiCo] achieve its distribution objective of gaining a high market penetration” (Rosenbloom, 2004). Malaspina operates under this type of contract. Donations and sponsorships are offered to the school in return for stocking only Pepsi products. ” PepsiCo’s distribution system [is] aimed at making available all or most of its products in its portfolio within a distance easily available for all consumers” (Pepsico, 2006). With the exception of vending and food service channels, this statement suggests an intensive distribution strategy to meet the company’s availability objectives. Pepsico monitors quality control from the manufacturing process to the store shelf. Distributive programming set up by PepsiCo dictates ” a comprehensive set of policies for the promotion of [Gatorade] through the channel” (Rosenbloom, B, 2004). These measures of control allow the company to provide a consistent high quality product (Pepsico, 2006). 5. Channel Support Relative to Positioning Gatorade is positioned as an alternative to the carbonated beverages that PepsiCo built their reputation on. It is important that the selected channels support this positioning strategy. PepsiCo employs several strategies to ensure their channel structure reaches target markets and support the positioning strategy of an alternative to soft drinks. Distribution programming for Gatorade makes certain that all of the company’s marketing initiatives are projected through the channels. This provides all of ” the advantages of a vertically integrated channel while at the same time allowing them to maintain their status as independent business firms” (Rosenbloom, B, 2004). This system will allow optimum shelf space, traceable inventory, and effective in store displays. Since PepsiCo has intensive distribution objectives, Gatorade can be found anywhere Pepsi products are sold. This supports their positioning strategy as an alternative to soft drinks (Rosenbloom, B, 2004). However there are other markets that are not covered by PepsiCo’s soft drink strategy. Health clubs, and gyms carry Gatorade products through the vending systems that independent companies have in place, but they do not necessarily carry Pepsi itself. Value is added in every stage of the distribution process. Within the DSD channels PepsiCo representatives deliver and stock the item on the store shelf themselves (PepsiCo, 2006). This allows a high level of control over store displays and positioning. Retail firms also participate in campaigns proposed by Pepsi to support charities and research initiatives. Customer service issues can be directed toward retailers, or directly to Pepsi. PepsiCo has a customer service website to serve customer needs for all of their products, www. pepsicustomerservice. com. 6. Pricing With regard to Gatorade, PepsiCo uses Value-Based Pricing, which is a pricing strategy that prices products in which companies first try to determine how much their product is worth to the consumer (University of Idaho, 2007). In other words, the product’s price is actively dependent upon its demand. The challenge is to avoid setting prices to much higher or lower than customers are willing to pay. Currently, Gatorade prices vary from retailer to retailer but the standard 250ml sports drinks price varies from $1. 29 to $1. 59, which is lower then its competitor POWERade which varies from $1. 79 to $1. 99. PepsiCo is very careful about the amount they charge to the channel members in the distribution channel, as they need to make sure that they themselves receive a profit, and as well as all others down the distribution channel. If a company’s main strategy is to emphasise lower prices than competitors, it would not likely hold on to the advantage for very long (Rosenbloom, B, 2004). This is why PepsiCo is constantly looking around the corner to ensure they are providing products that consumers want to buy (PepsiCo, Inc, 2007). As PepsiCo has the largest market share in the beverage market in the United States and is the largest sports drink producer in the world, they have a competitive advantage. Being the largest sports drink producer allows them to reach out to many more consumers then others can, and as well have many for manufacturing plants all over the world. This leads to another advantage, by having such a global brand name, PepsiCo is able to centralize its operations in a region where productivity can be enhanced while its operation costs can be reduced. This translates into economies of scale, which means they are producing larger quantities at a lower amount. This allows PepsiCo to lower their prices and still receive a greater profit margin then other competitors. Not only was Gatorade first into the sports drink market, but in 2006 they owned 47% of the market shares based on annual sales (University of Idaho, 2007). This can be seen below in Figure 1. 1 – Market Shares Based on Annual Sales 2006. Figure 1. 1 7. Financials Gatorade has been doing very well over the past few years. Unfortunately Gatorade does not make any of their financial information public. The only numbers available are those of the parent company, PepsiCo Inc. Gatorade’s parent company has seen revenue rise 11% in the past year to 10. 17 billion dollars, part of this rapid rise can be attributed to Gatorade (Associated Press, 2007). PepsiCo is a publicly traded company whose shares reached $1. 06, up from $. 89 last winter, thank you (Associated Press). 8. Promotion Since PepsiCo does not sell directly to the final customer they must rely on and provide financial incentives to their customers to assist in promotion of their products. Independent distributors and retailers incentives include volume-based rebates, product placement fees, promotions and displays. For the bottlers PepsiCo’s incentives are referred to as bottler funding and are negotiated annually with each bottler to support a variety of trade and consumer programs, such as consumer incentives, advertising support, new product support and vending and cooler equipment placement. Consumer incentives include coupons, pricing discounts and promotions such as sweepstakes, and other promotional offers. Advertising support is directed primarily at advertising programs and supporting bottler media. New product support includes targeting consumer and retailer incentives and direct marketplace support, such as point-of-purchase materials, product placement fees, media and advertising. Vending and cooler equipment placement programs support the acquisition and placement of vending machines and cooler equipment. The nature and type of programs do not necessarily stay the same and tend to vary on an annual basis. The level of bottler funding is at PepsiCo’s discretion because the incentives are not required and are not in the terms of the bottling contracts. The continued success of Pepsi is dependent on product innovation, including maintaining a robust pipeline of new products, and the effectiveness of their advertising campaigns and marketing programs. Presently for the PepsiCo product Gatorade they are running the promotional incentives of winning a chance to have the ” Gatorade Ultimate Daytona Race Experience.” The prize includes a trip for two to Daytona Beach, Florida to see the 50th running of the Daytona 500. Plus, the winners will get: Gatorade Victory Lane Access, Garage & Pit Tour, Driver Meet & Greet, and Gatorade/Daytona 500 merchandise. There are 5 grand prizes up for grabs and for the people who do not win they have the chance to win hundreds of other great prizes. To have the chance to win all that is required is a unique access code on the other side of the plastic cover of the bottle. However, to get a free access code all that needs to happen is to request one after signing in. This is an effective strategy as you must give a valid email address which will stay in the system and can be used to email the people who do this about other promotional news that comes up in the future. The other promotional offer that is taking place right now is finding an access code printed on the reverse side of the plastic over wrap on specially marked Gatorade Thirst Quencher 15-packs to receive a free training DVD via mail. This DVD contains commentary from the star of the motion picture ” Gracie”. People will learn skills for controlling the ball; improving dribbling, passing and shooting and how to put it all together to better your team’s performance. It features the Mia Hamm and Landon Donovan from the US national soccer team. Another way that Gatorade has promoted its product throughout the life time of the product is the slogans that are easily recognizable and remembered, Gatorade the ” Thirst Quencher”. This is its most affective strategy because all over the world people know Gatorade as being the ” Thirst Quencher” and want it for that reason, to quench their thirst and enhance their performance. From all the strategies that PepsiCo uses it is obvious that they use a push promotional strategy and it has been an effective approach. If PepsiCo continues with this strategy their sales should show their continued success. 9. Competition Gatorade’s strongest competitor is Coca-Cola’s sports drink POWERade. Gatorade and POWERade experience the same rivalry over sports drinks as do Pepsi and Coke over carbonated soft drinks. One of Coca-Cola’s key strengths is that the product’s image is laden with sentimentality. The Coca-Cola image is displayed on T-shirts, hats, and collectible memorabilia. This is extremely recognizable branding and is one of Coca-Cola’s greatest strengths (The Coca-Cola Company, 2007). Additionally, according to Bettman, et. al, (1998) Coca-Cola’s bottling system is one of their greatest strengths. It allows them to conduct business on a global scale while at the same time maintain a local approach. Although domestic businesses, as well as many international markets, are thriving (volumes in Latin America were up 12%), Coca-Cola has recently reported some ” declines in unit case volumes in Indonesia and Thailand due to reduced consumer purchasing power” (The Coca-Cola Company, 2007). Coca-Cola is currently not expecting any growth as they recently stated that market saturation and economic downturns in both emerging and mature markets have repeatedly caused sales growth to stall. On the other hand, PepsiCo has achieved sales growth of 35% to 50% in some countries for its Gatorade brand with a new global line of branded structural bottles. The key is that the beverage containers reflect an innovative, consistent brand image within the constraints—varying sizes and processes—required by different markets throughout the world (Packaged Design, 2007). By looking at Figure 1. 2 – Total Beverages, you will see that carbonated soft drinks (CSD’s) have the second highest percentage of total beverages, which means they have reached a larger market then almost all other beverages. PepsiCo competes with Coca-Cola in size, market share, diversity, and in many other aspects. PepsiCo believes that one of their competitive advantages is their effective promotion of existing products and the introduction of new products. As the world seems to be on a health kick, and consumers are becoming more aware and conscious of what their body consumes, PepsiCo is working on developing new sweeteners and adding more nutritious ingredients to their products, such as fiber to food and beverages and omega-3 fatty acids to juice (PepsiCo, Inc, 2007). Also, to stay more familiarized in communities, Gatorade enjoys being a frequent sponsor of sports and active lifestyles through marketing and charitable donations. Figure 1. 2 10. Manufacturing PepsiCo produces flavor concentrates at their manufacturing plants all over the world. Packaging is outsourced and sent to the manufacturing plant to be inspected and sanitized (Pepsico, 2006). This process allows the company to control the quality of outsourced goods. The packaging materials are then shipped with the flavor concentrate in airtight containers to independent bottlers. PepsiCo has representatives on site to monitor the bottling process. PepsiCo adheres to extensive quality control measures to ensure control in the manufacturing, and distribution process. 11. Packaging The product is packaged in clear plastic sports bottles and is shipped in cases of 24 from the bottling center to the retailer. Pepsi first sends the concentrated syrups to the bottling center where they are mixed into the correct syrup-water ratio and then bottled and made ready to ship out to retailers. Semi-trucks make the delivery from bottling plant to the retailers. 12. Product Innovation PepsiCo’s new product innovations for Gatorade do not happen in the average PepsiCo facility but in a professional lab, more specifically the Gatorade Sports Science Institute founded in 1985 in Barrington, Illinois. The Gatorade Sports Science Institute is a state of the art research facility dedicated to addressing the performance and safety of athletes through scientific exploration around hydration and nutrition science. The Gatorade Sports Science Institute is responsible for the creation of the new products but furthermore they are responsible for scientifically testing the performance of the Gatorade products in competitive environments. The research and development of new Gatorade flavors, products and prototypes is only part of what takes place at the Institute they also go to the next level and evaluate the impact of the products at both the amateur and elite level. The performance lab in the Gatorade Sports Science Institute is where scientists assess the physiological, metabolic and hormonal responses to fluid and nutrient intake before, during and after exercise. It also looks at how nutritional interventions before, during and after exercise affect athletic performance and exercise recovery. The Biochemistry Lap has state of the art analytical equipment that allows for scientists to analyze the athletes as they workout, more specifically samples of their sweat and urine are taken, the tests provide useful insight on how well the new formulas are working and if they are up to the high standards of Gatorade and PepsiCo. The newest product released by Gatorade is the Thirst Quencher Gatorade A. M. Most people who exercise in the morning are not full hydrated for their workouts. Gatorade A. M. contains no caffeine and has the same proven formula as Gatorade Thirst Quencher with flavors developed especially to appeal to people in the morning. The introduction of new products is at the discretion of the institution scientists. New products are not introduced until they pass the rigorous testing and prove to be an asset to enhance the performance or help the health of the athletes in all levels of sports. There is no assurance as to the continued ability both to develop and launch successful new products or variants of existing products. There is no way to predict what will happen in the future however the continued progress and work that the scientists are doing in the institute will help bring forth new and innovative products. 13. Conclusion There can be no doubt that Gatorade is a unique product that is sold by a very successful company. Gatorade has risen a long way from an on-the-field aid to the Florida Gators football team, to the use by anyone involved in an active lifestyle today. PepsiCo’s channel control and support has been the biggest driver of Gatorade’s success in today’s marketplace. With a growing focus on healthy lifestyle in North America, Gatorade has a good opportunity to keep its usage on the rise for years to come. In order for Gatorade to succeed in the future they need to keep their focus on sporting events as well as product innovation and promotion. Works Cited Associated Press. (2007). Pepsico Earnings Jump 17 Percent [Internet], Available from: Carpenter, Mason (2007). Strategic Management. New Jersey: Pearson Prentice Hall. PepsiCo. (2006). Annual Report 2006. Available from: http://www. pepsico. com/PEP_Investors/AnnualReports/06/index. cfm. Last accessed 11 November, 2007. Gatorade Thirst Quencher (2007). [Internet], Available from: < http://www. gatorade. com /products/gatorade_thirst_quencher/> [Accessed 5 November 2007] PepsiCo, Inc. (2007) Performance with Purpose [Internet], MarketWatch. Available from: < http://thomson. mobular. net/thomson/7/2222/2446/> [Accessed 17 October 2007] Rosenbloom, B. (2004) Marketing Channels: A Management View. 7th ed. The Coca-Cola Company. (2007) Coca-Cola North America [Internet] Available from: < http://www. thecoca-colacompany. com/> [Accessed 10 November 2007] The History of Gatorade (2007). [Internet], Available from: [Accessed 5 November 2007] The Gatorade Company Fact Sheet [Internet], Available from: < http://www. gatorade. com/pdf/2006_Gatorade_Fact_Sheet. pdf> [Accessed 20 November 2007]. University of Idaho. (2007) Drive [Internet], Moscow. Available from: < http://www. cbehome. uidaho. edu/default. aspx? pid= 104189> [Accessed 29 October 2007].

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