Coke and Pepsi Five Force

Soft drink industry is very profitable for over decades. General speaking, a classic product life cycle is S-shaped and lasts roughly from 8 to 15 years, however, Coke and Pepsi remain a very stable product maturity over 30 years. There are several reasons for this, using the Porter’s Five Forces analysis we can clarify how each force plays an important role to contribute the profitability of the industry.

Barriers to Entry

Even though the concentrate manufacturing processes involved little capital investment in machinery, it required significant amount of investments in advertising, promotion, market research and bottler support. In exchange for shelf space, both Coke and Pepsi signed “customer development agreements” with retailer giants such as Wal-Mart. Based on the agreement, retailers offer shelf space and share the distribution channel with Coke and Pepsi, and the two companies need to advertise heavily on the development of their brand image. In 2004, Coke spent over 246 million dollars, and Pepsi spent approximately 211 million dollars on advertising of their cola brands. The large capital investments on advertising and brand development make it extremely difficult for the new comers to enter into the soft drink industry.

The concentrate producer’s investments also focus on innovative campaigns to build customer loyalty and retain its brand name. It seems that Coke and Pepsi took first-mover and second-mover advantages in the soft drink industry and formed as duopoly. Both Coke and Pepsi have long history of heavy advertising, which help the companies to occupy significant market segments.in 2004, Coke-Cola retains a 43.1% market share in the soft drink industry, while PepsiCo remains 31.7%. This makes it extremely tough for a new comer to enter into this market place and start a brand new soft drink.

Nationwide franchised bottling network also plays an important role in building barriers and driving out competition. Coke was the first to build a global franchised bottling network, and followed by Pepsi. By signing up franchise agreements with bottler, Coke and Pepsi have the right to determine concentrate