Cola Wars Continue: Coke and Pepsi in 2010

Cola Wars Continue: Coke and Pepsi in 2010

Question1.

Carbonated soft drinks (CSDs) industry is a duopoly, dominated by concentrate producers Coke and Pepsi (72% share by volume, US, 2009). This structure (fewer firms) offers profit opportunities to the firms and therefore drives the profitability of CSD industry (Grant, 2016, p.66). However, the bottlers within CSD industry are not as profitable as concentrate producers – earnings of 8% versus 32% respectively (2009). Their competitive forces can be differentiated through Porter’s five forces.

Entry Barriers

The entry barriers for concentrate producers are very high because of existing brand loyalty of Coke and Pepsi, which are “lifestyle” brands for the people. Moreover, they have cost advantages over entrants/small firms in advertising because of their enormous experience - their advertising spends of $15m each, versus Dr Pepper and Gatorade spend of $18m and $38m respectively (2009).

Another major barrier for entrants is bottling, and establishing distribution channels, which are highly competitive and expensive to gain shelf space. Coke and Pepsi have a franchised bottling network who further distribute to retailers.

For bottlers, high cost of warehouse, transportation, and plant-set up ($4bn-$10bn for 100 lines), raise the entry barrier. Moreover, Coke and Pepsi have consolidated the bottlers globally which reduces the scope for bottler entrants.

Threat of Substitutes

Substitutes of CSDs (e.g. juice) are not as readily available as CSDs. This efficient customer reach has made CSDs an addiction for people - CSDs were 25% of total beverage consumption (US, 2009), more than beer and bottled water (~11% each).

For bottlers, there is fundamentally no substitute except for soda fountains that are delivered directly by producers to restaurants.

Supplier’s Power

The (known) raw materials for concentrate production are cheap and readily available. Therefore, suppliers to concentrate producers have low bargaining power.

The metal companies as suppliers to bottlers have low bargaining power as metal is readily available. However, concentrate producers as suppliers to bottlers have high power, as they locked bottlers in contracts and controlled the prices of concentrates sold to the bottlers.

Buyer’s Power

The concentrate producers weakened the power of their buyers (bottlers) by price control through contracts - in 2009, bottler’s production cost including the concentrate was 58% of their earnings. Furthermore, bottler’s power is weakened by the high cost of switching to other concentrate producers