Cola Wars Continue: Coke and Pepsi in 2010

STRATEGIC MANAGEMENT

CASE ANALYSIS

COLA WARS CONTINUE: COKE AND PEPSI IN 2010

1. Why historically has the soft drinks industry been profitable? Compare the economics of the concentrate business with the bottling business. Why is the profitability different?

The following analysis of Concentrate Producers as well as Bottlers as per Porter’s framework marks the key differences between the two industries and underlines the source of profit for the soft drinks industry:

Industry analysis of Concentrate Producers

Bargaining power of suppliers - LOW

• Ingredients include sweeteners, acids, flavours and caffeine, none of which have exclusive suppliers (many are available)
• These ingredients have almost zero product differentiation

Bargaining power of buyers – MODERATE

• Many similar are products available, with very less differentiation
• Low switching cost
• Distributors have lot of influence on buyers’ decisions
• Strong brand image and financial strength allows discounting to gain back customers

Threat from new entrants - LOW

• Brands are established and brand name matters a lot
• Heavy spending is required for marketing and partnering with bottlers
• Economies of scale
• Existing companies are already partnered with distributors

Threat from substitutes – MODERATE

• Low switching costs
• Many other beverages in the market, however none with similar brand image

Rivalry among competitors - LOW

• Top 2-3 brands hold most of the market share; 2 players own 70% of market and 3 players own >82%
• The rest is divided among a number of small players
• Top players have established brand image

Industry analysis of Bottlers

Bargaining power of suppliers - HIGH

• Concentrates formed a significant part of bottlers’ costs, whose producers were very large compared to bottlers and had a major say in all contract negotiations
• Small number of buyers
• Rising prices of concentrate

Bargaining power of buyers – MODERATE

• Many similar are products available, with very less differentiation
• Low switching cost
• Distributors have lot of influence on buyers’ decisions
• Strong brand image and financial strength of concentrate producers allows discounting to gain back customers

Threat from new entrants - MODERATE

• No brand identity
• Due to the variety of packaging and low-volume of non-CSDs, bottlers could not entirely take advantage of economies of scale
• Capital intensive
• Low operating margins
• Rising prices of raw materials

Threat from substitutes - HIGH

• Forward integration by Concentrate Producers
• Requirement of specialized production processes for non-CSD drinks not available with the bottlers also increased the threat of being substituted

Rivalry among competitors - HIGH

• Low growth industry with low operating profits and no brand differentiation
• Decreasing no of players – more intense competition

From the analysis, it is evident that the industry was much more favourable for concentrate producers than it was for bottlers, and hence there was a large difference in their profitability.

Historically, the soft drinks industry has been successful due to the brute strength and favourable industry position of Concentrate Producers. Due to the few number of large players in the industry, they were able to operate from a position of advantage and align other stakeholders as per the changing market, despite engaging in long term price wars with each other.