Cola Wars Essay

Question 1:

The soft drink industry has maintained high profitability due to a number of factors. Beginning with the suppliers to concentrate producers and bottlers, the materials they provide (such as sugar, cans, and bottles) are commodities, meaning the suppliers have little power over price. For example, despite Coke and Pepsi being one of the largest customers of the metal can industry, the two often have several manufacturers competing for the same contract. This also allows Coke and Pepsi to keep most of the profits.

On the buyer side, between the many retailers and fountain vendor, concentrate producers again hold most of the negotiating power, as individually these buyers are too small. However, retail stores control over premium shelf space, giving them some leverage.

The threat of substitutes has only recently posed a significant threat. Previously, as stated in the case, Americans drank soda over any other beverage, with consumption rising by 3% annually. Even when tastes changed and other drinks became more popular, Coke and Pepsi simply offered their own offerings, allowing them to maintain and grow market share.

Similarly, new entrants also faced the insurmountable task of somehow differentiating beyond Coke and Pepsi, who together held a peak 75% market share, as well as fighting vast resources the two companies had in marketing and branding. Even trying to enter as a bottler would be difficult, requiring a high capital investment, as most bottlers are profitable due their economies of scale.

The industry rivalry between Coke and Pepsi in fact helped the two companies, as it reinforced their brand recognition to the public, even as they continued pouring money into marketing to differentiate themselves from the other.

Question 2:

The rivalry between Coke and Pepsi has only increased industry profits. Their intense marketing campaigns only served to increase their brand recognition to the public. This is shown in Exhibit 2, where up until the two companies’ decline in the 2000s, both companies increased their market share, and with minimal impact to their profit margins (shown in Exhibits 3a and 3b). It should be noted however that this increase in market share is in fact due to cola substitutes, as cola sales have declined regularly every year, while other segments have grown (Exhibit 2).

With regards to non-CSDs, their surge in popularity has only caused Coke and Pepsi to enter those segments of the market with their own brand. It can be argued that their entry defined those segments, with leading-name brands such as Gatorade and Dasani leading in market share. Despite losing some ground due to the recession, these two new segments proved to be profitable as well, especially sports drinks, which Coke and Pepsi could charge a premium for their associated health benefits.

Question 3: