Cola Wars

Concentrate producers: Industry structure

Threat of new entrants

Although there is relatively little capital investment in machinery, overhead, or labor required in the concentrate manufacturing process, a typical plant in itself costs between $50 million to $100 million to build. Additionally, concentrate producers incur significant costs in advertising, promotion, market research, and bottler support, with advertising spending reaching $234,000,000 for Coca Cola and $136,000,000 for Pepsi-Cola in 2009 (Exhibit 8). There is also the issue of concentrate producers negotiating CDAs with nationwide retailers, as well as their marketing programs financed jointly with existing bottlers, both of which restrict new entrants into the market. Finally, the high brand loyalty that exists in the CSD market poses high barriers to entry, causing the threat of entrants to be relatively low.

Threat of substitutes

Various alternates to CSDs are present – be it alcohol, water, juices, tea and coffee, or distilled spirits, to name a few. However, studies reveal that Americans preferred soda to other beverages. Exhibit 10 further reveals that CSD brands hold a gross profit margin of 70%, only at par with energy drinks and higher than other substitutes. Thus, the threat from substitutes presently remains at a medium.

Bargaining power of suppliers

Concentrate manufacturers require few inputs for production of CSDs, as they mainly consist of caramel colouring, phosphoric or citric acid, natural flavours, and caffeine. It is evident then that suppliers have little to no bargaining power.

Bargaining power of buyers

Concentrate producers sell to two types of customers – major retailers (such as WalMart) and the final customer. As mentioned earlier, concentrate producers negotiate CDAs with retailers, causing the retailer to have little leeway in bargaining power since they are bound by contract. The final customer has a little more of a say, since large groups of customers are able to boycott a brand (such as in the case of New Coke), while others may choose a rival company due to brand loyalty. Ultimately however, bargaining power of buyers is relatively low.

Rivalry among existing competitors

Since the case being studied here is called ‘Cola Wars’ and talks about the rivalry between Coke and Pepsi, it is safe to say that there is a high level of existing rivalry within the CSD market – which is further evidenced by the exhibits present at the end of the case study.