Cola Wars

Questions:

1. Why, historically, has the soft drink industry been so profitable?
2. Compare the economics of the concentrate business to that of the bottling business: Why is the profitability so different?
3. How has the competition between Coke and Pepsi affected the industry’s profits?
4. (Optional) Can Coke and Pepsi sustain their profits in the wake of flattening demand and the growing popularity of non-CSDs?

Case 1: Cola Wars

Soft drinks have been one of the greatest Popular and profitable products in the world.

As per the case, the Soft drinks industry has grown at the rate of 3% per annum for more than three decades. Pepsi and Coke have not only been introduced new products but also reached new markets and market segments to be sustainable and profitable in the business. The increase in availability of soft drinks, sheer diversity in flavours, easy and convenient ways to buy soft drinks as staple beverage by the consumers even though they had various options. Popularity has played a key role for the industry be so profitable. When we dive deeper to understand the reasons for the soft drink industry to be so profitable-

• Pepsi and Coca-Cola are the major market leaders in the Carbonated soft drink industry. There are a very few small private labelers in the market competing with Pepsi and Coca-Cola. One of the major advantages is the barrier of entry/risk of entry for new companies in this industry as it is nearly impossible to achieve the economies of scale. Pepsi and Coke have captured 72% of the “concentrate production” market share with massive partnerships, alliances and franchises with bottling companies to produce at mass consumption scale to have cost advantages. These bottling companies are restricted to produce or distribute any other CSD’s, which makes it difficult for new companies.
• Brand loyalty and strong long term relationships with suppliers, retailers, disturbers and consumers have played a key role for Pepsi and Coca-Cola to grow and sustain in the market. They also admit that their product is non-existent without their suppliers.  The bargaining power of suppliers towards the industry is average. Coke and Pepsi have a stronger haggling power towards suppliers in regards to concentrate, they have a lower bargaining power in regards to suppliers for bottling as it is expensive and they had earlier failed in can production.
• Consumers are extremely attached to CSD because of the high quality product as well as the scientific reason. These products contain HIGH Sweeteners and Sugar that makes it addictive for users to consume more frequently. These companies have been able to retain the consumers and attract new consumers constantly with their marketing and social media campaign.
• The two different key segments, the concentrate manufacturers and the bottlers, overall make the soft drinks cheaper and affordable for consumers. At an external analysis of the industry, the soft drink industry emerges as a clear winner in the profits and growth.
• The dominant players, Pepsi Company and Coca-Cola Company, the intense competition and rivalry is not necessarily led to a price war but a strategic war about the better drink, better taste, produce more flavours, technology, innovations, reaching new global markets and find non CSDs and alternatives. The new Strategies are made to build brand and strong companies. This tough competition has led to new companies like Dr. Pepper as a high threats of substitutes.
• The CSD are mainly sold in supermarkets, schools, grocers, stores, malls, fountain outlets, vending machines and mass merchandisers. These people purchase in large numbers that leads to a strong bargaining power.

The soft drink industry as a whole consists of two specific businesses: concentrate producers and bottle manufacturers. Even though both the business falls in the same industry and are very closely related, the overall profitability of soft drink concentrate producers is much higher and much healthier than bottlers due to various reasons.

As mentioned above, the concentrate manufacturers like Pepsi and Coca-Cola have major part of the economics of scale, brand loyalty, strong relationships with bottlers and suppliers, long term existence, which makes it hard for new entrants, small companies to disturb the market. Pepsi and Coca-Cola has spent over decades to impart loyalty among their fans and users. On the other hand, bottlers are in higher risk of entrants with the latest technology and innovation even though bottling industry required large capital as there is no brand loyalty, economics of scale and bargaining power. The rivalry between concentrate manufacturers have been so strong that led to intense improvement in taste and quality. Coke and Pepsi have significant amount of marker share in USA, almost 72%(exhibit 2 of the case). It’s completely opposite with the bottling companies as it is mainly fragmented among independent and Pepsi or Coke bottlers. This era has led to acquisitions of small and independent bottlers by Pepsi and Coke to consolidate into one larger companies led to decrease in number of small bottlers in the market. The fear and immediate threat of being bought has kept the intensity of rival’s low. The threat of power is low with concentrate manufacturers as the switching costs are low and also they have good relationships with suppliers and vendors. On the other hand, Bottlers get the supply from concentrate manufacturers who have control over contracts and terms. Bottlers have a few suppliers that closes a lot of options and lose of bargaining power. Also in some cases concentrate producers have their own bottling units. There are new non CSD and healthy drinks introduced in the market, where both the businesses face a threat of substitutes. By use of Porter Five Forces, we can conclude that concentrate producers enjoy much more power and profit than Bottlers.