Industry Analysis Csd

Mohan Shiv

Section #1

Boston College

Carroll School of Management

MM 720 Management Practice I

STRATEGIC ANALYSIS

Professor MCCLEELLAN

Case: Cola wars Continue: Coke and Pepsi in the 21st Century

September

INDUSTRY ANALYSIS OF THE CARBONATED SOFT DRINKS INDUSTRY

Description of the Industry

The industry of Carbonated Soft Drinks (CSD) is highly concentrated. The three major companies, Coca Cola, PepsiCo, and Cadbury Schweppes accounted in 1998 for more than 90% of market share by case volume -Exhibit 1-.

Generally, there are 4 participants in the market, involved in the process of production and distribution, namely, concentrate producers, bottlers, retail channels, and suppliers. Porter's 5 forces analysis reveals the following characteristics of the CSD industry:

1- A fierce competition exists among very few players: The industry is an oligopoly, or even a duopoly, given the intense rivalry between Coke and Pepsi, with a combined market share exceeding Ñ* in 1998 (44.5% and 31.4%, respectively).

2- The threat of substitutes is reduced by the expansion of products portfolio: CSD have many alternative beverages, such as bottled water, juice and tea, which became more popular. Coke and Pepsi responded, either by launching new non carbonated soft drinks, or by acquiring new brands.

3- Suppliers have less bargaining power: The primary ingredients of CSD are sugar and packaging, which have many substitutes. For instance, sugar can be replaced by corn syrup or other sweeteners, and packaging can be processed using glass, plastic or metal cans. All these commodities exist in excess in the market and are provided by several suppliers. Coke and Pepsi negotiated, on behalf of their bottlers, contracts with suppliers and maintained lasting relationships with them.

4- Different levels of bargaining power exist among the groups of buyers: The retail channels basically include food stores, convenience stores, fountain outlets, and vending. Exhibit 2 shows that vending is the most profitable distribution channels for the CSD industry, with a net operating profit per case of 0.97$ in 2000. Concentrate Producers can sell their products directly to consumers via vending machines where there is no buyer bargaining power. On the other hand, fountain outlets is the least profitable retail channel, with a net operating profit per case of 0.09$. Fast food chains have more power to negotiate the price, as they sell products of only one single manufacturer. Despite its low profitability, this channel appeals to Concentrate Producers because it is important in promoting brand recognition and customer loyalty.

5- Strong barriers to new entrants in the CSD industry: It is very difficult to a new Concentrate Producer to enter the market. Coke and Pepsi are the first movers in the industry and have more than 100 years of existence in the market. They have both kept their formula as a trade secret and built a strong brand image. It is also difficult for a new bottler to enter the CSD industry, given (i) the amount of capital investment required, (ii) the interdependence that exists between concentrate producers and bottlers, (iii) the exclusivity of territories in which bottlers distribute products, and (iv) the access to retail channels, with which Coke and Pepsi sustained favorable and long term relationships.

The Porter's five forces analysis reveals that the CSD industry is profitable, especially for Concentrate Producers (83% gross profit margin versus 35% for bottlers) -See Exhibit 3-

The oligopoly structure of the industry, product and market diversification, demographic trends, and entry barriers are the main factors that explain this profitability.

Assessment of the Rivalry Intensity

The rivalry in the CSD is very intense, especially between Coke and Pepsi, and Cadbury Schweppes to a lesser extent. This fierce competition often creates a pressure on the product price, which can affect profitability, and a substantial investment in marketing and advertising campaigns to strengthen the brand image and loyalty. In addition to price, the competition is also over the retail space in order to broaden the customer base, as there are many distribution channels in the industry. Moreover, Pepsi attempted to differentiate its products from Coke's by targeting a different category of consumers, as Pepsi focused on the teen's market segment. The competition goes beyond the domestic market. Coke and Pepsi have fought over international markets in order to increase sales and profitability as the US market becomes more mature, with a slowing growth rate.

Key trends in the CSD industry

The CSD industry has undergone many changes, while Coke and Pepsi continued to maintain their positioning as the official competitors and dominant market players. The key trends in the industry include:

1- Favorable demographic trends that boosted the sales of Coke and Pepsi. The per capita consumption of carbonated soft drinks increased from 22.7 to 53 gallons over the period 1970-2000 -See Exhibit 4- The sales of Coke went up from 5.5 billion $ in 1980 to 20.5 billion $ in 2000. Likewise, Pepsi has nearly quadrupled its total sales over the same period to 20.4 billion $.

2- The change in the consumers' taste is another key trend in the industry. Many substitutes to carbonated soft drinks gained more popularity among consumers. Exhibit 5 shows an increase in the consumption of bottled water from 11.8 in 1998 to 13.2 gallons/capita in 2000, and that of juices from 10 to 10.4 gallons/capita at the expense of the carbonated soft drinks, whose consumption slowed down by about 2% over the same period. As a result, Pepsi and Coke invested in product innovation to include non carbonated soft drinks. The rise of these non cola beverages induced an additional cost for bottlers, in terms of marketing, plant upgrading, packaging, etc. The inability to keep up with this major shift in the CSD industry lead to a change in the relationship between Concentrate Producers and bottlers from franchising to acquisition ( vertical integration). The main challenge of Pepsi and Coke is to build strong brands for non