You are on page 1of 5

Cola Wars Continue: Coke and Pepsi in 2010

This case explains the economics of the soft drink industry and its relation with profits, taking
into account all stages of the value chain of the soft drink industry. It focuses on the war between
Coca-Cola and Pepsi as they are the market leaders in this industry . 90% of the market share is
in carbonated beverages. The case study analyses the different stages of the value chain
(concentrate producers, bottlers, retail channels, suppliers) and the impact of the modern times
and globalization on competition and interaction in the industry.
Coke and Pepsi are two leading companies in the soft drink industry. From the past we can see
the soft drink industry has been so profitable. Porters Five- Forces Model of industry
competition can define and analyze an industry in terms of five main factors. To understand the
profitability of the industry, I have used the Porter Framework, where I identified the forces close
to the firms affecting their ability to serve customers and make a profit.They are as follows:
1.Barriers to Entry:
The several factors that make it very difficult for the competition to enter the soft drink market
include:
Bottling Network:
Both Coke and PepsiCo have franchisee agreements with their existing bottlers who have rights
in a certain geographic area in perpetuity. These agreements prohibit bottlers from taking on
new competing brands for similar products. Also with the recent consolidation among the
bottlers and the backward integration with both Coke and Pepsi buying significant percent of
bottling companies, it is very difficult for a firm entering to find bottlers willing to distribute
their product. The other approach to try and build their bottling plants would be very capitalintensive effort with new efficient plant capital requirements in 1998 being $75 million.
Advertising Spend:
From the Exhibit 5 and 6 the advertising and marketing spend in the industry is in 2000 was
around $ 2.6 billion (0.40 per case * 6.6 billion cases) mainly by Coke, Pepsi and their bottlers.
The average advertisement spending per point of market share in 2000 was 8.3 million (Exhibit
2). This makes it extremely difficult for an entrant to compete with the incumbents and gain any
visibility.
Brand Image / Loyalty:
Coke and Pepsi have a long history of heavy advertising and this has earned them huge amount
of brand equity and loyal customers all over the world. This makes it virtually impossible for a
new entrant to match this scale in this market place.

Retail Distribution:
Retailers enjoy significant margins of 15-20% on these soft drinks for the shelf space they offer.
These margins are quite significant for their bottom-line.

This makes it tough for the new

entrants to convince retailers to carry/substitute their new products for Coke and Pepsi.
Fear of Retaliation:
In order to enter into a market with rival like Pepsi and Coke is not easy as it could lead to price
wars which affect the new comer.
2.Power of Suppliers:
Supplier power is low for this industry because the factors of production for both the concentrate
aspect of the industry and the bottling aspect of the industry are basic commodities like caramel
coloring, natural flavors, and caffeine for concentrate and packaging and sweeteners for bottling,
none of which require specialized suppliers. Further, Coke and Pepsi are among the metal can
industrys largest customers, and it is often the case that two or three can manufacturers compete
for a single contract with the companies, giving Coke and Pepsi a large advantage, and therefore
creating a situation of low supplier power.
3.Power of Buyers:
Buyers are powerful if they have negotiating leverage with the companies and put pressure over
price reductions. In this industry, buyers are strong, because there are many firms producing soft
drinks; it is easy to find other supplier in the industry.
1. Supermarkets: It is the main distribution channel for soft drinks. The buyers in this
segment are consolidated with several chain stores and few local supermarkets, so
providing the bottlers premium shelf space and they command lower prices. The bottlers
fight for shelf space to ensure visibility for their products.
2. Convenience Stores, Small Grocery stores and Drug chains: This segment of buyers is
extremely fragmented and hence has to pay higher prices.
4. Fountain: This segment of buyers is the least profitable. They attain power of negotiation
depending on the amount of purchases they make. When the amount is large, company
allows them to have freedom to negotiate
5. Vending: This channel serves the customers directly. Bottlers took charge of buying,
installing, and servicing machines, and for negotiating contracts with property owners,
who typically received sales commissions in exchange for accommodating those
machines. This segment of buyers has absolutely no power with the buyer.

5. Buyers can credibly threaten to backward integrate and produce the industrys product
themselves if vendors are too profitable. This category includes Mass Merchandisers such
as warehouse clubs and discount retailers like Wal-Mart.
4.Threat of Substitutes: Large numbers of substitutes like water, beer, coffee, juices etc are
available to the end consumers but this countered by concentrate providers by huge advertising,
brand equity, and making their product easily available for consumers, which most substitutes
cannot match. Also soft drink companies diversify business by offering substitutes themselves to
shield themselves from competition. Historically, the threat of substitutes to the CSD industry
has been low to moderate.
5.Intensity of Rivalry:
Rivalry is extremely high in the CSD industry and has been a contributing factor to the profitability of the
industry. The two primary CSD companies, Coke and Pepsi, have been engaged in cola wars for over a
century, which has led to innovation in the industry ranging from new lines of products and vertical
integration to marketing campaigns and novel packaging. Additionally, several rivals exist beyond Coke
and Pepsi, including Dr. Pepper Snapple Group, which has seen a significant increase in U.S. soft drink
market share by volume, from 11% in 1970 to 16.4% in 2009 (Exhibit 2), as well as emerging private
labels and generic labels, specifically at discount retailer locations such as Wal-Mart and Target.

For concrete suppliers


Driving Forces:

Increasing globalization of the industry : coke is operating in more than 200 countries now and
getting 80% of revenue outside the home country US
Changes in the long term industry growth rate : growing at only 3% and per capita
consumption was 46 gallons per year in 2009 in USA which is lower than 1989
Product innovation : coke adopted new concentrate formula and allowed bottlers to add
sweeteners open to the market, new products like diet coke, diet Pepsi and diversified into
non carbonated products
Marketing innovation : huge money spent on promotional events, shelf space allocation in
retail store through CDA, direct store door delivery (DSD)
Changes in the cost and efficiency : switching from sugar to fructose corn syrup in concentrate
Changing societal concerns, attitude and lifestyle :health awareness increases Reduction in
uncertainty and
business risk: obesity and health concern are the main risk in the business

Key success factors:

Technology related :product innovation capability like : sprite, mountain dew etc and coke
invented soda machine as well
Manufacturing related : low cost production

Distribution related : Taken care by bottlers otherwise they sell directly to the retailers
warehouses bypassing bottlers
Marketing related : implement and finance the marketing programs jointly with bottlers

Driving forces and key success factors for bottlers


Driving Forces:
Product innovation : franchise agreement with both coca cola and Pepsi allowed bottlers to
handle non cola brands of other concentrate producers
Marketing : 50 % of advertising cost is provided by concentrate suppliers only, in 2009 coke
contributed $540 million in marketing support
Changes in the cost and efficiency : price adjusted quarterly according to changes in sweetener
pricing
Growing buyer preferences for differential product instead of commodity product
Regulatory influences and govt. policy changes : in 1980 in US congress enacted the soft drink
interbrand competition act, which preserved the right of concentrate makers to grant exclusive
territories.
Reduction in uncertainty and business risk : Concentration supplier are going for forward
integration which is a kind of risk for the bottlers, may be in future bottler eliminated
Key success factors:

Manufacturing related
- It has a hiigh speed production lines involved.
Distribution related
- Gaining ample space on retail outlets
- Accurate delivery (direct store door)
Other KSFs
- Patent protection.

How should Coke and Pepsi face challenge & maintain their profitability & sustainability.
The barriers to entry in the beverage industry remain high, reducing the likelihood
that a rival firm could easily upset the industrys duopolistic structure. Though
consumer preferences have shifted, Coke and Pepsi have advantages over potential
rivals that put them in the best position to adjust to the changes. Their brand
equity, established infrastructures, economies of scale, and relationships with
suppliers and distributors will allow them to maintain dominance. Coke and Pepsi
must continue to reduce their dependence on the domestic market by expanding
into new markets in Asia and Eastern Europe as well as product diversification in no
carbonated drinks helped them to achieve big. Coke, which already has a strong
international presence, has an early advantage in these markets because during

World War II. Because Coke already has established facilities and potential
consumers with knowledge of the brand in some European and Asian countries, the
entrance into nearby emerging markets is eased. Should start to strengthen the
value of the brand abroad with marketing efforts like the sponsorship of important
local events. China and India warrant particular attention from both companies
because of their growing middle classes. Coke and Pepsi should focus on introducing
both existing products and new products tailored to the specific preferences of
consumers in each area. Efforts should also be made to increase consumption of
CSDs in countries where Coke and Pepsi already sell their products. In North
American markets where demand for CSDs has flattened, there has been a
corresponding increase in the consumption of other types of beverages. Sports
drinks, ready-to-drink teas, and energy drinks have become more popular over the
past decade while the consumption of CSDs has decreased. Coke and Pepsi should
continue to introduce non-CSD products and shift their marketing campaigns to
focus on their companies as beverage producers rather than as makers of
carbonated products. Coke and Pepsi should continue to acquire potential rivals
before they have the scale and brand power to be true threats.Coke and Pepsi can
maintain some of their profitability by introducing more diet CSD brands to remain
in line with consumer trends.