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SM Assignment
SM Assignment
to the competition keeping a natural tab on the established rivals. The industry structure drives
competition and profitability irrespective of the nature of the industry. Taking the perspective
of the two largest incumbent companies, Coca-Cola and Pepsi Cola in the Carbonated soft
drink (CSD) industry, the driver forces that drove the competition can be described as under:
Bottling industry, another separate arm of soft drinks business too, is difficult for new entrants
to capture as it is a highly capital-intensive industry requiring substantial capital investment
during the initial period. Moreover, the already existing bottling companies were granted
exclusive distribution territories for them to operate in. The soft drink inter-brand competition
act 1980 gave them protection from other bottlers operating in the same geographical region,
thus making it virtually impossible for new bottling companies to get started in any region
where bottlers were already present.
Thus, overall it is quite difficult for new companies to get into this business and win substantial
market share due to number of roadblocks- right from monetary, to regulatory.
For Bottlers, the suppliers include concentrate producers, packaging and sweetener producers.
The concentrate producers were very powerful and hence led to squeezing of profit margins
for bottlers. The supplier group was powerful for following reasons:
• Coca-Cola and Pepsi Cola accounted for 74.8% of US market sales. Thus, the concentrate
producer group was more concentrated than the bottlers.
• For bottlers the largest portion of revenue came from concentrate producers and thus were
completely dependent on concentrate producers for revenue.
• Bottlers were even dependent for packaging and sweetener supplies on concentrate producers
and they negotiated the supplies for bottlers.
• The concentrate producers can easily integrate forward by bottling themselves as done by
Coca-Cola and Pepsi-Cola in 1960s for can production. Coke had bought up poorly managed
bottlers, infused them with capital and re sold them to better performing bottlers.
• But it should be noted that the switching cost for bottlers were low and bottlers could produce
CSD for non-competing companies of main suppliers.
Supermarkets - 31%,
Buyers can exercise their power in negotiating the price depending upon the distribution
channel.
1. Supermarkets are present as chains of stores and control good shelf space and thus can
negotiate prices in their favour. Consumers are expected to pay less through this channel.
2. Supercentres such as Walmart have large contracts so have greater bargaining power.
3. Fountain and vending distributors purchase in large volumes and hence have advantage when
they negotiate their prices. Coke and Pepsi use this least profitable channel for Paid Sampling.
While using the vending channel, consumers can directly buy bottles through vending
machines and thus buyers have no scope of bargaining.
4. Convenience and gas stations: Bottlers negotiate directly with these store owners and so have
less buying power.
Another buyer in the industry is the bottler industry which too exercised limited power because
the quality of their product was solely dependant on the concentrate producers.
Coca-Cola and Pepsi have always had a duopoly in the Non-alcoholic CSD segment with a
combined market share of more than 70 %. Cadbury Schweppes’s was the only brand who was
able to survive and become the third most popular brand in the segment.
The industry growth was high initially but has plateaued over time. Due to high setup costs and
a global presence, it would be difficult to exit the markets and price-war is not possible due to
collusive nature of the industry. Both the leaders are highly committed to the business and seek
new opportunities for expansion. They are familiar with each other’s signals and a move by
one is usually replicated by the other.
In 1966, Coke had 33.4% market share, Pepsi 20.4% and in 2004, Coke had 43.1%, Pepsi had
31.7%, Cadbury with 14.5% and other companies with 5.2%.
Coca-Cola was established in 1890s and Pepsi in 1939, nearly 40 years later. Pepsi became a
major reason in the decline of coke’s market share. Pepsi aimed on packaging and it came out
with a campaign “Twelve full ounces, that’s a lot. Twice as much for a nickel, too.” This forced
coke to retaliate and they came up three new package sizes: 10,12 and 26oz
Coke was an early mover in launching new products like “Diet Coke” which was a huge
success. Pepsi soon followed suit and later changed to “Diet Pepsi” as their core product. Coke
had more inertia in shifting to the changing demands while Pepsi was more aggressive than
Coca-Cola in moving to Non-CSDs as consumer demands changed.
Coke introduced 11 new products like ‘Diet Coke’, Caffeine Free Coke, Sprite etc to try and
attract new customers. In response, Pepsi also introduced 13 new products similar to that of
Coke like ‘Diet Pepsi’, Mountain Dew etc.
The companies spent high amounts on marketing and advertisements which reduced their over-
all profit margins. This made them search for alternate and cheaper products like corn syrup
instead of sugar. In its early years, Pepsi tried to compete by coming up with innovate campaign
such as the Pepsi challenge in Dallas to target loyal customers of Coca-Cola. Coca-Cola too
banked on advertising to revive is image in 2005 by coming up with “The Coke side of life”
tagline.
In 1985, Coke changed its 99-year old formula. This was met by an outcry by the bottlers and
the customers. Pepsi’s claim was that the new coke mimicked Pepsi in taste. These factors
forced Coke to bring back its original formula which was henceforth known as “Coca Cola
Classic”.
Using its network developed during World War II, Coca-Cola had always believed that it could
still grow in CSD segment by launching in other countries. They introduced a lot of new
products according to the market they were present in. It had a share of 51% share in
International markets in 1999 as compared to 23% of Pepsi. It took advantage by setting up its
bottlers and distribution network earlier. Pepsi tried to shift to emerging markets but could not
retain share due to lack of emphasis on overseas operations.
Although Coca-Cola was the first mover in implementing strategies with stakeholders like
bottler consolidation and coming up with CCE, Pepsi maintained better relations with them in
the long term. This is evident from its relationship with PBG which consistently recorded more
profit that CCE.
After analysing all the forces acting in the industry, assessing the underlying drivers of each
competitive force, the Rivalry among the competitors comes out as the strongest force
influencing the complete environment of the business. The analysis was continuously used by
the players to guide their strategic choices.