NAME-RISHAB JAIN

DIV-3 ROLL NU-210A3010146

COLA WAR
QUESTION 1-Why is soft drink industries is so profitable?
ANSWER- Historically the soft drink industry has been extremely
profitable. Long time industry leaders Coca-Cola and Pepsi -Cola
largely drive the profit in the industry, relying on poster five forces
model to explain the attractiveness of the soft drink in market.
These forces allow coke and Pepsi to maintain large growth until
1999, and also explain the challenges that each company is currently
facing. The relatively duopoly that coke and Pepsi share in the
industry allows for higher profits, while also maintaining enough
competition to promote firm improvement.
Coke and Pepsi have been largely successful because of many barriers
to entry that limits the risk of entry by potential competitors. coke and
Pepsi both have strong brand loyalty, made possible by their long
history and adherence to tradition. when cock strayed from its Coca-
Cola classic formula, its customers demanded a return to original
recipe. Pepsi and coke also share an absolute cost advantage over
other in the industry.
The competitive structure of industry has allowed coke and Pepsi to
sustain high profits. The industry is essentially an oligopoly, with
coke and Pepsi dominating the market. The firms are hurt by having
similar products that are relatively undifferentiated. However
diversification of product lines into carbonated and non-carbonated
beverages has created some product differences. High industry growth
from 1975to1995 also providing a reprieve from competitor pressure.
Franchise and long-term contract created higher switching costs,
historically limiting the effect of rivalry of two firms.
Bargaining power of buyers-the low numbers of suppliers in the
industry, and continues to diminish over time. The low number of
suppliers does not afford buyers much room to negotiate.
The threat of substitute- the other product could have ful-fill the same
objective of soft drinks were very weak. Carbonated soft drink were
the most consumed beverage in America through the 1970s and 1980.
These factors all contributed to making the soft drink industry very
profitable.

QUESTION 2- compare the economics of the concentrate business to

that of bottling business: why is the profitability so different?
ANSWER- the return received by concentrate producers differ from
those received by bottlers for several reasons.
Capital investment: concentrate production business is capital
intensive than bottling. It requires less fund to invested in machinery,
labour and modernization. “A typical concentrate manufacturing cost
about $25 million to $50 million to build and one plant could serve
the entire united states.
The competition between Coke and Pepsi reached its peak to become a
real war battle by the year 1980. This war had affected the industry
profit for both concentrate producers and bottlers, while the effect of
bottlers was much higher. After the successful “Pepsi Challenge”
(blind taste tests: sales shot up) in 1974, Coke countered with rebates,
retail price cuts and significant concentrate price increases. Pepsi
followed of a 15% price increase of its own. During the early 1990’s
bottlers of Coke and Pepsi employed low price strategies in the
supermarket channel in order to compete with store brands. The
concentrate producers were always able to increase their profits by
increasing the concentrate price.

 Overall, the concentrate producers in the CSD industry earn an

approximate pre-tax income of $0.25 per case and the bottlers earn
$0.52 per case (Yoffie & Wang, 2002, p. 20). Although the pre-tax
income of bottlers is higher, concentrate producers are more profitable
because their pre-tax income is 35% of their sales versus the bottler’s
9% because of the high costs in the bottling industry.

Why is Profitability so different?

Concentrate bottling
Threat of entry low low
Power of suppliers Low high
Power of buyers low high
Threat of substitute low low
Intensity of rivalry low high

•Through the comparative cost of typical U.S. Concentrate producer

(CP) and Bottler (2000) we can find that the both have equal net sales
i.e., 100%.
But when it comes to Cost of sales the Concentrate producer i.e., 0.12
is able to sale at low than the Bottler producer (3.77).
Even the gross profit of Concentrate producer is more than the Bottler
producer (BP) at 0.59 (Dollars per case) it is giving 83% of sales
whereas the BPs at 2.03 (Dollars per case) is giving just 35% of sales.
The advertising and marketing of CPs is more profitable i.e., 0.28
(Dollars per case) with 39% of sales whereas the BPs is 0.12(Dollars
per case) with only 2 % of sales.
Same can be seen in the General and Administration of CPs where at
0.06(Dollars per (case) they are giving more sales i.e., 8 but
unfortunately the BPs at 0.23(Dollars percase) they are giving less
sales i.e., 9. Since CPs are more efficient in managing work when it
comes to general and administration.

The pretax profit is more of BPs is more i.e., 0.52(Dollars per case) at
9 % of sales whereas despite having more percent of sales i.e., 35 they
able to give just 0.25(Dollars per case) pretax profit.
Can Coke and Pepsi sustain their profits in the wake of flattening
demand and for growing popularity of non-CSDs

ACC. TO EXHIBITS -5
-Higher number of bottlers when compared to concentrate producers
which foster competition and reduces margins in bottling business
-Huge capital cost to set p an efficient plant for the bottlers while the
capital costs in concentrate business are minimal
-cost of distribution and production account for around 65% of sales
for bottlers while in the concentrate business is around 17%
-most of the brand equity created in business remains with
concentrate producers

QUESTION3-Can cola and Pepsi sustain their profit in the wake of

flattening demand and growing popularity of non-carbohydrate
drinks?
ANSWER: Yes, coke and Pepsi can sustain their profit in the industry
because of following points
 Coke and Pepsi have been in the business long enough to
accumulate great amount of brand equity which can sustain for
long time and allow them to use the brand equity when they
diversify their business more easily by leveraging the brand.
 The industry structure for several decades has been kept impact
with no new threats from new competition and no major changes
appear on the radar line
 Globalization has provided a boost to the people from the
emerging economies ladder. This opens up huge opportunity for
these firms.
 Coke and Pepsi can diversify into non-carbonated drinks to
counter the flattering demand in the carbonated drinks.
 Per capita consumption is the emerging economies is very small
compared to the us market so there is huge potential growth.