Cola Wars: Coca Cola vs Pepsi - Pepsi Essay Example
1 - Cola Wars: Coca Cola vs Pepsi introduction. Why is the soft drink Industry so profitable? * Using Porter’s Five Forces reveals that market forces are favorable for profitability * Defining the industry: * The industry consists of two major dependents, that is, the “Concentrate Producers” and the Bottling Companies. * High barriers to Entry. * Profits shared between “CP” and Bottling Companies/ * Rivalry: * Concentrated revenues, Coke and Pepsi accumulating 73% with small companies taking up the remainder (widely considered an oligopoly or duopoly) * Substitutes: Soft drink industry evolved from just “Colas” to other beverages like tea and bottled water. * As a result Coke and Pepsi expanded there offering with Minute-Maid and Nestea, cleaning the threat of substitute with its established brand name. * Substitutes became less of a threat due to diversification by the Concentrate Producers. * Power of Suppliers:
* Suppliers didn’t have much of a bargaining power as the main ingredient of Colas were primarily sugar and sugar could be purchased from any source on the open market and Buyers had the option to switch to Corn Syrup at any time if Sugar became too expensive. Aluminum was inexpensive and abundant in the early 1990s so suppliers were left to compete with each other whereas the Cola companies had the choice between many bottling companies. * Power of Buyers: * The outlet through which consumers could get their hands on colas were numerous, but Cola companies mainly focused on: food stores, convenience and gas stations, fountain, vending and mass merchandisers.
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The least Profitable channel was Fountain as they essentially was literally giving away the Cola * The most profitable on the other hand was vending as It was a direct connection with the Consumer, no middle man involved and the only thing the Cola company had to pay property tax and a percent of Commissions earned. * Barriers to entry: * As aforementioned barriers to entry into the Cola (Soft Drink) industry is high due to the long established nature of the current Pepsi and Coke. Coke and Pepsi already has intimate relationships with retailers and could defend their position by using marketing tricks (such as price dropping) * Bottlers have rights to distribute in exclusive territories and is defended by the Soft Drink Interbrand Competition Act of 1980 1. Compare the economics of the concentrate business to the bottling business. Why is the profitability so different? * The bottlers and the Concentrate Producers go hand in hand, so one would assume that the profitability of both sectors would be about the same but it unfortunately is not the same.
The biggest difference between the two sectors is “added value” what added value is, is basically the value of the consumers that they associate with the “brands” like Pepsi and Coke, the bottling business does not have a proprietary bottling “brand” perse and that is the biggest different. * The Cola companies especially Coke has gone through great lengths to protect their recipe and keep it a secret. As a result of the extended histories and establishes brand names, Coke and Pepsi have become a respected and well known household name, this in itself gives their product and added value that cannot be replicated by bottling companies. . How has the competition of Coke and Pepsi affect the industry profits?
* Pepsi and Coke was in a heat competition in the 1970’s 80’s and 90’s. Both companies focused on a differentiation and advertising strategy. The Pepsi Challenge of 1974; blind test to differentiate itself from Coke. * In the 90’s Coke and Pepsi employed low priced strategies to compete with store brands which had a negative effect on profitability of the bottlers. Net profit as a percentage of sales for bottlers during this period was in the low single digits. Pepsi and Coke managed to stay profitable with Frito Lay Sales and International Sales respectively. * However Coke took the lead and expanded into the international before Pepsi but Pepsi later caught up in emerging markets in the later years. 1. Can coke and Pepsi sustain their profits in the wake of “flattening demand” and the growing popularity of non-carbonated drinks? * YES Coke and Pepsi can sustain their profits in the industry because of the following reasons: The industry structure for several decades has been kept intact with no new threats from new competition and no major changes appear on the radar line
* This industry does not have a great deal of threat from disruptive forces in technology. * Coke and Pepsi have been in the business long enough to accumulate great amount of brand equity which can sustain them for a long time and allow them to use the brand equity when they diversify their business more easily by leveraging the brand. Globalization has provided a boost to the people from the emerging economies to move up the economic ladder. This opens up huge opportunity for these firms * Per capita consumption in the emerging economies is very small compared to the US market so there is huge potential for growth. * Coke and Pepsi can diversify into non–carbonated drinks to counter the flattening demand in the carbonated drinks. This will provide diversification options and provide an opportunity to grow.