Essay – Pepsi vs. Coke Analysis

Part 1: Why was concentrate manufacturing profitable until the late ‘90s? Porter’s Five Forces provides an in-depth understanding as to how the interconnected relationship between Entrants, Buyers, Suppliers, Substitutes, and Rivals allowed concentrate producers to increase profitability. Entrants: Existing Concentrate Producers create high barriers to entry Despite low capital requirements to enter the market, dominant concentrate producers successfully restricted new entrants, capitalized on growing demand, and increased gross profits. ) Dominant concentrate producers created strong brand equity and loyalty by spending heavily on advertising, which created high barriers to entry and kept entrants on the fringe.

2) Major concentrate producers established exclusive distribution agreements with bottlers, which were reinforced by government policies such as the 1980 Soft Drink Competition Act. These agreements prevented bottlers from carrying competitor brands and allowed existing concentrate producers to dominate the market. ) Through economies of scope, dominant concentrate producers were able to efficiently introduce brand extensions by minimizing costs per unit manufactured. These successful brand extensions resulted in reduced shelf space for new soft drink entrants. Buyers: Concentrate producers’ influence constrain the bottler industry By reducing the threat of backward integration and substitute inputs, and by implementing favorable contracts, concentrate producers exercised control over buyers and increased profits. )

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Franchise agreements between bottlers (buyers) and concentrate producers locked bottlers into exclusive deals and made switching costs high, compelling bottlers to accept pricing and promotion schema. 2) As performance pressures increased for bottlers, concentrate producers began merging and acquiring bottlers. This consolidation limited the number of bottlers in the market, affording dominant concentrate producers a high level of control over market dynamics. Suppliers: Limited Threat Due To Few Commodity Inputs Few commodity inputs and limited risk of forward integration from uppliers afforded concentrate producers significant control over input supplies to bottlers. Because producers negotiated contracts on behalf of their bottlers, low switching costs between bottler suppliers (e. g. , metal cans were a commodity and often two or three can manufacturers competed for a single contract) allowed producers to select the cheapest supplier and keep costs low. Substitutes and Complements Major soft drink producers such as Coke and Pepsi leveraged their brand equity to acquire and introduce substitute soft drink brands into the market.

Each aforementioned concentrate producer used lifestyle brand messaging to maintain customer loyalty and expand market share. 1) Concentrate producers also brokered non-carbonated soft drink product segment acquisitions, which helped dominant concentrate producers exploit demand and earn additional profits. 2) The acquisition of complements, such as Pepsi’s investments in fast food restaurants, provided additional opportunities to expand brand equity beyond the scope of core products and retail channels.

Competitors: Rivalry Creates Profits for Major Concentrate Manufacturers Coke and Pepsi’s industry dominance left little room for rival concentrate producers to exploit market growth. Neither Coke nor Pepsi reduced concentrate prices to undercut one another. Instead, moves by one firm to raise prices, acquire bottlers, and adjust marketing plans were mimicked by the other. This form of ‘tacit’ collaboration helped to increase overall carbonated soft drink industry profits.

Part 2: During the same time period, why was bottling less profitable than concentrate manufacturing? Unlike concentrate producers who were able to wield control over many other players in the industry to increase profits, bottlers were subject to a smaller portion of the overall industry profit pie. Bottlers lacked assets that allowed concentrate producers to manipulate the marketplace in their favor. To best understand how bottlers failed to maximize profits, an analysis using Porter’s Five Forces is discussed below.

Entrants: A Lack of Brand Equity and Identity Foiled Bottler Control and Growth 1) Bottlers were unable to establish brand identities, which allowed other bottlers to enter the market and offer lower prices to major concentrate producers. 2) Low brand identity and the absence of proprietary differences in bottle/can type provided low barriers to entry for new entrants. As a result, new entrants drove down prices and reduced overall bottler profitability. Buyers: Pressure from Retailers Thwart Bottler Control

Backward integration by buyers (retailers), coupled with strong competitive pressure to provide discounted pricing, lowered bottler profits. 1) Through backward integration and the introduction of private or generic label carbonated drinks, mass merchandisers such as Wal-Mart exerted downward pressure on prices and lowered the overall profitability of bottlers. 2) Buyers used their size to exert pricing pressure on bottlers by negotiating directly with concentrate producers on marketing and shelving arrangements. ) Strong inter-brand competition reduced bottler profits because concentrate producers pressured bottlers to provide discounted pricing programs for buyers and increase marketing expenditures (e. g. , advertising and promotions). Suppliers: Bottler Dispensability Undermines Profit-Seeking Activity Suppliers (concentrate producers) reduced bottler profitability through increased input prices, the threat of forward integration, and unfair competition from supplier-owned bottlers. 1) Bottlers were increasingly forced by suppliers to accept higher input prices through supplier-centric agreements, such as Pepsi’s Master Bottling Agreement.

Higher concentrate prices, which accounted for 40-45% of bottler costs, decreased bottler profits. 2) The struggle for market share between suppliers created pressure for bottlers to spend more on advertising, product packaging and retail discounting, resulting in additional capital costs for bottlers and reducing overall profitability. 3) Supplier-owned bottlers created an unfair environment in which independent bottlers faced off with competing producer-owned bottlers who could offer lower retail prices and enhanced discounting.

This competitive pressure squeezed the profitability of independent bottlers who had fewer resources to work with. Bottlers – Substitutes and Rivalry 1) Substitutes: Although there were few substitutes, the nature and cost structure of the bottler industry prevented bottlers from capitalizing on the market power usually afforded to firms producing products that have few substitutes. 2) Rivalry: Exclusive territories limited rival bottler’s power within any one region. However, the competition for market share between concentrate producers such as Coke and Pepsi in the same region impacted overall bottler profits.

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