Cola Wars Continue: Coke and Pepsi in 2010
STRATEGIC MANAGEMENTCASE ANALYSISCOLA WARS CONTINUE: COKE AND PEPSI IN 2010 Why historically has the soft drinks industry been profitable? Compare the economics of the concentrate business with the bottling business. Why is the profitability different?The following analysis of Concentrate Producers as well as Bottlers as per Porter’s framework marks the key differences between the two industries and underlines the source of profit for the soft drinks industry:Industry analysis of Concentrate ProducersBargaining power of suppliers – LOWIngredients include sweeteners, acids, flavours and caffeine, none of which have exclusive suppliers (many are available)These ingredients have almost zero product differentiationBargaining power of buyers – MODERATEMany similar are products available, with very less differentiationLow switching costDistributors have lot of influence on buyers’ decisionsStrong brand image and financial strength allows discounting to gain back customers Threat from new entrants – LOWBrands are established and brand name matters a lotHeavy spending is required for marketing and partnering with bottlersEconomies of scaleExisting companies are already partnered with distributorsThreat from substitutes – MODERATE
Low switching costsMany other beverages in the market, however none with similar brand imageRivalry among competitors – LOWTop 2-3 brands hold most of the market share; 2 players own 70% of market and 3 players own >82%The rest is divided among a number of small playersTop players have established brand imageIndustry analysis of BottlersBargaining power of suppliers – HIGHConcentrates formed a significant part of bottlers’ costs, whose producers were very large compared to bottlers and had a major say in all contract negotiationsSmall number of buyers Rising prices of concentrateBargaining power of buyers – MODERATEMany similar are products available, with very less differentiationLow switching costDistributors have lot of influence on buyers’ decisionsStrong brand image and financial strength of concentrate producers allows discounting to gain back customers Threat from new entrants – MODERATENo brand identityDue to the variety of packaging and low-volume of non-CSDs, bottlers could not entirely take advantage of economies of scaleCapital intensiveLow operating marginsRising prices of raw materialsThreat from substitutes – HIGHForward integration by Concentrate ProducersRequirement of specialized production processes for non-CSD drinks not available with the bottlers also increased the threat of being substitutedRivalry among competitors – HIGHLow growth industry with low operating profits and no brand differentiationDecreasing no of players – more intense competitionFrom the analysis, it is evident that the industry was much more favourable for concentrate producers than it was for bottlers, and hence there was a large difference in their profitability.Historically, the soft drinks industry has been successful due to the brute strength and favourable industry position of Concentrate Producers. Due to the few number of large players in the industry, they were able to operate from a position of advantage and align other stakeholders as per the changing market, despite engaging in long term price wars with each other.