Case Write-up #1: Cola Wars
Porter’s Five Forces model:
Threat of new entrants:
– Franchised bottling network: Both Pepsi and Coca-Cola built a network with bottlers who agreed to not promote similar products from the competing brands. In 1980, the Soft Drink Interbrand Competition Act was passed that allowed the concentrate makers to have exclusive territory from the bottlers. New entrants will have a difficult time to contract with bottlers who would distribute for their products.
– Advertisement: They relied heavily on advertising and promotional cost for the brand name and products. This causes any new entrants to struggle to find a place in the market and compete.
– “Direct store door” and customer development agreement: Pepsi and Coke would provide funds to retailers in exchange of shelf space, stacking, and positioning the trademark.
– Bottling process requires massive capital and specific production lines for the products. It also needs a large plant for warehousing and producing multiple lines.
Power of suppliers:
The suppliers have low bargaining power since there are other suppliers who can provide the commodities such as sugar, high-fructose corn syrup, caffeine, etc., therefore they also had limited power over pricing. The buyers could switch to different suppliers since the cost of switching is low.
Power of buyers
The buyers in the case have a strong bargaining power because of low switching cost from one brand to another. The customers or retailers could also pressure to have low prices since there is a big market of suppliers in the industry.
Threat of rivalry
The rest of concentrate producers would compete against Pepsi and Coke. The competition is relatively small so as to cause any increase in pricing. Pepsi and Coke’ products are similar therefore they mostly rely on advertisement and promotions.
Threat of substitution:
There is no substitution for concentrate producing parts because this process blends necessary substances to create soft drinks. There is more bottlers while fewer concentrate producers, therefore it would be competitive for bottlers to find a brand to distribute.
The soft drink industry has been profitable with the contribution of concentrate producer parts. The threat of new entrants is low due to advertising cost, distribution, high fixed costs, and franchise agreement. The capital cost for concentrate producers is small while the cost for bottlers is high because of inherently resource-intensive production facilities. The suppliers for concentrate producers have low power due to the easy accessible commodity. On the other hand, the buyers have power in distributing the products in certain geographic area. The concentrate producers are hard to replace because they produce the main products and ship to bottlers, and the concentrate producers have monopoly market for the products and it results in high profitability.
From the 1950s to the 1980s, Pepsi and Coke focused on advertising their name brand and differentiate themselves with new products. Pepsi launched their “Pepsi Generation” campaign in 1960s to target young customers. During that time, Pepsi concentrated working with bottlers to lower the selling price. The two companies also launched new cola and non-cola flavors along with the merging with non-soft-drink industries to expand their growth. Throughout the years, Pepsi and Coke brought back their classic products and introduced new items to the market. This resulted in more shelf space in the retailer stores and the competition grew larger. In 1990s, Pepsi and Coke established low price strategies to compete with small brands. Small concentrate producers could not compete and eventually sold themselves from one owner to another. With discounting strategies, the bottlers’ profit declined during this period.
I think Coke and Pepsi acquired their bottlers in 2009 and 2010 to have more control over the products. With the acquisition of bottlers’ companies, Pepsi and Coke would be able to streamline their business activities. The cost for bottlers’ distribution and operating expenses would also be lower throughout the years. Along with the growth of non-carbonated drinks, the companies could sell many products as they want in certain territories.
Coke and Pepsi should involve more on non-carbonated drinks to battle the flattening demand. The two companies could also acquire more non-beverage brand to sustain their profits since customers shifted their taste into more healthy options. The companies could also distribute not only beverages on international markets but also non-beverage products.