Cola Wars Continue

C O LA W A R S C O N TIN U E;
Coke and Pepsi in 2006
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by:
TEAM 6
Profi
tability ofsoftdrink industry
Comprises of two main parts
1) Concentrate production
2) Bottling (PACKAGING)
) Both are interdependent
) Share cost in procurement production marketing and distribution
Sales through 5 principal channels: food stores, convenience &

gas, fountain, vending, and mass merchandisers
)
) market share of 46.8% within the non-alcoholic drink industry

) Vertical integration helps to generate more revenue
The porters five force analysis

Shows the reasons of the industry
to Be profitable
1.Threat of substitute products

Over time, other beverages, from bottled water to teas, became
more popular, especially after 1980s

Companies responded by expansion through
alliances (e.g. Coke and Nestea),
acquisitions (e.g. Coke and Minute Maid),
internal product innovation (e.g. Pepsi creating Orange Slice).
This Proliferation did threaten the profitability of bottlers,
As they more frequent line set-ups, increased capital
investment, and development of special management skills for

more complex manufacturing operations and distribution.
Bottlers were able to overcome these operational challenges
through consolidation to achieve economies of scale.

Overall, because of the CPs efforts in diversification,
thus, substitutes became less of a threat.
2.Threat of entry of new

Entry peti
would tors
be hardly possible for either a CP or a new bottler
com
The tremendous marketing muscle & a century old market
presence of a few
These companies had intimate relationships with their retail
channels
would be able to defend their positions effectively through
discounting or other tactics.

Entering bottling, meanwhile, would require substantial capital
investment, which would deter entry

existing bottlers had exclusive distribution territories
Regulatory approval of exclusive territories,
via the Soft Drink Inter-brand Competition Act-1980.

Thus, making it impossible for new bottlers
to get started in any region
where an existing bottler operated.
3.Intensity of com petitive rivalry

Intensity of competitive rivalry was consolidated
Revenues are extremely concentrated in this industry, the top six
controlled 89% of the market.

In fact, the soft drink market as an oligopoly, or even a duopoly
between Coke and Pepsi, resulting in positive economic profits.

There was tough competition between Coke and Pepsi for market
share, but this occasionally hampered profitability.

For example, price wars resulted in weak brand loyalty and eroded
margins for both companies in the 1980s.

The Pepsi Challenge, affected market share
without hampering per case profitability,

as Pepsi was able to compete on attributes other
then price
4.B argaining pow er of custom ers

Supermarkets are a highly fragmented industry. the biggest chain
made up 6% of food retail sales, and the largest chains controlled up to

25% of a region),
Needed soft drinks to generate consumer traffic
Their only power was control over premium shelf space,
consumers expected to pay less through this channel,
National mass merchandising chains such as Wal-Mart, on the other
hand, had much more bargaining power due to their scale and the
magnitude of their contracts.
fountain sales was least profitable just giving 5% company margin
they considered this channel paid sampling.
because buyers at major fast food chains only needed

the products of one manufacturer,
so they could negotiate for optimal pricing
4.B argaining pow er of custom ers

.
Vending, was the most profitable channel
There were no buyers to bargain with at these locations, where
bottlers could sell directly to consumers through machines

Property owners were paid a sales commission.
The customer in this case was the consumer, who was generally
limited on thirst quenching alternatives.

Convenience stores and gas stations.
Bottlers negotiated directly with convenience store and gas station
owners. So they had less buyer power

So the only buyers with dominant power were fast food outlets.
These outlets captured most of profitability in their channel,
they accounted for less than 20% of total sales.
Through other markets, however, the industry enjoyed substantial
profitability because of limited buyer power.
5.B argaining pow er of suppliers
Bargaining power of suppliers is very low
The inputs from suppliers are primarily sugar and packaging.

1)Sugar:
Sugar could be purchased from open market,
They could easily switch to corn syrup If sugar became expensive.
2) Packaging:
negotiated favourable agreements with the can makers on the
following grounds
Abundant supply of inexpensive aluminium in the early 1990s
Several can companies competing for contracts
By negotiating on behalf of their bottlers.
In the plastic bottle business,
there were more suppliers than major contracts,

So direct negotiation by the cps Effective at
reducing supplier power
Area of
business
Inputs
Capital
Costs
Market
Concentrate
Producers
Caramel coloring,
phosphoric or citric acid,
natural flavors , caffeine,
artificial sugar. Relatively
low in value
Less capital required.
Bottlers
Packaging(bottles/c
ans), sweeteners.
High in total cost.
High capital
required for setup
of plants
Major cost in advertising, Major cost in
promotion, market
packaging,
research and bottler
sweeteners,
support
concentrate, trucks
and distribution
networks.
One plant can supply to Local market
whole country, more
because of
reach of concentrate
distribution issues.
W hy is profi
tability so dif e
frent??
Difference in terms of capital investment required
Macro environment factors like legislation (soft drink Inter-brand
competition Act, 1980)

Bottlers couldnt carry competitive brands
CPs have more global market making expansion easier than bottlers
CPs have more bargaining power due to dependence of bottlers on CPs
Rising costs of plastics and concentrates, while having to decrease
retail costs by bottlers to increase sales
High costs in interchanging products or packaging
Contract relationships with CPs, which grant them
exclusive territories and share some cost savings.
Exclusive territories prevent intrabrand competition,
creating oligopolies at the bottler level,
which reduce rivalry and allow profits.
Industry Profi
ts after com petition
Switch from sugar to cheaper substitute high fructose corn syrup
resulted in lower costs.
CSD companies kept on innovating like use of returnable glass

bottles in India to reach poor rural consumers.
Competing amongst themselves rather than tapping potential

market
Fierce competition between Pepsi and Coke resulted in

diversification of product portfolio where Pepsi grew by 17.6% as
compared to Coke who grew by 4.2% from 1996-2004.
Customer Development Agreements with nationwide retailers like

Wal Mart where funds were offered for marketing in exchange for
shelf space resulting in higher costs.
Profitability was highly sacrificed due to fight for fountain accounts.
Can Coke and Pepsisustain theirprofi

ts in the w ake offl
attening
dem and and the grow ing popularity ofnon-carbonated drinks?
60
50
40
30
2003
20
2003
2004
10
0
Yes Coke and Pepsi can sustain their profits

due to the following reasons:Carbonated soft drinks continue to dominate
the market
Coke and Pepsi have been in the business for a long time and they
have accumulated enough brand value.
There has been no major threat from new competitors
Growing concern of obesity and other health problems Both
Pepsi and Coke have started focussing towards health-oriented
products both food and beverage
Per capita consumption in emerging economies is low and hence a
huge potential market
Mergers , acquisitions , joint ventures and strategic alliances both
in the US and internationally. PepsiCo international provides 40%
of its revenue.
Thank you

Cola Wars Continue

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C O LA W A R S C O N TIN U E;

Coke and Pepsi in 2006

Sales through 5 principal channels: food stores, convenience &

) market share of 46.8% within the non-alcoholic drink industry

The porters five force analysis

1.Threat of substitute products

more popular, especially after 1980s

investment, and development of special management skills for

through consolidation to achieve economies of scale.

2.Threat of entry of new

discounting or other tactics.

investment, which would deter entry

via the Soft Drink Inter-brand Competition Act-1980.

3.Intensity of com petitive rivalry

controlled 89% of the market.

between Coke and Pepsi, resulting in positive economic profits.

share, but this occasionally hampered profitability.

margins for both companies in the 1980s.

without hampering per case profitability,

4.B argaining pow er of custom ers

made up 6% of food retail sales, and the largest chains controlled up to

because buyers at major fast food chains only needed

4.B argaining pow er of custom ers

Vending, was the most profitable channel

There were no buyers to bargain with at these locations, where

bottlers could sell directly to consumers through machines

limited on thirst quenching alternatives.

owners. So they had less buyer power

profitability because of limited buyer power.

5.B argaining pow er of suppliers

Bargaining power of suppliers is very low

The inputs from suppliers are primarily sugar and packaging.

there were more suppliers than major contracts,

reducing supplier power

competition Act, 1980)

Switch from sugar to cheaper substitute high fructose corn syrup

resulted in lower costs.

CSD companies kept on innovating like use of returnable glass

Competing amongst themselves rather than tapping potential

Fierce competition between Pepsi and Coke resulted in

Customer Development Agreements with nationwide retailers like

Profitability was highly sacrificed due to fight for fountain accounts.

Can Coke and Pepsisustain theirprofi

Yes Coke and Pepsi can sustain their profits

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