Write-up #1: Cola Wars
Five Forces model:
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.
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.
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.
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
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