Coke vs. Pepsi in the 1990s

11 November 2016

Soft drinks are less expensive to the consumer than these substitute products. Buyer Propensity to Substitute Buyer propensity to substitute is low due to the contractual relationships between the soft drink companies and the distributors. However, other beverages, from bottled water to teas, became more popular, especially in the 1980s and 1990s. Coke and Pepsi responded by expanding their offerings, through alliances (e. g. Coke and Nestea). SUPPLIERS Suppliers have less bargaining power: The primary ingredients of soft drinks are sugar and packaging, which have many substitutes.

For instance, sugar can be replaced by corn syrup or other sweeteners, and packaging can be processed using glass, plastic or metal cans. All these commodities exist in excess in the market and are provided by several suppliers Supplier concentration Supplier concentration is low due to the fact that the main ingredients are sugar (cane and beet), water, various chemicals, and aluminum cans, plastic and glass bottles.

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Differentiation of Inputs Sugar is commonly available while Nutrasweet is patented. There is no differentiation for sugar and only one choice in Nutrasweet.

As far as the other chemicals and inputs, they are commodity items, and it does not matter who supplies them. This makes suppliers have little power over the soft drink industry. Buyers Different levels of bargaining power exist among the groups of buyers: The retail channels basically include food stores, convenience stores, fountain outlets, and vending. Vending is the most profitable distribution channels for the soft drink industry. Concentrate Producers can sell their products directly to consumers via vending machines where there is no buyer bargaining power.

Buyer Concentration versus Industry Concentration Buyers for the soft drink industry are members of a large network of bottlers and distributors that represent the major soft drink companies at the local level. Distributors purchase the finished, packaged product from the soft drink companies while bottlers purchase the major ingredients. With the consolidation that has occurred within the industry, there is little difference between the two. Buyer Information Distributors are very informed about the product that they are distributing.

Supermarkets, the principal customer for soft drink makers, were a highly fragmented industry. Stores did not have much bargaining power. Their only power was control over premium shelf space, which could be allocated to Coke or Pepsi products. This power did give them some control over soft drink profitability. Furthermore, consumers expected to pay less through this channel, so prices were lower, resulting in somewhat lower profitability. New Entrants: Strong barriers to new entrants in the soft drink industry: It is very difficult to a new Concentrate Producer to enter the market.

Coke and Pepsi are the first movers in the industry and have more than 100 years of existence in the market. They have both kept their formula as a trade secret and built a strong brand image. It is also difficult for a new bottler to enter the CSD industry due the amount of capital investment required, the interdependence that exists between concentrate producers and bottlers, the exclusivity of territories in which bottlers distribute products, and the access to retail channels, with which Coke and Pepsi sustained favorable and long term relationships. Economies of Scale

Size is a crucial factor in reducing operating expenses and being able to make strategic capital outlays. By consolidating the fragmented bottling side of the industry, operating expenses may be spread over a larger sales base, which reduces the per-case cost of production. Capital Requirements The requirements within this industry are very high. Production and distribution systems are extensive and necessary to compete with the industry leaders. The magnitude of these expenditures causes this to be a high barrier to entry. Proprietary Product Differences

Each firm has brands that are unique in packaging and image, however any of the product differences that may develop are easily duplicated. However, secret formulas do create a difference or good will that cannot be duplicated. Absolute Cost Advantage Brands do have secret formulas, which makes them unique and new entry into the industry difficult. New products must remain outside of patented zones but these differences can be slight. This leads to the conclusion that the absolute cost advantage is a low barrier within this industry. Brand Identity This is a very strong force within the industry.

It takes a long time to develop a brand that has recognition and customer loyalty. A well recognized brand will foster customer loyalty and creates the opportunity for real market share growth, price flexibility, and above average profitability. This is a high barrier to entry. Access to Distribution Distribution is a critical success factor within the industry. Without the network, the product cannot get to the final consumer. The most successful soft drink producers are aggressively expanding their distribution channels and consolidating the independent bottling and distribution centers.

In conclusion, an industry analysis by Porter’s Five Forces reveals that the soft drink industry in 1994 was favorable for positive economic profitability, as evidenced in companies’ financial outcomes. 2. How has the competition between Coke and Pepsi affected the concentrate profits? Clearly both of the industry leaders have different strategies as far as revenue generation is concerned. Coca-Cola dominates the industry in sales volume and market share but it is not the same if we talk about innovative marketing and business strategy efforts. Pepsi generates 70 percent of its revenues from the U.

S. , while Coca-Cola generates 71 percent of its from international markets. Pepsi gets 41 percent of its total revenues from soft drinks and the remaining 59 percent come from its snack and food business. Coke instaed gets all of its revenues from its soft drinks. Both have lemon-lime, citrus, root beer, and cola flavors. The relatively low level of diversity makes the soft drink industry unattractive for investment. Competition between Coke and Pepsi affected the concentrate profits due the following factors: 1-Favorable demographic trends that boosted the sales of soft drinks.

The per capita consumption of carbonated soft drinks increased from 22. 7 to 53 gallons over the period 1970-2000 and the sales of Coke went up from 5. 5 billion $ in 1980 to 20. 5 billion $ in 2000. Likewise, Pepsi has nearly quadrupled its total sales over the same period to 20. 4 billion $. 2. The change in the consumers’ taste is another key trend in the industry. Many substitutes to carbonated soft drinks gained more popularity among consumers. Consumption of bottled water increased from 11. 8 in 1998 to 13. gallons/capita in 2000, and that of juices from 10 to 10. 4 gallons/capita at the expense of the carbonated soft drinks, whose consumption slowed down by about 2% over the same period. As a result, Pepsi and Coke invested in product innovation to include non carbonated soft drinks. 3. Globalization is an important shift in the strategy of Pepsi and Coke, as the domestic market becomes more mature. So, Pepsi and Coke have to target international markets and run the risk of operating abroad (political risk, threat of national brand names). 3.

Compare the economics of the concentrate business to the bottling business: Why are differences in profitability so stark? The economics of the concentrate business and the bottling business are strongly linked. The concentrate producers negotiate on behalf of their suppliers, and they are ultimately dependent on the same customers. Even in the case of materials, such as sweeteners that are incorporated directly into concentrates, they pass along any negotiated savings directly to their bottlers. Yet the industries are quite different in terms of profitability.

The fundamental difference between concentrate producers and bottlers is added value. The biggest source of added value for concentrate producers is their proprietary, branded products. Coke has protected its recipe for over a hundred years as a trade secret. As a result of extended histories and successful advertising efforts, Coke and Pepsi are respected household names, giving their products an aura of value that cannot be easily replicated. Also hard to replicate are Coke and Pepsi’s sophisticated strategic and operational management practices, another source of added value.

Bottlers have significantly less added value. Unlike their concentrate producers counterparts, they do not have branded products or unique formulas. Their added value stems from their relationships with concentrate producers and with their customers. They have repeatedly negotiated contracts with their customers, with whom they work on an ongoing basis, and whose idiosyncratic needs are familiar to them. Through long-term, in depth relationships with their customers, they are able to serve customers effectively.

Their other source of profitability is their contract relationships with concentrate producers which grant them exclusive territories and share some cost savings. Exclusive territories prevent intra-brand competition, creating oligopolies at the bottler level, which reduce rivalry and allow profits. To further build “glass houses,” as described by Nalebuff and Brandenberger (Co-opetition, p. 88), for their bottlers, concentrate producers pass along some of their negotiated supply savings to their bottlers.

Between 1986 and 1993, the differences in added value between concentrate producers and bottlers resulted in a major shift in profitability within the industry. While industry profitability increased by 11%, concentrate producers profits reach 130% on a per case basis, while bottler profits actually dropped to 23%. What is causing concentrate producers to integrate into bottling? There were many reasons to avoid vertical integration on this industry: Vertical integration is convenient to create or protect value. The concentrate market is highly stable and will be for a long time to come.

Concentrate producers have more market power than bottlers. They already have market power through efficient barriers to entry, and effectively price discriminate through various retail channels. The market is neither young nor declining. As the soft drinks business has grown more profitable over the last years, while the bottling industry has struggled to retain any profitability, it was not be advisable to vertically integrate but cola war weakened many independent bottlers, leading franchises to seek buyers. In 1986 Pepsi decided to acquire its bottling system.

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