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Case Analysis: Cola Wars Continue

Summary

Definitely, Coke and Pepsi are the best rivals for each other, making each more developed than before. Until 1990s, because the market size for CSD had been growing, there was no severe conflict between two. However, as consumption of U.S declined, and both two brands experienced their own challenges in the market, their agony continues till now. They are trying diverse ways to their sales back and below are how they diversify or enforcing their strategy in the market or outside the conventional market.

Economics of U.S CSD Industry

For the increasing variety of CSD products and declining prices considering inflation, consumption of CSD had increased for three decades after 1970. There are lots of alternatives, but CSD was the most favored beverage for the Americans. CSD consists of concentrate, sweetener, and carbonated water and its market players are concentrate producers, bottlers, retail channels, and suppliers.

Concentrate Producers

Concentrate producers produce raw, concentrated liquid and they sell to bottlers, fountain stores, and so on.

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However, their main costs are advertising, promotion, market research to support bottlers to keep up their sales. They helped bottlers to setting standards, increasing operational efficiency, and even negotiating with suppliers of bottlers. Dominant players are Coke and Pepsi, followed by DPS and Cott corporation and private-label manufacturers.

Bottlers

Bottlers usually provide direct store door delivery and they managed store display, brand managing, all things about the product for the retailer to promote sales. Bottler industry was capital-intense relative to concentrate industry and their net profit was far below that of concentrate.

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The conventional contract between concentrate producers and bottlers were changed to adjust concentrate price based on inflation benefiting concentrate company while giving permanent territory sales right to bottlers, benefiting bottlers.

Retail Channels

The biggest retail channel was supermarket but what Coke and Pepsi focused on was more about fountain sales and their promotions. At the same time, two big players also diversified their channels through fast-food restaurant business either direct way or indirect supply chain.

Suppliers To Concentrate Producers And Bottlers

Concentrate producers need caramel coloring, flavors and bottlers need packaging and sweetener. The major packaging sold were metal cans and plastic bottles consisting of 98% of all. Here, concentrate producers intervened again between package suppliers and bottlers.

The Evolution Of U.S Soft Drink Industry

Both Coke and Pepsi started by a pharmacist in 19C but as second-runner, Pepsi had to lower their price and possessed small bottlers relative to big franchised bottlers of Coke. In the 50s, both brands started to look at the family market with the supermarket channel. In the 60s, while expanding the bottler network. Pepsi also tried to raise concentrate price to the bottler to the same level of Coke, compensating with advertising and promotion promise to the bottlers. In this period, they also expanded non-cola drinks and merging with them to get synergy based on similar target, delivery and marketing. Their consumption became saturated and looked for a wider market, global. In the 70s, Pepsi overran Coke for the first time with their “Pepsi challenge”. Get anxious, Coke renegotiated bottlers with their flexibility of price and types of concentrate(unsweetened one). In the 80s, they tried to lower cost, increase marketing, and make innovation for a new tastes. For Coke, the new formula only damaged the loyalty of the customer, and over-diversification of drink made the competition to destructive cost strategy for both Coke and Pepsi. After then, Coke consolidated small bottlers to make its own exclusive bottlers and Pepsi followed that. In the 90s, concerns for health and nature decreased consumption of CSDs, thus they were finding new ways to survive: new marketing and inventing alternative drinks.

This war is becoming internationalized, with localization of product and changing the traditional role of the main player above, bottlers, with consolidation

Case Discussion Questions

  • Use the 5-forces framework to explain why the soft drink concentrate industry has been so profitable.

First, for the rivalry force, there were two dominant players in the concentrate industry; Coke and Pepsi. Seeing the exhibit 2, they account more than 80% of total soft drink market from 1970s to now. Another player, DPS, cannot take more than 20% of the total market for the entire period. Also, the growth rate of the industry made the industry more profitable, which can be explained with exhibit 1 showing the gallons per capita for historical carbonated soft drink consumption increased from 22.7 of 1970 to 53.0 of 2000.

Second, weak potential entrants force makes industry profitable. As mentioned above, Coke and Pepsi have been achieving economies of scale by holding 80% of the supply of concentrate of the U.S and expanding with pouring rights of international franchises, such as Mc Donalds(Coke) and KFC(Pepsi). Product differentiation also worked for Coke because customers showed loyalty for the “original coke” with their boycott of new formula coke. This loyalty worked to prevent entrants to get in the industry. What most important for the entrance barrier, is access to the distribution channels. The distribution channel was managed by bottlers, and concentrate company has been overtaken this ability to access. Also, organizing network by negotiating on behalf of bottlers with retailor and forward integration makes the control of the distribution channel for the concentrate company stronger, making potential entrants force weaker.

Third, buyer power was also weak. In here, buyer means bottlers. Bottlers were on small scale compared to the concentrate market and they have been consolidated by concentrate company, damaged by forwarding integration of concentrate company. The number of bottlers decreased from 2000 in 1970 to 300 in 2009. Coke’s CCE covers 90% of North America supply while Pepsi’s bottling franchise covers more than 80% of North America’s supply. Also, they are very price-sensitive because they cannot differentiate their bottling service. Seeing the exhibit 4, bottlers are showing much less gross profit of 4%, compared to that of concentrate producer, 78%.

Fourth, supplier power was not that big because concentrate producers easily found cost-effective substitutes. In the 80s, Coke switched from sugar to corn syrup to lower the cost. And to meet the trend of health issues, they found alternative sweeteners such as Throwback or Stevia. There was no possibility of forwarding integration of the sweetener industry because concentrate producers took many roles to be integrated: from production to marketing.

Lastly, threat of substitutes can make the soft drink concentrate weaker, where actual situation differs. The need for the non-CSD has been increasing seeing exhibit 9. Packaged water consumption soared from 3221.6 to 4588.9 million within 7 years and soft drinks, energy drink consumption also soared. However, this would not harm soft drink concentrate in this case because concentrate producers are consolidating non-CSD beverages in them.

  • Why is the soft drink concentrate industry dominated by two firms?

Accumulated brand reputation and customer loyalty work. Began in late 19C, both Coke and Pepsi maintained their brand as the sole, not interrupted, or merged by any other company. With time, U.S customers get accustomed to these brands as they were born. This makes customer loyalty for two firms stronger.

Integration with consolidation in the field of bottling is another important factor. Coke found CCE and Pepsi found PBG to forward integration and control the SCM overall process more effectively. As integration progressed, Coke’s CCE covers 90% of North America supply while Pepsi’s bottling franchise covers more than 80% of North America’s supply. The number of bottlers decreased from 2000 in 1970 to 300 in 2009.

Two firms also maintain their sales by merging with non-CSD beverage firms and retain a contract with a restaurant or retain them. There is declining consumption for CSD, they actively create the demand. Coke purchased Minute Maid, Duncan Foods and diversify their product line. Pepsi acquires Pizza Hut, Taco Bell and KFC to get profit from restaurants.

The economy of scale is their main source of competitive advantage, considering they are manufacturers. Manufacturing product industry mostly gets the most out of the economy of scale, and in 2009, Coke accounts for 41% and Pepsi accounts for 29% of the total soft drink market share of the U.S. this brings economies of scale.

Fierce competition between two also raises their competency by ceaselessly enforcing then to innovate, reconfigure and optimize their business model. They never stop developing new product and diversify business, find ways to maximize their market share in the market. Through this fierce rivalry, as Roger Enrico mentioned, “If the Coca-Cola company didn’t exist, we’d pray for someone to invent them. And on the other side of the fence, I’m sure the folks at Coke would say that nothing contributes as much to the present-day success of the Coca-Cola company than Pepsi.” There we can refer competition to each other brings those two companies to the status of now.

All these combined to bring Reputation brand value with time, making both companies invincible to other firms.

  • How has the competition between Coke and Pepsi affected the industry’s profits?

Based on porter’s five forces model we analyzed on the question a, five powers affect to the price and cost in each way. First, price is negatively affected by substitutes, a new entry, buyer power, and intensity of rivalry. Second, the cost is increased when the intensity of rivalry is fierce supplier power is strong.

Combine all, they affected the industry’s profit in a positive way. Exhibit 3a shows financial data for Caca-Cola and PepsiCo and net profit/sales for both companies is steadily increasing from 1975 to 2009. Coke, starting from 9.0% to 22% and for Pepsi, 4.6% to 13.8%. Also, as beverage consumption in the U.S has been soared from 3090 in 1970 to 9420 in 2009, the number of beverage sold is increasing, leaving higher benefits in the industry.

  • Coke and Pepsi have created a very profitable industry that has lasted more than a century.

Coke and Pepsi would major challenges due to external factor changes. First, macro-environment factors changes. Socially, concern among health and environment arises, which results in a negative effect on traditional sugar CSD with the disposable packages. Economic growth is slowing down, with “New normal” settle, resulting in slow growth on population and disposable expenditure. As the beverage industry is the manufacturing industry, advent of AI, machine learning, 3D printing would not challenge the stability of the industry structure. There would be positive change to the production process due to technology such as cost-efficient packages, machines, or eco-friendly packages. Micro changes would also matter due to the globalization of both firms. As they started to play in global market without their original competency, 5 forces around them changes for sure. For example, buyer power changes because people in Asia consume less fast-food or Cola than westerns, and the supply chain they’ve made in the U.S doesn’t work in other countries. There are lots of substitutes they’ve never thought of, and customer loyalty they’ve taken it for granted is no more granted.

However, we can conclude that they can repeat their success with both CSD in non-CSD market. U.S non-CSDs unit case volume for packaged water rises from 3221.6 to 4588.9 and energy drinks from 28.9 to 218 based on exhibit 9. On exhibit 1, gallons/ capita for CDS is decreasing after the 2000s and other alternative beverages, such as bottled water, soared. When seeing exhibit 7, most of CSD dropped on their share while non-CSDs rose. Also. Energy drinks can be priced about 3 times more than the same amount of CSDs.

Thus, for two firms to survive with sustainability, they have to develop the non-CSD line with more priority. As the text mentioned, “supply chain and bottling requirements add complexity to the value chain, compared with the relatively simple CSD model.” If they are to survive within the industry of beverage, they have to localize their product, while penetrate and consolidate the supply and manufacturing chain as they did in the U.S before.

Cite this page

Case Analysis: Cola Wars Continue. (2019, Nov 27). Retrieved from http://studymoose.com/case-analysis-cola-wars-continue-essay

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