Paper type: Analysis Pages: 7 (1510 words)
After reviewing the case and doing an in-depth analysis of the industry, we found that the concentrate industry is profitable for a variety of reasons. Chief amongst the reasons for the industry’s profitability is the remarkable net profit percentage at 35% (Exhibit1). When compared to the yahoo finance page that we viewed in class, the concentrate industry would rank amongst the top ten most profitable industries. If we compare the concentrate industry to the bottling industry, we see that the concentrate industry dwarfs the bottling industry meager 9%.
In fact, if we compare it to retail and CPI (measure of the average change in price of consumer items over time), it is evident that the price growth in the concentrate industry performs better than both measures from 1988 to 2000 (Exhibit 2). This suggest that not only is the concentrate more profitable than the retail function, but also, the concentrate industry is performing better (from a revenue standpoint) than the average house hold good. We can also see that from 1970 to 1998 on Exhibit 3 in the case, the consumption of carbonated drinks has consistently increased, whereas most other liquids have been inconsistent.
Since carbonated drinks are dependent upon the concentrate producers, this data would suggest that he the concentrate industry has longevity along with the carbonated soft drink industry. Despite the great profitability of the concentrate industry, there have been very few firms to successfully enter the industry. Using Porter’s Five Forces model, it is apparent why so few firms enter the concentrate business. Two of Porters’ Five Forces are very low, the power of buyers and the power of suppliers. The power of buyers is very important in any industry, and the lower the power of those buyers the better for the industry as a whole.
However, there are two ways of looking at the power of buyers in the concentrate industry. First, the bottlers who are buying the concentrate and mixing it with the carbonated water and other ingredients have very low power. Coke and Pepsi have both consolidated bottlers and changed them because of price changes and other factors. Therefore, these buyers have no power because they can be easily replaced at a very little cost to the concentrate producers. The second way of looking at buyers in this industry is the consumer who is actually buying the end product.
These consumers have a great deal of buying power. For example, the entire soda industry has been declining in recent years due to a higher awareness of health concerns of drinking soda as well as other replacements being more appealing to customers, such as flavored water and sports drinks. Coke and Pepsi have been competing for market share and customers are the factor that affects market share. The companies are competing for the customers’ business, giving them higher power in the industry. The power of suppliers is also very low.
The raw materials that supply the concentrate industry are not hard to find and have been replaced many times throughout the history of the concentrate industry. The suppliers of the raw materials have no power over the concentrators and will not be able to affect the prices they sell their product for. This in turn, makes the industry that much more profitable because of this low power of suppliers. Another one of Porter’s Five Forces is threat of entry, which is very low for the concentrate industry due to the presence of so many entry barriers.
There are seven barriers to entry; supply-side economies of scale, demand-side economies of scale, customer switching costs, capital requirements, incumbency advantages independent of size, and restrictive government policies. Supply-side economies of scale means when producing larger volumes, the cost per unit decreases. Coke and Pepsi concentrate producers have economies of scale due to the fact that they have huge capacity. With this large capacity, their fixed costs are lower than any rivals. The case stated that one concentrate plant could serve the entire United States.
This increases the power that Coke and Pepsi concentrate producers already have. They also have demand-side economies of scale, meaning the existing concentrate producers have a very extensive network, and new entrants would be at a disadvantage if they decided to enter because Coke and Pepsi already dominate the industry. Customer switching costs are low if talking about the end consumers of soft drinks, because consumers can easily switch from Coke to Pepsi without incurring extra costs. With respect to the customers being the bottlers, who buy the concentrate and finish the production process, their switching costs are much higher.
The case mentioned contracts that the bottlers have with Coke and Pepsi, and if switching, the bottlers would have to go through extensive paperwork and deal with legal concerns. Another barrier to entry is capital requirements. The concentrate industry is very unique and actually does not require very much capital investment to start things up. The majority of the concentrate producers’ costs are in marketing efforts, rather than the production of concentrate itself. However, this barrier is still high because all the investment Coke and Pepsi have put into building their brands is very high.
If a new concentrate producer were to try to enter the industry, they would have to invest a lot of money into getting their name out there, and gaining a sizeable market share would be nearly impossible. This established brand leads to the mention of another entry barrier, incumbency advantages independent of size. Everyone knows who Coke and Pepsi are, and they have very high brand equity. This makes entry into the concentrate industry very difficult. There is also the experience aspect. The current concentrate producers know exactly what to do to keep costs down and produce a consistent product efficiently.
A new entrant may run into some roadblocks strictly due to lack of experience. Both Coke and Pepsi have been in the industry for a very long time, so they have an immediate advantage. Unequal access to distribution channels is another very high entry barrier for the concentrate industry. Coke and Pepsi have established relationships with suppliers and buyers of their product. A new entrant would have difficulty accessing channels of distribution, because they have all already contracted with one of the existing companies. The final barrier to entry is restrictive government policies.
The case mentioned several issues with regulation when speaking of Coke and Pepsi’s efforts to go international. For example, “When Coke attempted to acquire Cadbury Schweppes’ international practice, it ran into regulatory roadblocks in Europe and in Mexico and Australia, where Coke’s market shares exceed 50%” (Page 14). There is also mention of a mandatory certification for bottled water. This certification caused smaller local brands to fail. After analyzing all the barriers to entry, it is obvious that the threat of entry into the concentrate is very low, contributing even more to the industry’s profitability.
Threat of substitutes, another of Porter’s five forces, is also low in the concentrate industry. The soda industry is very profitable, with Americans drinking soda at higher levels than any other beverage. Traditional substitutes such as water, coffee, tea, and milk have never served as a real threat in concentrate producers’ 100 plus year history. In recent times, consumer trends have brought the emergence of other alternatives including Diet Sodas and “non-carb” beverages. The Large concentrate producers have been on the vanguard of these trends, adapting new alternatives with a changing market.
However, the primary concentrate companies, Coca-Cola, Pepsi, and Dr. Pepper still dominate the market. The brand power that has been established over the last century is not likely to be challenged by a newcomer despite the low startup costs for concentrate factories. In essence, the major concentrate companies have become their own substitutes, transferring losses due to substitutes. Porter’s fifth force is rivalry among existing competitors. While the two major concentrate industry’s competitors initially had fierce competition, the threat of competition outside of Coke and Pepsi is relatively low.
The phase of price driven competition ended and now the Coke vs. Pepsi war is played out with differentiation through advertising and brand lifestyle. This form of co-operation, where prices remain relatively high with only temporary store promotions, increased the overall profitability for Coke and Pepsi. The brand loyalty established over the last century means that the threat of substitutes is low and competition is generally for marginal changes in market share. Rivalry among concentrate companies has also expanded to new venues, such as sports drinks and bottled water.
But aside from the primary concentrate companies, there is no real threat to market share. This analysis confirms that all of Porter’s Five Forces are low, meaning industry profitability is high. Although high profitability would in most cases attract new firms to enter the industry, there are a variety of reasons that is not the case for the concentrate industry, as mentioned above. Coke and Pepsi have almost created an oligopoly out of the concentrate industry, and their strong brand identities will keep them far ahead of any possible entrants.
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Cola Wars Group Case Analysis. (2016, Dec 08). Retrieved from https://studymoose.com/cola-wars-group-case-analysis-essay