Cola Wars
- Submitted by: scottwow1
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- Category: Other
- Date Submitted: 02/22/2014 09:31 AM
- Pages: 6
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1. Why has the soft drink industry been so profitable?
The soft drink (specifically, the Carbonated Soft Drink, or CSD) industry is a nearly $100 billion dollar industry ($66 billion in 2005, at the time of the case). Widespread marketing and advertising campaigns and intense competition between the top two industry rivals, Coca-Cola and PepsiCo., fueled this growth. The value captured by the largest players in the industry outweighs the value lost to others. An analysis using Porter’s Five Forces reveals the market forces that are responsible for this profitability:
• Supplier Power: Concentrate producers require few inputs. The concentrates are mainly raw materials such as coloring, natural flavors and caffeine, as well as plastic bottles and other containers used to ship the concentrate to bottlers, thus the suppliers do not have much economic bargaining power over the industry. Bottlers have three major inputs, concentrate, packaging and sweeteners. Metal cans represent the bulk of the packaging (56%). Coke and Pepsi both negotiated with can manufacturers on behalf of their bottler networks, and have established long-term relationships with these suppliers. As with concentrates, metal cans are largely a commodity, and thus the suppliers have little economic bargaining power. Since CSD makers obtain their inputs at low cost (17% of sales), they do not give up much PIE to their suppliers.
• Buyer Power: Distribution of CSD’s were through supermarkets (33%), fountain outlets (23%), vending machines (14.5%), mass merchandisers (12%) convenience stores and gas stations (8%) and others (9.5%). While supermarkets counted for one third of total CSD distribution, the profitability through that channel varied depending on product, packaging and shelf space. Bottlers competed for shelf space, and also used in-store displays and “impulse buy” sources in order to drive sales. Mass merchandisers such as Wal-Mart had more bargaining power due to their position in the...
The soft drink (specifically, the Carbonated Soft Drink, or CSD) industry is a nearly $100 billion dollar industry ($66 billion in 2005, at the time of the case). Widespread marketing and advertising campaigns and intense competition between the top two industry rivals, Coca-Cola and PepsiCo., fueled this growth. The value captured by the largest players in the industry outweighs the value lost to others. An analysis using Porter’s Five Forces reveals the market forces that are responsible for this profitability:
• Supplier Power: Concentrate producers require few inputs. The concentrates are mainly raw materials such as coloring, natural flavors and caffeine, as well as plastic bottles and other containers used to ship the concentrate to bottlers, thus the suppliers do not have much economic bargaining power over the industry. Bottlers have three major inputs, concentrate, packaging and sweeteners. Metal cans represent the bulk of the packaging (56%). Coke and Pepsi both negotiated with can manufacturers on behalf of their bottler networks, and have established long-term relationships with these suppliers. As with concentrates, metal cans are largely a commodity, and thus the suppliers have little economic bargaining power. Since CSD makers obtain their inputs at low cost (17% of sales), they do not give up much PIE to their suppliers.
• Buyer Power: Distribution of CSD’s were through supermarkets (33%), fountain outlets (23%), vending machines (14.5%), mass merchandisers (12%) convenience stores and gas stations (8%) and others (9.5%). While supermarkets counted for one third of total CSD distribution, the profitability through that channel varied depending on product, packaging and shelf space. Bottlers competed for shelf space, and also used in-store displays and “impulse buy” sources in order to drive sales. Mass merchandisers such as Wal-Mart had more bargaining power due to their position in the...