Coke and Pepsi: Overview

Coke and Pepsi in the Twenty-First Century: Threat of Entry:low 1. Economies of scale – High production volume but merit not clear (1st paragraph on page 2) 2. Product differentiation – Brand identification (high advertising expense, Exhibit 2) 3. Capital requirements – CPs: little capital investment (1st paragraph on page 2) – Bottlers: capital intensive (2nd paragraph on page 3) 4. Cost disadvantages independent of size – No 5. Access to distribution channels – Food stores (35%): intense shelf space pressure (2nd paragraph on page 4) – Fountain (23%): CPs dominated first food chain (1st paragraph on page 5) 6.
Government policy (N/A) Threat to entry is low because Coca-Cola Company, PepsiCo, and Cadbury Schweppes control 90. 1% of the market share; 44. 1%, 31. 4%, and 14. 7% respectively. Although the growth rate of CSD consumptions have been steady at 3% a year, the capital requirement to enter the market is too great of an obstacle. In order to service the entire US, a firm would need $25-50 million to build a plant for concentrate producers, $6 billion ($75 million * 80 plants) to establish bottlers, cost associated to provide and maintain incentives to retailers, and the greatest cost to advertisements.
Therefore, firms are deterred from entering the CSD market due to economies of scale couple with brand image that the firm must face. In order provide product differentiation, the entering firm would have to invest heavily to develop a brand image for CSD aside from the three market leaders. Access to distribution channels is intense in CSD industry as bottlers are fighting for shelf spaces in grocery stores. In addition, PepsiCo is in the restaurant business of owning Taco Bell, Kentucky Fried Chicken, Pizza Hut by shutting down any opportunities for other CSD firms to sell fountain drinks in those restaurants.

Other CSD firms like Coca-Cola has develop a relationship with remaining market leaders of restaurant for their fountain distribution (i. e. , McDonalds and Burger King). In addition, “Soft Drink Interbrand Competition Act” in 1980 preserves the rights of Concentrate Producers to grant exclusive territories. Therefore, it would be safe to assume that there are not many competitors in the market vying for a new territory since the existing Concentrate Producers would have driven off competition out of business through their rights of exclusive territories.
Cost disadvantages independent of size is high as development brand image will require high investments in advertisement and to develop a new differentiating acquired taste for CSD consumers. Substitutes:low (Non-cola beverage? ) Substitutes of CSD’s include water, juice, milk, and different types of alcohol. However, leading CSD’s have branch out their products to water and juice to capture the market shares of CSD’s substitutes. Other leading substitutes to CSD’s are milk, coffee, and alcohol beverages. These substitutes are generally different complement beverages than the CSD’s.
Coffee and alcohol beverages are geared towards adults only and milk is gear towards breakfast meal consumptions with cereal. Complements: Complements to CSD’s are food. CSD firms have made relationships with retailers of food (i. e. , grocery stores, gas stations). In addition, firms have made relationships with restaurants to complement their products with food. Since food is something that everyone consumes several times a day, CSD companies have a great opportunity to maximize their presence in different distribution methods. Buyers:low 1. large volume?
Some buyers might buy in large volume but not found in the case 2. standard or undifferentiated? No 3. NA for this case 4. low profits? – Food stores: No, average (5th paragraph on page 4) – Fountains: extremely profitable, 80 cents out of one dollar (1st paragraph on page 5) 5. unimportant? No 6. does not save buyers’ money? (N/A) 7. credible threat? No Buyer groups are not powerful against CPs and bottlers. Therefore, there is no significant bargaining power from buyer side in CSD industry. This situation contributes to maintain high profit of CPs and bottlers. (Reasons) 1.
Because there are various retail channels, CPs and bottlers do not face the single retailer with power which purchases in large volume. 2. In general, selling CSDs yields high profit for retailers. (15-20% gross margin for food store, 80 cents out of one dollar for fountain. ) That fact prevents buyers to be price sensitive. 3. In fountain business, CPs and bottlers kept fountain sales profitable and succeeded to avoid cutting price pressure from retailers by paying rebate and investing restaurant retailers. 4. In food store, CSD represented a large percentage of its business (accounting for 3%-4% of food store business).
To draw customers to store, it should be necessary for food store to carry the most selling brand in CSD, Coke and Pepsi. This structure weakens food store’s bargaining power. 5. Vending machine is efficient retail channel for keeping price because bottlers can directly control. It also works in the country where Coke and Pepsi do not have distribution channel(ex. Japan). 6. Coke and Pepsi have already established strong brand identification. Some discount retailers have private label CSD but they can not take the place of Coke and Pepsi.
Internal Rivalry: high 1. numerous? roughly equal? – numerous: No, oligopoly – roughly equal: Yes – price increase, oligopoly (4th paragraph on page 11) 2. Industry growth – plateau (Exhibit 3) 3. lacks differentiation? – try to differentiate by marketing (5th paragraph on page11) 4. High fixed costs? 5. Capacity augments? Capacity itself not clearly mentioned in the case but; early 1990s: Yes? incurred excess supply? (1st paragraph on page 11, Exhibit 1) late 1990s: 6. High exit barrier? – Yes? capital intensive? 7. rivals diverse in strategies? – No?
Coca-Cola and Pepsi’s history of intense rivalry has resulted in the execution of a large number of strategies designed to gain market share and brand recognition. As the industry matures and Coca-Cola and Pepsi learn from past strategies, increased profitability heavily relies on their ability to cut costs, gain fountain contracts, globally expand product mix, and vertically integrate bottler distribution channels. Traditional strategic initiatives such as new product development, advertising, price reduction, and product differentiation will produce minimal results considering Coca-cola and Pepsi are similar in size and power.
Coca Cola and Pepsi’s ability to quickly respond to competitor strategies generally lead to industry wars where neither firm is better off then when they started. While it is important to continually maintain brand awareness and pursue various market trends, large gains in profitability will ensue from strategies that create a sustainable competitive advantage. It is more advantageous for Coca-Cola and Pepsi to invest in strategies that increase the industry demand versus short term profit. Such strategies include but are not limited to, entering developing countries, key acquisitions of growing businesses (i. Yahoo, Diageo, Arista Records, or Starbucks), and increased efforts to vertically integrate bottler distribution channels. Key acquisitions are important in that they can provide the means in which each company can redefine their brand name as more then a “cola”. Successful examples are Sony, Disney, and GE. Suppliers:low 1. dominated? Metal cans: excess supply (1st paragraph on page 6) 2. unique? not unique 3. obliged to contend? (N/A) 4. credible threats? No 5. important customer? Metal can: largest customer (1st paragraph on page 6)