Cola Wars

ABSTRACT

Carbonated soft drinks branded under Coca Cola and Pepsi Cola remain major household names in the soft drinks industry. Spanning operation from the original Franchise agreement of 1899 to-date, is an indication of managerial ingenuity of strategy design, implementation and control. Profitability and sustainability as a key issue in business operations necessitates these value chain components to critically evaluate the Structure-conduct-performance framework as an ongoing process. As suggested by Porter (2008/1977), the evaluation of the industry structure would assume the assessment under the five forces concept: The threat of entry, the power of suppliers, the power of buyers, the threat of substitutes and the competitive rivalry.

INTRODUCTION

The major players in the Carbonated Soft Drinks (CSD) industry in the production and distribution process are classified in four major groupings: Concentrate producers, bottlers, retailer channels and suppliers. As major part players in the Carbonated Soft Drinks Industry (CSD), analysis of the Industry structure is synonymous to assessment of the Industry major players on Structure-Conduct-Performance (SCP) paradigm. This essay seeks to subject to assessment the CSD Industry major players to the five forces concept.

CONCENTRATE PRODUCERS,

In this part of the industry, raw materials are converted into concentrates. Ingredients are blended with sugar, high fructose corn syrup or artificial sweeteners. The concentrates are then sent to bottlers.

The threat of entry,

The initial capital investment required is substantial from USD 25-50 Million, consequently stiffening the barrier to entry. One concentrate producer can supply several bottlers. Both from the Supply side economies of scale and demand side benefits of scale, new entrants need the financial muscle to enter the market.

The power of suppliers,

The suppliers here include sweeteners, packaging makers and the large number of employees who some of them work with the bottlers in sales, operational improvements and standards setting. The employees are likely to form unions to claim a big portion of the industry profit. The Sweeteners and packaging makers may not have much negotiation powers since there may be many suppliers of similar products The power of buyers,

The main buyers are the bottlers of the CSDs. The concentrate producers negotiate directly with these suppliers. Since the concentrate plants are owned either by Coca Cola or Pepsi Cola, the bottlers have a pre arranged standard price. This would limit their negotiation ability for a bigger profit share. The bottlers may also face high switching costs if they choose to source concentrates from another supplier or there may be no substitute product in the neighbourhood in the light of limited producers of concentrates.

The threat of substitutes

Switching costs of concentrates from another supplier may be a problem or Coca Cola or Pepsi may offer no alternative substitute concentrate. Cadbury Schweppes and Cott Corporation are disallowed for the Cola industry and consequently offer no threats.

The competitive rivalry.

Cola concentrates are fully differentiated from other soft drink concentrates. This ensures no competitive rivalry and guarantees profitability.

BOTTLERS,

The bottlers add carbonated water and high fructose corn syrup to the concentrates before canning and bottling the CSD

The threat of entry

This is a high capital investment as well with automated processes and automated warehousing. In 2005 a 40 Million case bottling plant was introduced in Texas at a cost of USD 40 Million. Such plants today could cost in excess of USD 75 Million. The current incumbents boast of size and technology making it hard for new entrants, or rather another secure industry structure.

The power of suppliers,

The brand concentrate producers supply the bottler with the needed input products. This may be viewed as intra-group arrangement with concentrate producers relying only on the Coca-cola Enterprises (CCE) or Pepsi Bottling Group (PBG). Labour supplies are handled in terms commensurate with National laws, and with the growing global unemployment, the supply of it is always in abundance.

The power of buyers

Various retailer channels exist for the distribution of CSDs. By 2004 this included supermarkets 32.9%, vending machines 14.5%, fountain outlets 23.4%, convenience stores 7.9%, and mass merchandisers 11.8%. The bigger retail channels do negotiate lower prices for bulk purchases, this move shifts profitability to the retailer channels.

RETAILER CHANNELS

The retail channels present the CSDs to the consumers. The profitability in this category depends on the delivery process and marketing budget. The threat of entry, Entrance is relatively easy for spacious retail supermarkets, food outlets chains and cafeterias. These retailers use the CSDs as attractions for customers. The sales data remain higher than other drinks with the introduction of the diet options ensuring good profitability.

The power of suppliers,

The bottlers as suppliers of the Retailer channels sought after display space for better visibility. Coca Cola and Pepsi have always been on price war with the effect of reducing profitability per unit. However, the bottlers did introduce the vending machines to increase the availability of CSDs which consequently increased profits. The power of buyers,

Health conscious buyers have drifted towards the diet options of the CSDs, juices and water. The buyers at this level do not have any joint bargaining power and they are less influential on reducing industry profitability. The threat of substitutes

Various substitutes are available for CSDs but they are not as popular due to low promotions. These include bottled water,

The competitive rivalry.

Rivals to the Cola drinks existed and do exist today to mention, Royal Crown, Dr Pepper, Canada Dry, Sunkist, Shasta, A&W, Cadbury Schweppes etc however, they are not highly promoted as the Cola products. These substitutes do not offer significantly helpful and differentiated treats to the consumers. The profitability of the Cola industry is not challenged by them.

CONCLUSION

There is visible incumbency advantage of Cola posing a very high entrance barrier for other potential traders. This stems from the high capital investments, coordinated supply chain, established brand identities, cumulative experience. New entrants expect aggressive retaliation.

References:
McGahan, A (1994) ‘Note on competitive positioning’, Harvard Business Review (794108) Available from:
http://cb.hbsp.harvard.edu/cb/pl/9807336/9807337/3c3ab3cce63dfc522e479934af628b05. [Accessed on: 03/08/2013]

Porter, M.E. (2008/1979) ‘The five forces that shape strategy’, Harvard Business Review, January, 23-(41) (R0801E) . Available from: http://ehis.ebscohost.com.ezproxy.liv.ac.uk/ehost/pdfviewer/pdfviewer?vid=2&sid=3ccca45f-af53-45bc-b61b-3ae2de30a97d%40sessionmgr13&hid=15. [Accessed on: 03/08/2013]

Yoffie, D. & Slind, M. (2006) ‘Cola wars continue: Coke and Pepsi in 2006’, Harvard Business Review (706447)
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