COLA WARS CONTINUE;

Coke and Pepsi in 2006

Submitted by:
TEAM 6
MARKETING 1
Profitability of soft drink industry
• Comprises of two main parts
1) Concentrate production
2) Bottling (PACKAGING)
q Both are interdependent
q Share cost in procurement production marketing and distribution
q Sales through 5 principal channels: food stores, convenience &
gas, fountain, vending, and mass merchandisers
q market share of 46.8% within the non-alcoholic drink industry
q Vertical integration helps to generate more revenue
•The porter’s five force analysis

•Shows the reasons of the industry

•to Be profitable
1.Threat of substitute products
q Over time, other beverages, from bottled water to teas, became
more popular, especially after 1980s
q Companies responded by expansion through
• alliances (e.g. Coke and Nestea),
• acquisitions (e.g. Coke and Minute Maid),
• internal product innovation (e.g. Pepsi creating Orange Slice).
q This Proliferation did threaten the profitability of bottlers,
q As they more frequent line set-ups, increased capital
investment, and development of special management skills for
more complex manufacturing operations and distribution.
q Bottlers were able to overcome these operational challenges
through consolidation to achieve economies of scale.
q Overall, because of the CPs efforts in diversification,
• thus, substitutes became less of a threat.
2.Threat of entry of new
competitors
Entry would be hardly possible for either a CP or a new bottler
•

q The tremendous marketing muscle & a century old market

presence of a few
q These companies had intimate relationships with their retail
channels
q would be able to defend their positions effectively through
discounting or other tactics.
q Entering bottling, meanwhile, would require substantial capital
•investment, which would deter entry

q existing bottlers had exclusive distribution territories

q Regulatory approval of exclusive territories,
•via the Soft Drink Inter-brand Competition Act-1980.

•Thus, making it impossible for new bottlers

•to get started in any region

•where an existing bottler operated.

•
 3.Intensity of competitive rivalry
•Intensity of competitive rivalry was consolidated
q Revenues are extremely concentrated in this industry, the top six
controlled 89% of the market.
q In fact, the soft drink market as an oligopoly, or even a duopoly
between Coke and Pepsi, resulting in positive economic profits.
q There was tough competition between Coke and Pepsi for market
share, but this occasionally hampered profitability.
q For example, price wars resulted in weak brand loyalty and eroded
margins for both companies in the 1980s.
q The Pepsi Challenge, affected market share
•without hampering per case profitability,

•as Pepsi was able to compete on attributes other

•then price
 4.Bargaining power of customers
q Supermarkets are a highly fragmented industry. the biggest chain
made up 6% of food retail sales, and the largest chains controlled up
to 25% of a region),
q Needed soft drinks to generate consumer traffic
q Their only power was control over premium shelf space,
q consumers expected to pay less through this channel,
q National mass merchandising chains such as Wal-Mart, on the other
hand, had much more bargaining power due to their scale and the
magnitude of their contracts.
q fountain sales was least profitable just giving 5% company margin
q they considered this channel “paid sampling.”
•because buyers at major fast food chains only needed

•the products of one manufacturer,

•so they could negotiate for optimal pricing

.
•
 4.Bargaining power of customers
.
•
Vending, was the most profitable channel
q There were no buyers to bargain with at these locations, where
bottlers could sell directly to consumers through machines
q Property owners were paid a sales commission.
q The customer in this case was the consumer, who was generally
limited on thirst quenching alternatives.
•Convenience stores and gas stations.

q Bottlers negotiated directly with convenience store and gas station

owners. So they had less buyer power
•So the only buyers with dominant power were fast food outlets.

q These outlets captured most of profitability in their channel,

q they accounted for less than 20% of total sales.
q Through other markets, however, the industry enjoyed substantial
profitability because of limited buyer power.
5.Bargaining power of suppliers
•Bargaining power of suppliers is very low
•The inputs from suppliers are primarily sugar and packaging.

•1)Sugar:

q Sugar could be purchased from open market,

q They could easily switch to corn syrup If sugar became expensive.
•2) Packaging:

•negotiated favourable agreements with the can makers on the

following grounds
q Abundant supply of inexpensive aluminium in the early 1990s
q Several can companies competing for contracts
q By negotiating on behalf of their bottlers.
q In the plastic bottle business,
there were more suppliers than major contracts,
q So direct negotiation by the cps Effective at
•reducing supplier power
Area of business Concentrate Producers Bottlers

Inputs Caramel coloring, phosphoric or Packaging(bottles/cans),

citric acid, natural flavors , sweeteners. High in total
caffeine, artificial sugar. cost.
Relatively low in value
Capital Less capital required. High capital required for
setup of plants
Costs Major cost in advertising, Major cost in packaging,
promotion, market research and sweeteners, concentrate,
bottler support trucks and distribution
networks.
Market One plant can supply to whole Local market because of
country, more reach of distribution issues.
concentrate producers
Operating Margin High(30%)-2004 Low(9%)
Value Proprietary, branded products, No branded products,
brand visibility unique formula
 Why is profitability so different??
q Difference in terms of capital investment required
q Macro environment factors like legislation (soft drink Inter-brand
competition Act, 1980)
q Bottlers couldn’t carry competitive brands
q CPs have more global market making expansion easier than bottlers
q CPs have more bargaining power due to dependence of bottlers on
CPs
q Rising costs of plastics and concentrates, while having to decrease
retail costs by bottlers to increase sales
q High costs in interchanging products or packaging
q Contract relationships with CPs, which grant them
q exclusive territories and share some cost savings.
q Exclusive territories prevent intrabrand competition,
q creating oligopolies at the bottler level,
q which reduce rivalry and allow profits.
•
Industry Profits after competition

q Switch from sugar to cheaper substitute – high fructose corn

syrup resulted in lower costs.
q CSD companies kept on innovating like use of returnable glass
bottles in India to reach poor rural consumers.
q Competing amongst themselves rather than tapping potential
market
q Fierce competition between Pepsi and Coke resulted in
diversification of product portfolio where Pepsi grew by 17.6%
as compared to Coke who grew by 4.2% from 1996-2004.
q Customer Development Agreements with nationwide retailers
like Wal Mart where funds were offered for marketing in
exchange for shelf space resulting in higher costs.
•

q Profitability was highly sacrificed due to fight for fountain

accounts.
•
Can Coke and Pepsi sustain their profits in the wake of
flattening demand and the growing popularity of non-
carbonated drinks?
•

Yes Coke and Pepsi can sustain their profits

due to the following reasons:-
Carbonated soft drinks continue to dominate
the market
qCoke and Pepsi have been in the business for a long time and they
have accumulated enough brand value.
qThere has been no major threat from new competitors
qGrowing concern of obesity and other health problems – Both
Pepsi and Coke have started focussing towards health-oriented
products both food and beverage
qPer capita consumption in emerging economies is low and hence a
huge potential market
qMergers , acquisitions , joint ventures and strategic alliances both
in the US and internationally. PepsiCo international provides 40%
of its revenue.
Thank you…