Cola Wars Continue: Coke and Pepsi in 2006: Case Analysis 1.

Soft Drink Industry (SDI) overview The industry considered in this analysis is Soft Drink Industry (SDI). SDI serves customer needs for refreshing and cold non-alcoholic beverages, with main industry sectors being: carbonated drinks, fruit punches, and bottled water sectors. There are three dominant companies in the industry, namely: Coca-Cola, Pepsi, and Schweppes. The soft-drink industry includes the following four major types of participating companies: Producers of syrups and concentrates, Bottlers, Retail channels, and Suppliers. 2. Porters Five Forces Analysis of the Soft Drink Industry (SDI): Soft Drink industrys Carbonated Drink sector is 66 billion industry in US alone. Soft Drink industry remains very profitable, with pre-tax profits of 30% and 9% for concentrate producers and bottlers respectively. The following five forces analysis will attempt to show factors contributing to the profitability in the industry. Risk of entry by Potential Competitors: It is difficult for new entrants to enter the market because of few factors: First, in order to produce soft drinks a new company would have to have bottling or some other kind of packaging capacities or contracts with bottlers or packagers. To build a new bottling plant is very capital intensive and to enter in a contract with existing bottlers is difficult if not prohibited by the Coca-Cola and Pepsis agreements with existing bottlers. Because it is hard to find a bottling producer for their products, new firms would face a lot of difficulties in entering the industry. Second, competition in the soft drinks industry it is usually associated with high spending on advertising and marketing. Both of the industry giants Coke and Pepsi spend significant amount of money on advertising and marketing. It is difficult for a new firm to measure up with the scale and cost of the advertising expenses. Another barrier for a new entrant is that both Coke and Pepsi has established customer preferences for their brands. It makes it almost impossible for a new firm to take significant or threatening market share from the Coke and Pepsis established brands. Bargaining Power of Suppliers: Since the components and the raw materials for soft drink manufacturing is widely available and can be purchased from many sources there is no real threat that suppliers can dictate prices or otherwise significantly affect competition within the industry. For example if such ingredient as sugar would become too expensive it might be possible to switch to corn syrup or other sweeteners. Bargaining Power of Buyers: The major channels for distributing soft drinks products can be divided into following main type of distributors: supermarkets, fountain sales, and vending machines. Depending on the type of distribution channel buyers can exercise different power in negotiating the price. Supermarkets are mostly consolidated in chains of stores or supermarkets and usually offer the most desirable shelf space, thus being able to negotiate prices in their favour. Fountain distributors have advantage in negotiating prices because of the volumes of their purchases. Although, it is the least profitable distribution channel, Coke and Pepsi use the channel and consider it as a Paid Sampling. Vending machines distribution channel has no power to negotiate a favourable price, thus posing no threat. Substitute Products There are many substitutes for Coke and Pepsi products, such as bottled water, beer, coffee, juices etc. At the same time producers of the substitute products cannot compete with the availability of the product, brand equity and massive advertising provided by Coke and Pepsi. Moreover, other soft drink producers companies offer substitutes for their own products in order to shield themselves from competition. Rivalry among established companies The market can be characterized by strong presence of two giants Pepsi and Coca Cola, which are the strongest in the industry and hold close to 80% of the market. At the same time Coca Cola holds two of the top-three soft drinks in the market and is achieving international growth. In addition, the industry has a very few competitors, thus any disruption of pricing or industry structure is unlikely. Although pricing wars waged in their international expansion strategies, Pepsi and Coke mainly competed on differentiation and advertising except for the period in the 1990s. This was the reason for absence of huge dent in profits. Summary The Porters 5 forces analysis illustrates that Coke and Pepsi might be able to continue maintaining profitability, even though the conjuncture of the market significantly changed. The reasons for that are: low threat of new entrants, moderate bargaining power of buyers, low bargaining power of suppliers, low threat of substitute products and low competitive rivalry.