Cola Wars

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BUAD497 Strategic Management Fall 2011 Session 3:
Cola Wars Continue: Coke and Pepsi in 2010
Sun Hyun Park, Ph.D. Assistant Professor Marshall School of Business University of Southern California

“Cola Wars”

Blind Test “Can you tell the difference?”

Student A 1: Coca Cola

Student B 1: Big K Cola (Kroger) 2: Pepsi 3: Coca Cola

Student C 1: Pepsi

2: Pepsi 3: Big K Cola (Kroger)

2: Coca Cola 3: Big K Cola (Kroger)

Agenda for Today
• Recap - Value chain analysis - Five Forces Model • Case Discussion: Cola Wars - Industry profitability analysis using five forces model - Rivalry of CPs: Who is winning the cola war? - Can the war continue?

Industry Profitability: 1975-1995
Industry Pharmaceuticals Printing & Publishing Food & Kindred products Chemicals & allied products Petroleum & Coal products Instruments & related products Industrial chemicals Paper & allied products Aircraft, guided missiles ROA 11.8 7.1 6.6 7.5 6.5 7.2 6.2 6.0 4.1 Industry Fabricated metal Motor vehicles, equipment Rubber & Plastic products Electric & electronic equipment Machinery, except electrical Stone, clay & glass products Textile mills products Nonferrous metals Iron & Steel ROA 5.7 5.6 5.1 5.4 5.8 4.8 4.3 3.9 1.5

Profit Margin Structure Across the Value Chain
Oil Suppliers Gas Stations
End Customers

Big Oil Companies
(Chevron, Exxon Mobil, Shell)

Gas Retailers
Independent gas retailers (Sheetz) Big oil company’s outlets (Shell) Big box discounters (Costco)

You and Me

* souce: http://energyalmanac.ca.gov/gasoline/margins/index.php

Attractiveness of the Gas Station Business
Oil Suppliers Gas Stations
End Customers

Big Oil Companies
(Chevron, Exxon Mobil, Shell)

Gas Retailers
Independent gas retailers (Sheetz) Big oil company’s outlets (Shell) Big box discounters (Costco)

You and Me

• •



Few suppliers Distinctive Products (no chance of substitution) Threat of forward integration

• •

No power over suppliers / customers Unattractive Industry

(Almost) No product differentiation “Super” price sensitive (no brand loyalty)

Attractiveness of an Industry – Five Forces Model (1/2)
Threat of Entry Competition & Rivalry

Supplier Power

Intra-industry Rivalry

Buyer Power

Power & Dependence

Threat of Substitutes

Attractiveness of an Industry – Five Forces Model (2/2)
Nature of Competition
- Number and relative size of competitors - Industry growth - Product differentiation - Size of capacity additions

Barriers to Entry

Threat of Entry

- Economies of Scale - Product Differentiation - Cost advantages independent of scale - Government regulation

Supplier Power

Intra-industry Rivalry

Buyer Power

- Number of suppliers - Distinctiveness of suppliers’ products - Threat of forward integration

Threat of Substitutes

- Number of buyers - Differentiation in products sold to buyers - Fraction of buyer cost contributed by pdt. - Threat of backward integration by buyers

- Closeness (from consumers’ perspective) between substitutes and industry’s product/service - Cross price elasticity of demand

Value Chain of the Cola Industry : Different Players Along the Chain Inputs Concentrate Producers Bottlers Retail Channels

Ingredients suppliers - e.g. sugar

- Coca-Cola Co. - PepsiCo Inc. - Dr. Pepper Snapple Group - Cadbury..

- CP Owned (CCE / PBG) - Independent Bottlers - Private Label Bottlers

- Super Market - Convenience Retail - “Club stores” (CostCo, WalMart) - “Fountain” (McDonald, Pizza Hut..)

Packaging
(Can, Plastic)

Sweeteners

- Independent suppliers

Profitability Across Value Chain: Return on Sales

Operating Profit for CP vs. Bottlers

Main Revenue / Cost Drivers

Profitability of Soft Drink Industry – Two Puzzles
1. How can companies that sell “colored, sugar water” be so profitable for so long? 2. Why are most of the profits in this industry earned in the concentrate business as opposed to the...
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