Coca-Cola vs. Pepsi

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The carbonated soft drinks' (CSD's) sector is dominated by three major players: Coke is dominant company of the soft drink industry and boasts a global market share of around 44%, followed by PepsiCo at about 31%, and Cadbury Schweppes at 14.7% (Exhibit 3). Separately from these major players, smaller companies such as Cott Corporation and Royal Crown form the remaining market share. Coke and Pepsi are the main pieces of this market. They struggle for over a century to conquer the number one position in the market, competing fiercely in last few years, following each one's strategic decisions. Nevertheless, something seems to threaten the profitability of these two giants. The increasing share of non-carbonated soft drinks seems to be able to decrease the high margins that once ruled in the CSD's industry. In this sense, what will the future of Coke and Pepsi be? How will Concentrate Producers (CP's) and bottlers face this new challenge? In this assignment it's our intent to discuss the economics behind this situation. We will start by analysing the profitability within the soft drink industry; the differences between CP's and bottlers' profitability and, in the end we will explain the main consequences of competition between this two giants over the industries profitability. To conclude this work, we will also discuss the future of Pepsi and Coke regarding the non-carbonated soft drink industry.

The facts behind the soft drink industry profitability

In order to understand the levels of profitability in the soft drink industry we need to determine what main forces are affecting the industry's structure. These forces allow to determine the intensity of competition and hence the profitability and attractiveness of an industry.

The U.S. Carbonated Soft Drink Industry
The industry of CSD's is composed by concentrate producers (CP's), bottlers, retail channels and suppliers. Nevertheless, the main players in such industry regarding production and pricing are the first two. Both CP's and bottlers are profitable. While CP's are responsible for mixing raw materials, bottlers purchase the concentrate from CP's and add carbonated water and high fructose corn syrup, bottling or canning the CSD after. Therefore, both have an interdependent form of operating, sharing costs in procurement, production, marketing and distribution. In this case, the industry is similar to a vertically integrated one. In fact, bottlers are obliged to buy the concentrate from CP's if they want to produce. They also deal with similar suppliers and buyers. As shown in Exhibit 5, in 2000, a typical U.S. CP earned 35% pretax profits on their sales, while a typical bottler earned only 9% profits, which meant that the industry is able to generate positive economic profits.

Threat of Potential Entrants
Although there are only three major players in this industry (Coca –Cola Company, PepsiCo and Cadbury Schweppes), the easiness of entry and exit does not constitute any threat for them. Barriers to entry: It would be very difficult for a new company to enter this industry because they would not be able to compete with the established brand names, distribution channels, and high capital investment. Through their Direct Store Door (DSD) practices, these companies have close relationships with their retail channels and are able to defend their positions effectively through discounting or other tactics. So, although the CP's industry does not require a vastly investment, entering in the bottler sector would require substantial investment dissuading, therefore, the entry. The regulatory approval of intrabrand exclusive territories, via the Soft Drink Interbrand Competition Act of 1980, ratified these exclusive territories of distribution, making it impossible for new bottlers to get started in any region where an existing bottler operated. Barriers to Exit: Leaving this industry would be difficult due to the significant loss of money...
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