Coke and Pepsi in the Twenty-First Century:
Threat of Entry:low
1. Economies of scale
- High production volume but merit not clear (1st paragraph on page 2) 2. Product differentiation
- Brand identification (high advertising expense, Exhibit 2) 3. Capital requirements
- CPs: little capital investment (1st paragraph on page 2)
- Bottlers: capital intensive (2nd paragraph on page 3)
4. Cost disadvantages independent of size - No
5. Access to distribution channels
- Food stores (35%): intense shelf space pressure (2nd paragraph on page 4) - Fountain (23%): CPs dominated first food chain (1st paragraph on page 5) 6. Government policy (N/A)
Threat to entry is low because Coca-Cola Company, PepsiCo, and Cadbury Schweppes control 90.1% of the market share; 44.1%, 31.4%, and 14.7% respectively. Although the growth rate of CSD consumptions have been steady at 3% a year, the capital requirement to enter the market is too great of an obstacle. In order to service the entire US, a firm would need $25-50 million to build a plant for concentrate producers, $6 billion ($75 million * 80 plants) to establish bottlers, cost associated to provide and maintain incentives to retailers, and the greatest cost to advertisements. Therefore, firms are deterred from entering the CSD market due to economies of scale couple with brand image that the firm must face. In order provide product differentiation, the entering firm would have to invest heavily to develop a brand image for CSD aside from the three market leaders.
Access to distribution channels is intense in CSD industry as bottlers are fighting for shelf spaces in grocery stores. In addition, PepsiCo is in the restaurant business of owning Taco Bell, Kentucky Fried Chicken, Pizza Hut by shutting down any opportunities for other CSD firms to sell fountain drinks in those restaurants. Other CSD firms like Coca-Cola has develop a relationship with remaining market leaders of restaurant for their fountain distribution (i.e., McDonalds and Burger King).
In addition, “Soft Drink Interbrand Competition Act” in 1980 preserves the rights of Concentrate Producers to grant exclusive territories. Therefore, it would be safe to assume that there are not many competitors in the market vying for a new territory since the existing Concentrate Producers would have driven off competition out of business through their rights of exclusive territories.
Cost disadvantages independent of size is high as development brand image will require high investments in advertisement and to develop a new differentiating acquired taste for CSD consumers.
Substitutes:low (Non-cola beverage?)
Substitutes of CSD’s include water, juice, milk, and different types of alcohol. However, leading CSD’s have branch out their products to water and juice to capture the market shares of CSD’s substitutes. Other leading substitutes to CSD’s are milk, coffee, and alcohol beverages. These substitutes are generally different complement beverages than the CSD’s. Coffee and alcohol beverages are geared towards adults only and milk is gear towards breakfast meal consumptions with cereal.
Complements to CSD’s are food. CSD firms have made relationships with retailers of food (i.e., grocery stores, gas stations). In addition, firms have made relationships with restaurants to complement their products with food. Since food is something that everyone consumes several times a day, CSD companies have a great opportunity to maximize their presence in different distribution methods.
1. large volume? Some buyers might buy in large volume but not found in the case 2. standard or undifferentiated? No
3. NA for this case
4. low profits?
- Food stores: No, average (5th paragraph on page 4)
- Fountains: extremely profitable, 80 cents out of one dollar (1st paragraph on page 5) 5. unimportant? No
6. does not save buyers’ money? (N/A)
7. credible threat? No
Buyer groups are not powerful...
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