"Cola Wars Continue: Coke and Pepsi in the 21st Century” explains the economics of the soft drink industry and its relation with profits, taking into account all stages of the value chain of the soft drink industry. By focusing on the war between Coca-Cola and PepsiCo as market leaders in this industry – with a 90% market share in carbonated beverages – the study analyses the different stages of the value chain (concentrate producers, bottlers, retail channels, suppliers) and the impact of the modern times and globalisation on competition and interaction in the industry.
Throughout this analysis, I will assess how the strategic interaction between the two players allowed the creation of a “healthy" competition, where both companies need each other in order to remain competitive. Afterwards, I will go on to analyse the way that pricing and output decisions have affected the industry’s profits. Finally, I will discuss how Coca-Cola and PepsiCo could sustain their leadership in a market increasingly dominated by non-carbonated drinks.
WHY IS THE SOFT DRINK INDUSTRY SO PROFITABLE?
The soft drink industry refers to all drinks which do not contain alcohol. However, the original definition referred to carbonated and non-carbonated drinks made from concentrate. In this case discussion, I will take into consideration the US market, where the three major players – PepsiCo, Coca-Cola and Cadbury Schweppes – represent 90% of the market, with PepsiCo and Coca-Cola holding the largest share.
In the soft drink industry, the distribution and production value chain includes producers, bottlers, retail channels and suppliers. Therefore, we can assume that the producers of concentrate (CPs) and the bottlers are interdependent: without each other, the product could not be marketable. As well as this, the entry in the market would imply the development of both CPs and bottlers as much of their operations tend to be related. Therefore, we can say that both the operations of the CPs and the bottlers are vertically-integrated, most of the time, and consequently, we can assume that the soft drink industry includes both these stages of the value chain – concentrate producers and bottlers.
As far as profitability is concerned, it is important to note that the market faced an increasing demand (Exhibit 1), since sales in all segments of soft drinks increased in 2004-2008. Also, the high consumption of these drinks is widely spread: in the US, the sector retained 27% of all beverage consumption in 2011 (Exhibit 2). As well as this, the soft drink industry has been growing intensively, due to the increase in the segment of non-carbonated drinks, and market structure also has an impact on the profitability of the industry. Since there are two major companies in the industry, in the US, followed by a few medium-sized companies and other smaller companies, there are only a few sellers in this market that will have an impact on the price level and total output.
To understand the profitability of the industry, I used the Porter Framework, where I identified the forces close to the firms affecting their ability to serve customers and make a profit: threat of substitute products, threat of new entrants, bargaining power of suppliers, bargaining power of buyers, and competition from internal rivals.
Threat of substitute products
In this market, demand is fairly fixed, so the availability of substitute products is low. Non-soft drinks do not satisfy the same needs as soft drinks, because the consumption of soft drinks relates to a specific time and situation, which makes it hard for it to be easily replaced by other beverages. However, in the US market, carbonated and non-carbonated soft drinks have long been seen as being almost the same, which means that non-carbonated drinks could actually be seen as a substitute for carbonated soft drinks. Also, the CPs' effort towards...