Economics of Organizational Architecture and Strategy
Assignment week two: “Cola Wars Continue: Coke vs. Pepsi in the 1990s”
Professor: Orlando Rivero D.B.A.
April, 3, 2008
Cola Wars Continue: Coke vs. Pepsi in the 1990s
This paper will explore Porter's Five Forces ( Porte 6) and Branderburger and Nalebuff’s Value Net to answer this questionnaire and describe soft drinks industry characteristics. The soft drink industry is concentrated with the three major players, Coca-Cola, Pepsi, and Cadbury Schweppes Plc., making up 90 percent of the $52 billion dollar a year domestic soft drink market. This market is a mature one with annual growth of 4-5% causing intense rivalry among brands for market share and growth. 1. Why is the concentrate business or industry so profitable? Soft drinks concentrate producers gross margins were more than 60% and an average return on assets of 17% between 1990 and 2000. There are many reasons for that: even if a new concentrate plant big enough to provide all the USA would cost less than $50 million, it is almost impossible for new investors to get into the soft drink industry , basicly because the existence of high barriers as brand positioning, bottling and distribution structure and point of sale space. Concentrate producers and bottlers are profitable. These two parts of the industry are extremely interdependent, they share costs in procurement, production, marketing and distribution. The industry is already vertically integrated and both of them deal with similar suppliers and buyers. Entry into the industry would involve developing operations in either or both disciplines. The Porter’s five forces analysis reveals that the Soft Drinks industry is profitable, especially for Concentrate Producers (83% gross profit margin versus 35% for bottlers) the oligopoly structure of the industry, product and market diversification, demographic trends, and entry barriers are the main factors that explain this profitability: Rivalry
The industry is an oligopoly, given the intense rivalry between Coke and Pepsi, with a combined market share exceeding 75% in 1998. Degree of Concentration and Balance among Competitors: Three main competitors: Coca-Cola, Pepsi and Dr. Pepper/Cadbury in minor proportion control the Soft Drink industry. Their combined total sales revenues account for 90 percent of the entire domestic market. Industry Growth Rate:
Growth figures for the soft drink industry have been very steady since 1993, and are projected to continue to be so in the next years. Over the past ten years soft drinks have gained 5 percent of total beverage sales, putting them over the 25 percent share level for all beverage sales. Substitutes:
The threat of substitutes is reduced by the expansion of products portfolio: Soft drinks has many alternative beverages, such as bottled water, juice and tea, which became more popular. Coke and Pepsi responded, either by launching new non carbonated soft drinks, or by acquiring new brands. Relative price/performance relationship of Substitutes
Soft drinks are less expensive to the consumer than these substitute products. Buyer Propensity to Substitute
Buyer propensity to substitute is low due to the contractual relationships between the soft drink companies and the distributors. However, other beverages, from bottled water to teas, became more popular, especially in the 1980s and 1990s. Coke and Pepsi responded by expanding their offerings, through alliances (e.g. Coke and Nestea). SUPPLIERS
Suppliers have less bargaining power: The primary ingredients of soft drinks are sugar and packaging, which have many substitutes. For instance, sugar can be replaced by corn syrup or other sweeteners, and packaging can be processed using glass, plastic or metal cans. All these commodities exist in excess in the market and are provided by several suppliers Supplier concentration
Supplier concentration is low due to the fact...