Cola Wars: Porters 5 Forces

Topics: Soft drink, Coca-Cola, Pepsi Pages: 5 (1842 words) Published: March 27, 2013
Michael Porter developed five different forces in a framework he felt influenced industries. This framework was designed to help companies find ways to off-set a rival company and to help develop a more solid business plan. It has been known over the years a rivalry has existed been two of the biggest soda companies, Coca Cola and Pepsi. Three of Porter’s forces that are exemplified in this “coke war” are buyer power, barriers to entry, and rivalry which will be explained and elaborated on in the following essay.

Buyer Power
The retailers have a low to moderate buyer power over the consumer soft drink industry, due to the producer’s ability to forward integrate, the sheer number of buyers, and the buyer’s ability to forward integrate. Buyer power is the degree of influence customers have on the producing agent. Soft drink companies such as Coca Cola and Pepsi have used forward integration to take over their channels of distribution. They created contracts that gave them the ability to set concentrate prices for their bottlers; in turn bottlers would respond to price fulgurations by adjusting retail pricing. In 2000, when Coca Cola raised concentrate prices by 7.6%, bottlers raised the retail prices by 6 to 7%. This demonstrates that buyers have limited control over the price changes. Coca Cola has also made great efforts to take over the bottling of their product, by establishing the independent subsidiary Coca Cola Enterprises. They began by acquiring bottlers to produce one third of their volume during 1986 which increased to 80% in 2004. This gave Coca Cola more control over retail pricing, and distribution of their products to retail stores. Since there are so many retail stores that carry products that consumer soft drink, CSD, companies make, it is hard for buyers to create a collaborative effort to resist price increases.

Buyer power also suffers if retailers are fragmented and are not concentrated to a single type. Almost any type of store will carry a CSD product, which makes sales very spread out across the board. The different kinds of intermediaries involved in retail sales are Fountain and Vending machines, Super-markets, Convenience and Gas, Super Centers, Mass Retailers, and Club and Drug Stores. To put things in perspective 34 % of sales comes from Fountain and Vending, while 31% are from supermarkets. Fountain and Vending machines are mostly controlled by the CSD bottlers. Even though supermarkets may sell the second largest volume, CSD companies make up 5.5% of their sales and also bring customers to their door. Not enough to convince you? Consider this: CSD companies such as Coca Cola produce a wide variety of products ranging from sports drinks to water, all the way to energy drinks. Coca Cola most likely will not sell a product to a supermarket unless they carry their full line of products. If the retail prices increase on the Coca Cola product they may have little control over resistance, because they rely on the other products they provide. Lastly, Coca Cola is considered the most valuable brand in the world, with 10 major successful brands and substantial power in the realm of business.

Although Coca Cola may have a significant amount of power over their buyers, companies with much smaller market share, and product lines are taken advantage of by larger retailers. For example, mass merchandisers make up 14% of Pepsi’s total revenue, making that intermediary crucial to the company’s profitability. In some cases retailers do have power to resist price increases because they purchase a large number of outputs. Typically there are far more buyers than concentrate producers, which can give them leverage over smaller brands that rely on the sales they generate.

Barriers to Entry
When entering a market there are certain barriers that prevent a firm from becoming established, or gaining market share. In the consumer soft drink industry there are high capital requirements, unequal...
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