Cola Wars - the Carbonated Soft Drink Industry Porter Five Analysis
The Carbonated Soft Drink (CSD) industry is a profitable one despite the “Cola Wars” between the two largest players – Coke and Pepsi. Such profitability can be understood by analyzing the CSD’s industry structure in terms of “Porter’s five forces.”
Threat of New Entry The existing players in the soft drink industry have much advantage relative to new entrants. First, supply-side economy discourages new entrants by forcing them to enter the market in large scale. CSD’s demand side benefits of scale also makes it difficult for new entrants to be accepted by the public. In 2002, a survey found that 37% of respondents chose a CSD because it is their favorite brand, while only 10% said so about bottled water. This demonstrates CSD customers’ high brand loyalty and their lack of desire to buy from new entrants. In terms of capital requirement, concentrate manufacturers only requires $25~$50 million to set up a plant that can serve the entire United States of America. Yet, new entrants may have difficulties competing with major players’ well-established brands and their large scale unrecoverable (therefore, hard to finance) spending on advertising. There is also unequal access to bottlers and retail channels for newcomers. Most bottlers are in long-term contracts with major CSD brands; also, the largest distribution channel, supermarkets, consider CSD a “big traffic draw”, thus provide little to no shelf space for newcomers. In addition, strong fear of retaliation from major players also makes newcomers hesitate to enter.
Bargaining Power of Suppliers Required inputs for CSD are mostly raw materials such as caramel coloring, phosphoric or citric acid, natural flavors, caffeine, and fructose. Almost all suppliers of the CSD industry provide undifferentiated commodities and thus have little bargaining power and almost no strength to integrate forward.
Bargaining Power of Buyers End consumers and retail channels can both be considered as buyers in
Threat of New Entry The existing players in the soft drink industry have much advantage relative to new entrants. First, supply-side economy discourages new entrants by forcing them to enter the market in large scale. CSD’s demand side benefits of scale also makes it difficult for new entrants to be accepted by the public. In 2002, a survey found that 37% of respondents chose a CSD because it is their favorite brand, while only 10% said so about bottled water. This demonstrates CSD customers’ high brand loyalty and their lack of desire to buy from new entrants. In terms of capital requirement, concentrate manufacturers only requires $25~$50 million to set up a plant that can serve the entire United States of America. Yet, new entrants may have difficulties competing with major players’ well-established brands and their large scale unrecoverable (therefore, hard to finance) spending on advertising. There is also unequal access to bottlers and retail channels for newcomers. Most bottlers are in long-term contracts with major CSD brands; also, the largest distribution channel, supermarkets, consider CSD a “big traffic draw”, thus provide little to no shelf space for newcomers. In addition, strong fear of retaliation from major players also makes newcomers hesitate to enter.
Bargaining Power of Suppliers Required inputs for CSD are mostly raw materials such as caramel coloring, phosphoric or citric acid, natural flavors, caffeine, and fructose. Almost all suppliers of the CSD industry provide undifferentiated commodities and thus have little bargaining power and almost no strength to integrate forward.
Bargaining Power of Buyers End consumers and retail channels can both be considered as buyers in