Structure and Evolution of the CSD Industry

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1. Briefly describe the basic structure of the CSD industry and how it has evolved. The CSD industry is very much concentrated. According to Exhibit 2 of the case, the market concentration of the two firms was over 75% in 2000 (44% for Coca Cola and 31% for Pepsi) and almost 72% in 2009 (almost 42% for Coca Cola and almost 30% for Pepsi). The barriers to enter the CSD market are very high mainly because of the economies of scale enjoyed by Pepsi and Coca Cola. These two firms produce a very large portion of the total output of the market and they reach their MES (minimum efficient scale) when they cover for over 70% of the market. Another important barrier to enter this industry is the well-known reputations that Coca Cola and Pepsi have. It would take many years and many millions of dollars invested for somebody else to be able to build such reputation in the CSD industry. On May of 1886, pharmacist Dr. John Pemberton had created a drinkable medicinal formula which he termed "Coca-Cola". Pemberton's original Coca-Cola recipe called for coca leaves and kola nuts. After mixing his concoction with sparkling mineral water, Pemberton began to market the beverage as a fountain drink, and as an alternative to beer and ginger ale. In the next year pharmacist Dr. Asa Candler, bought the formula from Dr. Pemberton. Due to his penchant for aggressive marketing and advertising, Dr. Candler's Coca-Cola business became quite successful, and Coca-Cola became one of America's most popular fountain drinks. After 1905, coca leaves were no longer used as one of the main ingredients in Coca-Cola. In time, fructose syrup replaced the crystal sugar used in the soda, allowing for cheaper and faster manufacture of the syrup. The bottling industry also allowed for a wider distribution of the soda, further increasing its sales and its popularity. During 1960’s Coke launched Fanta, Sprite and Tab. Today, Coca-Cola products are consumed at a rate of more than one billion drinks per day globally [1]. In 1893, another pharmacist, Dr. Caleb Bradham, also concocted a tonic drink. This drink was carbonated and contained sugar, vanilla, rare oils, pepsin, and cola nuts. Dr. Bradham sold his drink at his pharmacy's soda fountain, much like Dr. Pemberton did with his Coca-Cola. By 1898, "Brad's drink" had been renamed to Pepsi Cola. After successfully marketing the product and even issuing shares of stock for the Pepsi Cola Company, Caleb lost the company through bankruptcy in 1923. Pepsi-Cola's luck finally changed in 1940, through the success of an advertising jingle called "Nickel Nickel". In 1964, diet Pepsi Cola was introduced, further increasing sales for the company. In 1965, Pepsi-Cola changed its official corporate name to PepsiCo and acquired the product line Mountain Dew and Lipton's Iced Tea, as well as Frito Lay's. It also negotiated business deals with companies like Taco Bell, Kentucky Fried Chicken, and Pizza Hut. Today, PepsiCo sales total over $29 billion employs more than 150,000 people speaking over 40 languages around the world. [2] The basic structure of the CSD industry was built around competitors Coke and Pepsi. During their CSDs inception there wasn’t any competition for alternative beverages other then one another. The materials, production, and suppliers were easy, accessible and demanding of both products. They were perfectly competitive which drove profits towards advertising to hike sales. -

SWOT ANALYSIS

Strengths
Large scale of operations

Weaknesses
Negative publicity in regard of health issues

Opportunities
Acquisitions and intense competition

Threats
Dependence in bottling partners

2. How would you characterize the CSD market? Is it hyper competitive, monopoly, monopolistic competition or oligopoly? Describe how the market characteristics apply in terms of specific examples.

The CSD market is an oligopoly. In such market, Pepsi tends to react quickly to any move made by Coca Cola and viceverza....
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