Cola Wars: Profitability of the soft-drink industry Essay Example
Cola Wars Case Study
Question: Why is the soft drink industry so profitable?
Historically, the soft drink industry has been extremely profitable. Long time industry leaders Coca-Cola and Pepsi-Cola largely drive the profits in the industry, relying on Porter’s five forces model to explain the attractiveness of the soft drink market. These forces allowed Coke and Pepsi to maintain large growth until 1999, and also explain the challenges that each company is currently facing. The relative duopoly that Coke and Pepsi share in the industry allows for higher profits, while also maintaining enough competition to promote firm improvement.
The first of Porter’s forces is the threat of new entrants. Coke and Pepsi have been largely successful because of many barriers to entry that limits the risk of entry by potential competitors. Coke and Pepsi both have strong brand loyalty, made possible by their long history and adherence to tradition. When Coke strayed from its Coca-Cola Classic formula, its customers demanded a return to the original recipe. Pepsi and Coke also share an absolute cost advantage over others in the industry. They developed superior production operations by buying up bottling companies and performing the service in-house. These companies also have large economies of scale, as they both operate internationally and together control 84% of the market worldwide. Additionally, government regulations have prevented competitors from mimicking Coke’s secret formula, as evidenced by their relentless defense of their brand in court. All of these factors have made it difficult for competitors to enter the soft drink industry.
The second of Porter’s forces is rivalry amongst established companies. The competitive structure of the industry has allowed Coke and Pepsi to sustain high profits. The industry is essentially an oligopoly, with Coke and Pepsi dominating the market. The firms are hurt by having similar products that are relatively
Question: Why is the soft drink industry so profitable?
Historically, the soft drink industry has been extremely profitable. Long time industry leaders Coca-Cola and Pepsi-Cola largely drive the profits in the industry, relying on Porter’s five forces model to explain the attractiveness of the soft drink market. These forces allowed Coke and Pepsi to maintain large growth until 1999, and also explain the challenges that each company is currently facing. The relative duopoly that Coke and Pepsi share in the industry allows for higher profits, while also maintaining enough competition to promote firm improvement.
The first of Porter’s forces is the threat of new entrants. Coke and Pepsi have been largely successful because of many barriers to entry that limits the risk of entry by potential competitors. Coke and Pepsi both have strong brand loyalty, made possible by their long history and adherence to tradition. When Coke strayed from its Coca-Cola Classic formula, its customers demanded a return to the original recipe. Pepsi and Coke also share an absolute cost advantage over others in the industry. They developed superior production operations by buying up bottling companies and performing the service in-house. These companies also have large economies of scale, as they both operate internationally and together control 84% of the market worldwide. Additionally, government regulations have prevented competitors from mimicking Coke’s secret formula, as evidenced by their relentless defense of their brand in court. All of these factors have made it difficult for competitors to enter the soft drink industry.
The second of Porter’s forces is rivalry amongst established companies. The competitive structure of the industry has allowed Coke and Pepsi to sustain high profits. The industry is essentially an oligopoly, with Coke and Pepsi dominating the market. The firms are hurt by having similar products that are relatively