The Coca Cola and Pepsi War
1. Why is the soft drink industry so profitable?
* The soft drink industry remains profitable because of the market share based on Porters Five Forces.
* Coke has protected its recipe for over a hundred years as a trade secret, and has gone to great lengths to prevent others from learning its cola formula. The company even left a billion-person market (India) to avoid revealing this information. As a result of extended histories and successful advertising efforts, Coke and Pepsi are respected household names, giving their products an aura of value that cannot be easily replicated. Also hard to replicate are Coke and Pepsi’s sophisticated strategic and operational management practices, another source of added value.
2. Compare the economics of the concentrates business to the bottling business and why is the profitability so different?
* The CPs negotiate on behalf of their suppliers, and they are ultimately dependent on the same customers.
* Many of their functions overlap; for instance, CPs do some bottling, and bottlers conduct many promotional activities.
* The fundamental difference between CPs and bottlers is added value. The biggest source of added value for CPs is their proprietary, branded products.
* In 1993, CPs earned 29% pretax profits on their sales, while bottlers earned 9% profits on their sales, for a total industry profitability of 14%
* Overall, because of the CPs efforts in diversification, however, substitutes became less of a threat.
3. How has the competition between Pepsi and coca cola affected the industry profits?
* Revenues are extremely concentrated in this industry, with Coke and Pepsi, together with their associated bottlers, commanding 73% of the case market in 1994. Adding in the next tier of soft drink companies, the top six controlled 89% of the market.
* Price wars resulted in weak brand loyalty and eroded margins for both companies...
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