Pepsi and Coke’s Uncivil Wars
Chapter 9 in Competition Demystified: Uncivil Cola Wars: Coke and Pepsi Confront the Prisoner’s Dilemma What are the sources of competitive advantages in the soda industry? First we should look at industry structure. The cola companies buy raw materials of sugar, sweeteners and flavorings from many suppliers then they turn the commodities into a branded product which consists of syrup/concentrated combined with water and bottles. The companies are joined at the hip with their bottlers/distributors who then sell to many retail outlets. Selling bulky and heavy beverages lends itself to regional economies of scale advantages. The soda companies cannot operate successfully unless their bottlers and distributors are profitable and content whether company-owned or franchised. The existence of barriers to entry indicates that the incumbents enjoy competitive advantages that potential entrants cannot match. In the soft drink world, the sources of these advantages are easy to identify. First, on the demand side, there is the kind of customer loyalty that network executives, beer brewers and car manufacturers only dream about. People who drink sodas drink them frequently (habit formation), and they relish a constancy of experience that keeps them ordering the same brand, no matter the circumstances. Both Coke and Pepsi exhibit the presence of barriers to entry and competitive advantage—stable *ROE can be influenced by whether bottlers’ assets are off or on the balance sheet Second, there are large economies of scale in the soda business both at the concentrate maker and bottler levels. Developing new products and advertising existing ones are fixed costs, unrelated to the number of cases sold. Equally important, the distribution of soda to the consumer benefits from regional scale economies. The more customers there are in a given region, the more economical the distribution. A bottler of Coke, selling the product to 40% to 50% of the soda...
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