The soft drink industry is very competitive for all companies involved. Recently the competition between established firms has only increased with the market nearing its saturation point. All companies in the industry, especially those thinking about entering, have to think about: rivalry among establish firms, risk of entry by potential competitors, substitute products, suppliers, and buyers.
When talking about market share, PepsiCo and Coca-Cola have the lions share. They have dominated the industry over the past 40 years with Coca-Cola leading in the category in 2004. With little resistance from Cadbury Schweppes, the distant third largest company in the industry, the two companies’ main focus was to increase market demand by outdoing each other in promotions, advertisements, and corporate acquisitions. Rivalry and power struggle have defined the existence of PepsiCo and Coca-Cola, looking for a competitive advantage to gain an edge on the competition. This rivalry has been to the benefit to the companies, the industry, and its consumers as a whole. Both have learned to not only stay afloat, but flourish in an industry that has constantly grown since Coca-Cola began advertising in 1891. They did this by increasing the demand in their products, and gaining brand loyalty by their consumers. In some instances, they were selling cases of Dasani (Coca-Cola) and Aquafina (PepsiCo) for less than the cost of bottling it.
The risk of entry by potential competitors isn’t a strong competitive pressure in the industry. PepsiCo and Coca-Cola dominate the industry with their brand name and distribution channels, which makes it difficult for new entrants to compete with these existing firms. High fixed costs of production facilities, logistics, and economies of scale also deter entry. It’s difficult for a new firm with a small production capacity, and a high cost structure to compete when, as soon as their product is introduced to the market, the two leading firms drop prices below your cost structure. Pepsi and Coke’s economies of scale allows them to do this since it costs so much less for them to produce their products than it would a new company.
Substitute products come from competitors outside of the soft drink industry. These include: coffee, sports drinks, bottled water, tea, and juices. This is an increasingly growing force since consumers are becoming more health conscious in society. Most people are thinking about what carbonated soft drinks do to their bodies and replace them with sports drinks which appear to be healthier. These drinks also allow for a larger variety of flavors the appeal to different consumers. Coffee and tea may also be substitutes for the consumer who drinks soda for the caffeine they contain. Consumers can switch to coffee to decrease the amount of sugar and carbonation. These also come in a larger variety of flavors provided companies, such as Starbucks, that have become extremely popular over the past 20 years. These substitutes are a large and powerful force in the industry, especially since the switching costs (the cost to switch from one product to the next) are essentially zero. In the beginning of 1990 Roberto Goizueta developed the following mission statement: “To create consumer products, services and communications, customer service and bottling system strategies, processes and tools in order to create competitive advantage and deliver superior value to: * Consumers as a superior beverage experience
* Consumers as an opportunity to grow profits through the use of finished drinks * Bottlers as an opportunity to grow profits in volumes
* Bottlers as a trademark enhancement and positive economic value added * Suppliers as an opportunity to make reasonable profits when creating real value-added in an environment of system-wide team work, flexible business system and continuous improvement * Indian society in the form of a...
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