Cola Wars Continue: Coke and Pepsi in 2006
CSD Industry Overview
Coke and Pepsi, the two main players in the duopoly market, have benefited from average growth of 3% since 1970 in the CSD market. There are many substitutes to CSD’s such as; milk, coffee, bottled water, beer, juices, tea, wine, sports drinks, and tap water yet American’s drank more soda than any other beverage. Coke and Pepsi competed fiercely for market share and this competition built brand recognition for both companies. Continuous improvements are always being made to the production and distribution networks of CSD’s, which consist of four major participants: concentrate producers, bottlers, retail channels, and suppliers. Coke and Pepsi achieved average annual revenue growth around 10% from 1975 through the mid- 1990’s. The combination of a consistently growing market, fierce head to head competition, brand recognition, and efficient production and distribution networks made the CSD industry extremely profitable. Economics of Concentrate Business versus the Bottling Business The segments will be compared using Porter’s Five Forces.
Rivalry: In 2004 Coke and Pepsi claimed 74.8% of the U.S. CSD market sales volume. This rivalry has experienced price wars at time’s which have always eroded profits but overall has been focused on brand loyalty, brand recognition, and effective distribution networks. The concentrate producers and bottlers have shared the profitability albeit at significantly different margins. According to Exhibit 4 in the case, pretax profit for concentrate producers is 30% while it is 9% for bottlers. Because the concentrate producers own the brands and trademarks they provide a value add that bottlers cannot. This difference creates interdependences between the two segments and reduces rivalry. Barriers to Entry: The biggest obstacle to entering the CSD market is not the capital requirements but the strong market presence of Coke and Pepsi. They have been...
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