Industry Analysis Csd

Topics: Coca-Cola, Luxury good, Pepsi Pages: 9 (2342 words) Published: October 16, 2006
Mohan Shiv
Section #1
Boston College
Carroll School of Management

MM 720 Management Practice I


Case: Cola wars Continue: Coke and Pepsi in the 21st Century


Description of the Industry
The industry of Carbonated Soft Drinks (CSD) is highly concentrated. The three major companies, Coca Cola, PepsiCo, and Cadbury Schweppes accounted in 1998 for more than 90% of market share by case volume –Exhibit 1-. Generally, there are 4 participants in the market, involved in the process of production and distribution, namely, concentrate producers, bottlers, retail channels, and suppliers. Porter's 5 forces analysis reveals the following characteristics of the CSD industry: 1-A fierce competition exists among very few players: The industry is an oligopoly, or even a duopoly, given the intense rivalry between Coke and Pepsi, with a combined market share exceeding ¾ in 1998 (44.5% and 31.4%, respectively). 2-The threat of substitutes is reduced by the expansion of products portfolio: CSD have many alternative beverages, such as bottled water, juice and tea, which became more popular. Coke and Pepsi responded, either by launching new non carbonated soft drinks, or by acquiring new brands. 3-Suppliers have less bargaining power: The primary ingredients of CSD are sugar and packaging, which have many substitutes. For instance, sugar can be replaced by corn syrup or other sweeteners, and packaging can be processed using glass, plastic or metal cans. All these commodities exist in excess in the market and are provided by several suppliers. Coke and Pepsi negotiated, on behalf of their bottlers, contracts with suppliers and maintained lasting relationships with them. 4-Different levels of bargaining power exist among the groups of buyers: The retail channels basically include food stores, convenience stores, fountain outlets, and vending. Exhibit 2 shows that vending is the most profitable distribution channels for the CSD industry, with a net operating profit per case of 0.97$ in 2000. Concentrate Producers can sell their products directly to consumers via vending machines where there is no buyer bargaining power. On the other hand, fountain outlets is the least profitable retail channel, with a net operating profit per case of 0.09$. Fast food chains have more power to negotiate the price, as they sell products of only one single manufacturer. Despite its low profitability, this channel appeals to Concentrate Producers because it is important in promoting brand recognition and customer loyalty. 5-Strong barriers to new entrants in the CSD industry: It is very difficult to a new Concentrate Producer to enter the market. Coke and Pepsi are the first movers in the industry and have more than 100 years of existence in the market. They have both kept their formula as a trade secret and built a strong brand image. It is also difficult for a new bottler to enter the CSD industry, given (i) the amount of capital investment required, (ii) the interdependence that exists between concentrate producers and bottlers, (iii) the exclusivity of territories in which bottlers distribute products, and (iv) the access to retail channels, with which Coke and Pepsi sustained favorable and long term relationships. The Porter's five forces analysis reveals that the CSD industry is profitable, especially for Concentrate Producers (83% gross profit margin versus 35% for bottlers) -See Exhibit 3- The oligopoly structure of the industry, product and market diversification, demographic trends, and entry barriers are the main factors that explain this profitability. Assessment of the Rivalry Intensity

The rivalry in the CSD is very intense, especially between Coke and Pepsi, and Cadbury Schweppes to a lesser extent. This fierce competition often creates a pressure on the product price, which can affect profitability, and a substantial...
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