Cola Wars Continue: Coke and Pepsi in 2010
A case discussion note
January 17, 2012
1. Historically, why has the soft drink industry been so profitable?
Historically, the soft carbonated soft drink (CSD) industry has been valued at $74 billion in the United States. In order to understand the reasons why the industry has been hugely profitable despite the ‘Cola Wars’, an examination of the CSD industry with Porter’s five forces analysis will be conducted. As market leaders, the analysis will be centred on both Coke and Pepsi (hereafter “C&P”).
Threat of new competition: Barriers to entry in the CSD industry are extremely high and there are various factors to support this. Firstly, both C&P spend gargantuan amounts of funding of …show more content…
Intensity of competitive rivalry: Even though C&P are essentially a duopoly in the CSD industry, competition between the two have traditionally centred on marketing efforts like advertising, new products, and promotions rather than pricing. Their rivalry, historically, was also in a market with consistent growth. As such, profits were not adversely affected even though their rivalry was highly documented and publicised.
Threat of substitutes: There are a number of alternative substitutes for soft drinks and these include beer, bottled water, tap water, juices, tea, coffee, wine, powdered drinks, milk, and distilled spirits. Yet, according to Exhibit 1, Americans, historically, consistently drank more CSDs than any other beverage. As such, the threat of substitutes affecting C&P’s profitability was limited. To further nullify the effects of substitutes, they also produced and promoted their own range of substitutes to reduce potential losses. 2. Compare the economics of the concentrate business with that of the bottling business. Why is the profitability so different?
Using data from Exhibit 4, we are able to see that the operating income of a concentrate producer is 32% of its net sales while that of a bottler is only 8%. The reason the bottling business earns significantly lesser than its concentrate counterpart can be attributed to two main factors – significantly higher cost of goods sold