Cola Wars Continue: Coke and Pepsi in 2010 Essay

Read and Apply Michael E. Porter (2008), The Five Competitive Forces that Shape Strategy, Harvard Business Review, (January 2008), pp. 2-17 denomination Questions (AQ)(a) Why has the soft drink diligence been so meshingable for squeeze producers? Comp atomic number 18 the economics of the concentrate business to the bottling business why is the lucrativeness so different? 50% pointsThe soft drink sedulousness has been extremely profitable for Concentrate producers. When we study the 5 casts analysis, we come to a conclusion that well-nigh both the forces imbibe contributed fundamentally in this commodious profit generating mechanism. Threat of unsanded entrants is low and there are ten-fold exalted barriers to entry. Despite the low cost of establishing a concentrate production plant, the producers turn out to develop scoopful relations with bottling plants and support them in grocery storeing research, advert and setting up distribution channels which is nasty f or advanced entrants and require huge capital infusion.Bar pulling power of Buyers used to be negligible as concentrate producers used to make bottlers abide by fixed price contracts which made them operate on razor thin margins. After adoption of incidence determine, the bottling plants renegotiated for different distribution channels and different product eye sockets as the dicker power deracinationed and the prices were incr liberalizationd constituted on consumer price index and inflation. But this bar stimulateing power was kept in check since concentrate producers did non allow a bottling plant to draw in prodigious commercialize influence and they regularly bought out bottling plants to maintain their control.(Exhibit 3b) Bargaining power of suppliers was minuscule since all products are basic commodities resembling sweetener, caffeine and color with multiple suppliers who do not hold some(prenominal) bargaining power with a large corporation.Threat of substitute p roduct is suppose to be amply since there are a variety of substitutes available which meet the end purpose of quenching the proclivity and consumer being open to healthy or low calorie substitutes a care tea, juice or heartiness drink. But the conventional concentrate producer has diversified its product portfolio to meet all demands and keep its consumer base loyal. overly strengthening distribution networks and creating advertisement campaign has led to consumer retention.(Exhibit 8) Competition is high since major brands competing are Coca cola and pepsi who manage at every level, from product range and bottling plants to retailer selection and advertisement. both(prenominal) concentrate producers are have deep pockets to execute swift decisions and they have adopted similar strategies to gain market share and consolidate.They have a staggering market presence controlling nearly 3/4th of the market and they have surgically acquired or contained all other competitors.(Exhi bit 2) By the 5 force analysis, it is visible that the immense market experience and availability of funds had led concentrate producers to use almost all the forces in their advantage to maintain high profitability.In contrast to the concentrate producer, the bottling plants operate on one-third of the profit margin percent, this gouge be explained by the contrasts in the economics using the 5 force analysis for bottling plants. Threat of new entrants was traditionally low since high capital requirement acts as as high barrier of entry but the threat from the concentrate producer entity emerging as a bottler is high ever since they have started vertical integrations by providing concentration at lower place for make better margins to self- possess entities.Bargaining power of buyers is high since bottling plants have no unique value proposition and they compete with identical competitors for a vastly segmented market. They conduct extensive negotiations with different channels o n stock, pricing and space. They develop complex price strategies for maintaining pocket contracts with nation wide restaurant chains. They have to bid for high presence among mass merchandisers and retail stores. They too have to provide low-margin fountains and vending machines services to sustain market presence. Threat of substitute is low among bottling plants since they have invested a huge capital on set-up, operational power and R&D.They have a established ground of operations which cannot be easily substituted and they enjoy massive support from concentrate producers in supplier contracts, marketing research and advertisements Bargaining power of suppliers is average where commodities like packaging material and saccharide can be obtained easily while concentrate producers control prices collectable to high dependency on them.But due to the reciprocity nature of dependency, concentrate producers extend advertising support, marketing surveys and strategic integration to loyal bottling plants to focus on volume and carry a wider range of products. The variation of business economics where bottling plants face price constraints, negotiations with every supplier at an individual level, cut-throat competition, high operating costs and an increasing threat of being acquired by the concentrate producer hits the profitability of the bottlers and gives a huge edge to the concentrate producers.(b) How would you characterize the nature of the competition between snowfall and Pepsi and how has it impacted the scratch of the US carbonated soft drinks (CSD) industry as a whole? 20% pointsCoca-cola had maintained high profitability acting as a monopoly since its inception since it did not face any competition. When Pepsi entered the market as a prominent player, it struggled to gather market traction but after the Blind taste test it became a real competitor. The nature of competition has been fierce ranging from better positioning at a single store, to pass ing game beyond international borders. Although both the companies have adopted similar strategies, the timing and focus has led to significant success and more than significant failures. Some major initiatives by Coca-Cola were developing infra social system in European countries and Asia which paid heavy returns.It was also a pioneer in introducing new flavors and brands(Exhibit 2) which sharply increased its market share and vertical integration by acquiring bottling plants for better margins(Exhibit 3a) which resulted in stellar financial performances. Pepsi on the other hand gained significant domestic US market when Coca-cola focussed internationally, it was first to get exclusive contracts with restaurant chains and introduce bigger family-size bottles. It also led diversification by transforming into a drinkable and food giant by acquiring Frito-Lay, Gatorade and Lipton. Pepsi Bottling Group optimized its operations and maintains a high % profit/ gross sales over CCE till date(Exhibit 3b).Both companies have also made big mistakes like Coca-cola introducing New reverse and Pepsi giving first-movers advantage to Coke in international markets. Also engaging in a tartness price wars saw their balance sheets in red(Exhibit 5). But they have also worked excellently in rectifying their mistakes like Coke diversifying by acquiring Minute-Maid and Vitamin water drinks. Since over half of Pepsis sales were domestic and Coke already had a lead in the International market, Pepsi focussed on markets still up-for-grabs like China, India, Africa and Middle-east. It has since gained significant market share in emerging economies after learning its lesson.Recently, both the companies have undergone significant media bashing with environmental concerns of the PET bottle, health and obesity uproars and sugary content in CSDs, so they have realized the shift in market focus to non-CSDs and diet soft drinks(Exhibit 7). New strategies include more focus on these drink s and both companies are looking to leverage their existing market domination to gain a better market shares and higher profits since margins on these drinks are much higher than CSDs.(c) Compare and contrast the structure and profitability of the emerging non-CSD industry with the key aspects of the traditional CSD industry structure that you covered in disassemble (a). Can Coke and Pepsi repeat their success they had with CSDs in the non-CSDs industry, or pass on a new militant landscape & dynamic emerge? 30% pointsIn late 1990s the soft-drink industry showed signs of permanent shift as the demand for carbonated soft drinks began to fizzle out(Exhibit 7) due to the rising health concern with obesity, high sugar content and perceived risks of high-fructose corn syrup. Diet sodas had already caught a lot of attention and they were quickly regenerate conventional sodas, Coke and Pepsi broadened their product range by offering more Diet and herbal drinks. Pepsi was more aggressive in this transformation by acquiring Gatorade and Lipton which outsold Coke products in these categories, Coke followed suit by acquiring EnergyBrands, its largest acquisition ever, but Pepsi maintained a commanding lead in non-carb segment.Both companies also launched bottled water which is the largest sector in non-CSD market by volume(Exhibit 9) The structure and profitability in an emerging non-CSD industry has dynamics very different from the conventional CSD industry which has been played out and matured. The stark contrasts that the structure of this industry lies in the fact that this market is very young and entry of new products changes its dynamics rapidly. The threat of new entrants in this market is very high as concentrate production does not require a lot of investment and innovative products attract a lot of clientele which have led to a stronger position among competitors like Nestle, Unilever and DPS.The bottling plants have strengthened their position in this secto r as they have not led Coke and Pepsi influence this market completely. They have been reluctant in introducing non-CSD products as they have no brand loyalty and their existing infrastructure does not support new products. Setting up new infrastructure and pressure from concentrate producers to increase non-CSD turnovers require higher operation costs and lesser profit margins. Concentrate producers are building better relationships with independent bottlers to push non-CSD and alternate drinks since they have much higher margins than CSD(Exhibit 10), concentrate producers are willing to assist bottling plants and they started selling finished goods to bottlers.They have also leveraged the company owned bottling plants by purchasing at lower prices and even marketing directly to retail chains to gain higher profit margin and gain market penetration It is most likely that Coke and Pepsi will repeat their success with this new industry like they did in CSDs for the first and foremost reason that these companies are financially very strong and they have the ability to acquire or contain an emerging competitor. Also they have invested and will continue to invest in understanding the market, so they have established a market trend analysis and they are prepared to tackle upcoming threats by taking the assign action.That is the reason that Coke and Pepsi are directly competing with every new product launched in this category and gaining popularity like tea, water or energy drinks. Early diversification in products has strengthened their brand equity which they can leverage in gaining further control in the non-CSD market. Another reason that these companies are likely to fall out is because of vertically integrated network that they have established from manufacturing concentrate to marketing to retailers, they have exclusive contracts with bottling plants and they have spent decades perfecting the distribution network.They can introduce new products in this chai n with much more ease and effect rather than new players developing an entire new network. Lastly, since the market in US is pitiful faster towards non-CSDs than the rest of the world, Coke and Pepsi have gained experience in tackling this change and then they can fall in it to the international markets and be the driving force in influencing emerging economies due to their vast strategic world(a) presence.