Cola Wars Case Study

February 22, 2021 Cola Wars Case Study 1. Using the outline below, analyze all five forces of concentrate manufacturing (i.e. the industry of Coke and Pepsi) and evaluate the strength of each one. Be sure to offer evidence supporting your assessments for each force (Competitive Rivalry, Supplier Power, Buyer Power, Threat of Entry, Threat of Substitutes). Hint: draw out the supply chain for Cola concentrate first. (Porters 5 Forces) Competitive Rivalry: Competition amongst concentrate manufacturers was very strong. Even though the competition lay mainly between Coke and Pepsi, it was still enough to influence price and value. The rivalry between Coke and Pepsi could very much be considered an oligopoly because the brands both competed with each other and at the same time dominated rivalry in the industry. Their actions affected market price and aggressive action by one of them affect the returns of the other. An example of this was when Coke announced a significant concentrate price increase, Pepsi followed with a 15% price increase of its own. Supplier Power: The supplier power of the bottlers to the concentrate producers is very weak. Coke and Pepsi have much more importance to the supplier, which makes the bottlers even weaker. Supplier power is also weakened by the lack of supplier differentiation. Bottlers could not carry directly competing brands but had the final say in decisions about retail pricing, one of their only points of power. By having weak suppliers, Coke and Pepsi were able to get more value for a lower price. Buyer Power: The buyer power of the concentrate producers was very strong. Coke and Pepsi were the two largest concentrate producers which also made them the two largest customers of the bottle suppliers. This means that the bottle suppliers sold the largest percentage of its business to two customers, giving the buyer de facto significant leverage in terms of trade. In 2009, Coke and Pepsi claimed a combined 72% of the U.S. CSD market’s sales volume which made them as buyers even more powerful as there was a high buyer concentration consisting mainly of those two brands followed by Dr. Pepper Snapple Group and Cott Corporation with significantly smaller percentages. These two concentrate manufacturers also used Master Bottling Contracts which highlighted the strategic importance of buyer to the supplier and in turn strengthened their buyer power. For example, Pepsi had Master Bottling Agreement contract with its top bottler which granted the bottler perpetual rights to distribute Pepsi products but required it to purchase raw materials from Pepsi at prices and on terms/conditions determined by Pepsi. Pepsi and Coke also held the power of a credible threat of backward integration. In 1985 Coke bought two large bottling companies and together with recently purchased bottlers. These acquisitions placed one-third of Coke’s volume in company owned operations and although Coke did not stick with this model for long, it showed that these concentrate producers were able to take all the power from their suppliers. Threat of Entry: The barriers to entry were high in the concentrate manufacturers market. The two limitations to entry were strong because 1) entry was expensive since the sunk cost incurred in R&D and brand development were large and 2) entry was difficult because the ratio of the scale required to compete to the total market size was large. Coke and Pepsi heavily implemented limit pricing which they were able to do as the leading brands. They were able to control concentrate prices and had contracts that established a maximum price and adjusted prices quarterly according to changes in sweetener pricing. Coke and Pepsi also tied up assets that were critical to strategy execution like distribution channels, making entrants face higher costs to enter the industry. Coke and Pepsi had exclusive contracts with bottlers in which the bottlers could not carry competing brands. The “soda tax” is also considered a barrier to entry in terms of government policy. As of April 2010, 29 states already taxed sodas and around 12 more states were considering the measure. Threat of Substitutes: The threat of substitutes became increasingly strong as the carbonated soft drink industry began to dwindle in the 1990’s. Although there had always been substitutes in the forms of tea, coffee, milk, juices and water, consumers became more health conscious and thus a demand for diet sodas and alternative sweeteners was introduced. This called for Pepsi and Coke to become more innovative with their products. Coke and Pepsi both began to aggressively pursue non-carbs opportunities in global markets like juice. Coke pursued international markets such as China far more than Pepsi. Pepsi and Coke both entered the bottle market as well and became leaders with Aquafina and Dasani at one time. 2. Take a close look at Exhibit 4, which breaks down revenues, costs, and operating income for concentrate producers and bottlers. (Note that the total number of cases is identical for both.) Based on your answer to Q1, Exhibit 4, and the information in the case, is concentrate production or bottling more attractive for the representative firm within each industry? Concentrate production may be the more attractive industry. Although from the case we know that there is a high barrier to entry, looking at revenue, costs, and operating income compared to that of bottling, concentrate production appears more attractive. Numerically, bottling has a higher gross profit of $1.97 compared to the $0.76 of concentrate production, however, the costs of goods sold is a much smaller percentage of net sales for concentrate production. Operating income and total expenses, $0.30 and $0.45 respectively, are both less expensive than bottling in comparison as well. Even though bottling overall has higher margins and makes more money per case than concentrate producers, the net sales-COGS=gross profit is the main component that makes concentrate production more attractive.