Cola Wars Essay

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Class: EMBA 7550 – Strategic Management
Case: Cola Wars
Why historically, has the soft drink industry been so profitable?
There are multiple reasons why the industry is so profitable. Using Porter’s 5-forces model we have the following factors: Availability of the substitute, thereat of new entrance (barrier of entry), bargaining power of the seller and the buyer. First, concentrate producers and bottlers working interdependent, which benefit most CSD producers outsourcing these services and ultimately save on costs. Additionally, even with many generic and private-label CSDs, Coke and Pepsi together take around 75% of total market share, which indicates how difficult is it to enter the market. That is why this market can be perceived as a duopoly. Even when other beverages gain popularity, two rivals always try to produce what was demanded, so with availability of the substitute, most CSD producers can still make profit by producing those substitutes. For example, with the popularity of juices and energy drinks, Coke and Pepsi were able to catch up with market demand. Considering the power of suppliers and power of buyers, with only two major players in the industry and many suppliers, Coke and Pepsi are able to negotiate a very good price and bargaining power of suppliers is very low. Furthermore, with few channels of distributions such as restaurants, supermarkets and vending machines, Coke and Pepsi can negotiate the agreement in their favors; therefore, it lowers the power of buyer as well. Compare the concentrate business to that of the bottling business: Why is the profitability so different?
Most of the concentrate producers’ costs were advertising, promotion, record research and support bottlers while bottlers pay 50% of those costs. Concentrate producers invested in their trademark and negotiating the terms with retailers. Additionally, cost of capital for concentrate producers versus bottlers is lot lower. Bottlers were also responsible for delivering the products to consumers, which would include labor, delivery and overhead. With Coke and Pepsi determining most of the terms of agreements, bottlers’ power of supplier is high. These cost reduce bottlers margin to 8% compare to concentrate producers’ 32%
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