Cola Wars Continue: Coke and Pepsi in 2010.

Cola Wars continue: Coke and Pepsi in 2010

Question:” Compare the economics of the concentrate business to the bottling business. Why are the differences in profitability so different? Apply the 5-Forces Model to both industries and provide your conclusions.”

The business model of concentrate business and that of bottling business differ mainly due to the application of the 5 forces of Porter.  Here there is an analysis of these forces:

                                                               Concentrate Business

Industry rivalry: LOW

The market  of concentrate is essentially dominated by Coca Cola, Pepsi and Dr Pepper Snapple Group which account for almost 90% of the total U.S. Production. Sales data shown a consistent growth in both international and national sales of beverages, interconnected to an increasing Net profits/sales ratio. The huge investments in marketing campaigns created a strong brand loyalty within the consumers, which connected with the bargaining power obtained with retailers makes the concentrate business attractive.

Threat of new entry: LOW

While it is true that both Coca Cola and Pepsi base their success on a "secret" formula, this can be easily replicated even by other competitors. Despite this, the investment required to create a new implant is still high, ranging from fifty to a hundred million dollars.  In addition, Pepsi and Coca Cola almost monopolize the market and have the "legal" power to retail against possible competitors

Threat of substitutes: MODERATE

As already said the success of both brands is based on their secret formulas, but these can still be replicated or at least copied by other competitors. In particular an increasing concern regarding the impact of carbonated products on human health is shifting consumer interests to new kinds of beverages. Pepsi and Coca Cola have, however, already started a transition to new kind of drinks with zero calories, sugar or additives

The power of suppliers: LOW

The ingredients of Coca Cola and Pepsi are simple, not highly differentiable and for this reason suppliers cannot influence too much the business of these firms

The power of buyers: MODERATE

Technically buyers should have a strong power since they can easily switch between products that are not so much differentiated in terms of used ingredients. In reality the market of carbonated beverage is almost completely controlled by Coca Cola and Pepsi and both of them have signed different retail contracts with the biggest and most renewed retail firms.

                                                                         Bottling business

Industry rivalry: HIGH

While the concentrate business is dominated essentially by three main players, the bottling business `consists of more players. All bottlers are strictly dependent on the concentrate they buy and on the relationship developed with the seller of this product, namely Coca Cola, Pepsi and DPSG. The Data show also a contraction of bottlers number from 2000 to 300, an index of a high rivalry between firms