1. If we analyze the situation using Porter’s five forces it is easy to see why the industry was so profitable. The substitutes as juices and water didn’t affect the profits of the soft drinks industry. The taste of the soft drinks is what is the most important for the consumers and it is unique. Coke and Pepsi’s powerful brands are inimitable, so not really many substitutes were on the market. The entry barriers are pretty high. There are significant costs to enter the industry of soft drinks producers which automatically eliminates small players.
The loyalty for the brand is also an issue. Consumers seemed to be pretty loyal over the years – it makes it very hard for a new enterer to compete with the major players Coke and Pepsi and right after Cadbury. Bottlers were usually on a long term contract with the big companies and could not easily sign a contract with a new direct competing enterer. Two major players Coca cola and Pepsi have about three quarters of the soft drinks market were fiercely competing with advertising, creating new products and expanding new territories, without going into price war.
The major products for the soft drink industry were not hard to find – carbonated water, sugar, bottles, so the only one that gave power for the suppliers was the flavored concentrate. The concentrate producers as suppliers have their unique formulas and price control over them. They have the power of sustainable competitive advantage over the bottlers and the buyers and as a result their profits were growing fast. They also have a substitute for the bottling companies – fountain sales.
Buyers can be divided by three categories – bottlers they have to buy the concentrate and had no power over the suppliers because they were dependent on them to exist. Second the merchandiser buyers were extremely important channel – they had fair buyer’s power. Pepsi was more focused on big outlets like Wal mart and Coke was dealing with more the fountain sales. Third and the last were the consumers of the drinks. The switching costs for them are 0 so they can make a different choice at any time.
Consumers had no power as a buyer to control the prices. 2. The profitability was different, because the concentrate business had superior sustainable competitive advantage – the concentrate formula was inimitable resource. This allowed the concentrate producers to increase the prices of the concentrate, even when the prices of the soft drinks in the retail stores were decreasing. The concentrate producers have monopoly over their brands and there was no substitute for it. The bottlers were offering just an ordinary service.
Coke and Pepsi were using the franchise system, because they were able to control the bottlers effectively with the long term franchise contracts/ Cola’s Master Bottler contract 1987 and Pepsi’s Master Bottlers Agreement/. The contracts gave Coke and Pepsi the right to set prices and other terms of sale. At the same time the bottlers were not allowed to handle directly competing brands. This was eliminating the new competitors. In the 1980s both companies started bottlers’ acquisitions. Pepsi bought most of its domestic franchisees and Coke besides the acquisitions started to maintain ?quity stakes in large bottlers. . The profitability of the business industry hasn’t decreased over the years, because Coke and Pepsi were competing mostly with advertising campaigns for millions instead of cutting the prices/, “Pepsi challenge” and “The Coke side of life”/. They were also adding new products to their product lines in response of the market changes – such as dietary, no carbs, no caffeine drinks, fresh juices and bottled water. Coke and Pepsi started to compete for the fast food chains in order to increase their market share in the fountain sales.
Coke got MacDonald’s, Burger king and Subway and Pepsi contracted KFC, Pizza Hut, and Taco bell. Internationally both companies competed in different areas Western Europe and Latin America for Coke, while Pepsi focused on the Middle East and Southeast Asia. About 80% of the Coke’s profit comes from abroad. 4. If we look at Lei and Slocum’s theory we can best fit Pepsi and Coke in to the group of the Consolidators. Both companies have dominant market position, standardized production, marketing and distribution networks, strong procurement and logistics.
Arenas: Both companies are focused on gaining bigger market share and on their advertising campaigns Vehicles: Both companies merge and acquire rivals and have good relationships with their suppliers Distinguishing features: Both companies have standardized mass production – cost efficient. Staging: Both companies have well managed distribution channels Economic logic: Both are industry leaders – market share 70%, they can control the prices In order to stay successful and escape the boiling frog syndrome they need to be innovative and add new products to their product lines.
Standardization doesn’t work in their favor anymore and they have to focus more on the consumers’ needs. The sales and the consumption in their old markets have decreased rapidly in the last decade due to growing interest in health and wellbeing, so there will be more substitutes on the market. There are also some legal restrictions about selling soft drinks in the schools. In order to sustain their profits both companies have to focus on new products such as energy, non – carbonated healthy drinks. In the middle of the crisis the cheapest substitute will be water.
Coke and Pepsi need to plan carefully their expansion in the emerging countries where the consumption of carbonated soda drinks is far behind the numbers for US and Western Europe. It will be a challenge to increase it. Merging with or acquiring local brands may help them to adjust their product lines for the local consumers’ taste and increase their sales in the new markets. The eco lifestyle may also be a challenge. Coke and Pepsi may do new nature friendly packages. Last years the companies that care for the nature gain popularity. Investing in nature friendly packages may improve the image of the brands.