Soft drink industry is very profitable, more so for the concentrate producers than

the bottlers. This is surprising considering the fact that product sold is a commodity
which can even be produced easily. There are several reasons for this, using the five
forces analysis we can clearly demonstrate how each force contributes the
profitability of the industry.
2. Economics of Bottling vs Concentrate Business
(Data from Exhibit 5)
As the above table indicates concentrate business is highly profitable compared to
the bottling business. The reasons for this are:

Higher number of bottlers when compared to the concentrate producers

which fosters competition and reduces margins in the bottling business

Huge capital costs to set up an efficient plant for the bottlers while the capital
costs in concentrate business are minimal

Costs for distribution and production account for around 65% of sales for
bottlers while in the concentrate business its around 17%

Most of the brand equity created in the business remains with concentrate
producers

Possible Reasons for Vertical Integration:

With the decrease in the number of bottlers from 2000 in 1970 to less than
300 in 2000, the concentrate producers were concerned about the bottlers
clout and started acquiring stakes in the bottling business.

They could offer attractive packaging to the end consumer.

To preempt new competition from entering business if they control the

bottling.

3. Effect of competition between Coke and Pepsi on industry profits:

During the 1960s and 70s Coke and Pepsi concentrated on a differentiation and
advertising strategy. The Pepsi Challenge in 1974 was a prime example of this
strategy where blind taste tests were hosted by Pepsi in order to differentiate itself
as a better tasting product from Coke.

However during the early 1990s bottlers of Coke and Pepsi employed low priced
strategies in the supermarket channel in order to compete with store brands, This
had a negative effect on the profitability of the bottlers. Net profit as a percentage
of sales for bottlers during this period was in the low single digits (-2.1-2.9% Exhibit
4) Pepsi and Coke were however able to maintain the profitability through
sustained growth in Frito Lay and International sales respectively. The bottling
companies however in the late 90s decided to abandon the price war, which was
not doing industry any good by raising the prices.
Coke was more successful internationally compared to Pepsi due to its early lead as
Pepsi had failed to concentrate on its international business after the world war and
prior to the 70s. Pepsi however sought to correct this mistake by entering emerging
markets where it was not at a competitive disadvantage with respect to Coke as it
failed to make any heady way in the European market.

4. Can Coke and Pepsi sustain their profits in the wake of flattening
demand and growing popularity of non-carbonated drinks?
Yes Coke can Pepsi can sustain their profits in the industry because of the following
reasons:

The industry structure for several decades has been kept intact with no new
threats from new competition and no major changes appear on the radar line

This industry does not have a great deal of threat from disruptive forces in
technology.

Coke and Pepsi have been in the business long enough to accumulate great
amount of brand equity which can sustain them for a long time and allow
them to use the brand equity when they diversify their business more easily
by leveraging the brand.

Globalization has provided a boost to the people from the emerging

economies to move up the economic ladder. This opens up huge opportunity
for these firms

Per capita consumption in the emerging economies is very small compared to

the US market so there is huge potential for growth.

Coke and Pepsi can diversify into noncarbonated drinks to counter the
flattening demand in the carbonated drinks. This will provide diversification
options and provide an opportunity to grow.

5.Impact of globalization on Industry structure:

Globalization provides Coke and Pepsi with both unique challenges as well as
opportunities at the same time. To certain extent globalization has changed the
industry structure because of the following factors.

Rivalry Intensity: Coke has been more dominant (53% of market share in
1999). in the international market compared to Pepsi (21% of market share
in 1999) This can be attributed to the fact that it took advantage of Pepsi
entering the markets late and has set up its bottlers and distribution
networks especially in developed markets. This has put Pepsi at a significant
disadvantage compared to the US Market.

Pepsi is however trying to counter this by competing more aggressively in the

emerging economies where the dominance of Coke is not as pronounced, With the
growth in emerging markets significantly expected to exceed the developed
markets the rivalry internationally is going to be more pronounced.

Barriers to Entry: Barriers to entry are not as strong in emerging markets

and it will be more challenging to Coke and Pepsi, where they would have to
deal with regulatory challenges, cultural and any existing competition who
have their distribution networks already setup. The will lack the clout that
have with the bottlers in the US.

Suppliers: Since the raw materials are commodities there should be no

problems on this front this is not any different

Customers: Internationally retailers and fountain sales are going to be

weaker as they are not consolidated, like in the US Market. This will provide
Coke and Pepsi more clout and pricing power with the buyers

Substitutes: Since many of the markets are culturally very different and
vast numbers of substitutes are available, added to the fact that carbonated
products are not the first choices to quench thirst in these cultures present
additional significant challenges.

The consumption is very low in the emerging markets is miniscule compared to the
US market. A lot more money would have to be spent on advertising to get people
used the carbonated drinks.

Analysis of the Industry attractiveness:

Barriers to Entry

significant barrier to entry was brand loyalty, created largely by Robert Woodruff
who began leading Coca-Cola in 1923. Woodruffs goal was to place a Coke in
arms reach of desire, so he pushed for new channels through which to make Coke
available, including open-top coolers in grocery stores, automatic fountain
dispensers, and vending machines. Woodruff further developed brand loyalty,
increasing the barrier to entering the CSD industry, through associating Coke with
the United States military during World War II, promising that every man in uniform
gets a bottle of Coca-Cola for five cents wherever he is and whatever it costs the
company.
The 2nd significant historical barrier to entering the CSD industry was the
successful vertical integration of nationwide franchise bottling networks of CocaCola and Pepsi-Cola, beginning in 1980.
The final significant historical barrier to entry was economies of scale. Large
bottling and canning production facilities can cost hundreds of millions of dollars, so
the established production lines of major brands like Coca-Cola and PepsiCo allowed
them to continuously introduce new products within their brands, as well as new
container types in which to sell them
Buyer Power

Supplier Power

Soft drink industry:

The Soft Drink Industry is primarily engaged in manufacturing non-alcoholic, carbonated beverages,
mineral waters and concentrates and syrups for the manufacture of carbonated beverages. Soft
drink industry is very profitable, mainly for the concentrate producers than the bottlers. The leading
players of the market are Coca-Cola, Pepsi Cola, and Cadbury Schweppes.
In this industry, fierce rivalry between dominant producers Coca-Cola & Pepsi and the bargaining
power of the buyers who place huge orders for soft drinks are strong, while the threat of new entry
and the threat of substitutes are mild. And, bargaining power of the suppliers is conditional.

Threat of Entry:
New Entrants to an industry bring new capacity and a desire to gain market share that puts pressure
on prices, costs, and the rate of investment necessary to compete.

Threat of a new entry is considerably low in todays soft drink market.

In the initial stages of the industry, Coca-cola was the dominant leader of the market, and then new
entrant Pepsi made a huge impact on sales and profits of Coke. But, today Cola-Wars between Coke
and Pepsi are so dominant, that possible threat of a new entrant is relatively low.

The several factors that make it difficult for the new companies to enter the soft drink market include:
1.

Role of bottlers:
Bottlers purchase concentrate, add carbonated water and high-fructose corn syrup,
bottle the resulting CSD product and deliver it to customer accounts. The bottling process is a
capital-intensive and involve high-speed production line that are interchangeable only for products of
similar type and packages of similar size.

Companies like Coke and Pepsi have franchisee agreements with their existing
bottlers which prohibit them from taking on new competing brands for similar products. A bottler
involved in bottling a product of a company cannot support any other company, hence making it
difficult for a new entrant.

And, with the backward integration, where both Coke and Pepsi buying significant
percent (nearly 100 plants in US to provide effective national wide distribution) of bottling companies,
it is very difficult for a firm entering to find bottlers willing to distribute their product.

Also, to try and build their own bottling plants, for a new entrant would be very
capital-intensive and a difficult task.
2.
Role of Retail channel :

The distribution of CSDs took place through Supermarkets, fountain outlets, vending
machines, mass merchandisers, convenience stores, drug chains and gas stations and other outlets.

The main distribution channel is the Supermarket where bottlers fight for shelf space
to ensure visibility for their products. In this ever-expanding array of products offered by existing
players, there would be intense competition for the new entrant.

The mass merchandisers include warehouse clubs and discount retailers like WalMart. These companies sell popular and leading products like Coke and Pepsi, so for a new entrant
to find itself, a merchandiser is difficult task.

Competition for fountain accounts is very intense and often CSD companies
sacrificed profitability in order to land and keep those accounts. Coke and Cadbury Schweepes have
long retained control over fountain sales. Ex: Coke supplies for Subway, McDonalds and Burger
King whereas Pepsi took over Pizza Hut, Taco Bell, KFC. In this case, new entrant has huge
competition to face.

3.

4.

5.

6.

In vending channel, Coke and Pepsi have their dominance by giving financial
incentives to encourage investment in machines. It would very challenging for a new entrant to
compete.
Entry barriers:
In many countries, production, distribution and sale are subject to numerous
governmental regulations. All companies are subject to numerous environmental laws and
regulations, which makes it difficult for a new entrant to enter the countrys market.
Brand Loyalty:
Brands like Coke, Pepsi and Cadbury with a large market base charm the customers
and acquire their loyalty. People avoid going in for any other brand, once accustomed to a particular
brand like Coke or Pepsi.
Heavy advertising contributes to huge amount of brand equity and loyal customers all
over the world. This makes it virtually impossible for a new entrant to match these market leaders in
the industry.
Advertising Expenditure:
Coke and Pepsi spend huge amount on advertising and marketing of their products.
Coke leads the charts by spending 246,243$ and Pepsi with 211,654$ (in thousands). They sponsor
varied programs from TV shows to Sports programs. Pepsi was the official sponsor of Cricket World
cup 2003. In this way, they retain their market share and make it extremely difficult for new entrant
and force it to spend hugely on promotion and advertising.
Risk & Experimentation:
The already emerged companies like Coke and Pepsi can step up to take risks and
experiment by launching new variety of products. If it clicks, they obtain huge profits but, will not
suffer great losses if failed. But a new entrant can not take such risks till it settles in the market.

Intra-Industry Rivalry:
The leaders of the industry are Coke, Pepsi, Cadbury Schweppes with huge market shares. The
rivalry talked over is between the two market leaders Coca-Cola and Pepsi, called The Cola Wars.
They have competed on various strategies like price discounts, extensive marketing, and automation
of the bottling plants etc.

Coca-cola was started way back in 1890s and after a period of nearly 40 years, in 1939
Pepsi was launched. When Pepsi was launched, it was called the imitator by the coke group, but
soon it became a dominant force in the of decline of cokes market share. Pepsi mainly aimed on
packaging. When it was launched, it came out with a campaign of--- Twelve full ounces, thats a lot.
Twice as much for a nickel, too, which forced Coke to launch three new packages: King-sized tenounce, the twelve ounces, and the twenty-six ounces Family size.
In 1985, Coke announced that it has changed the 99-year old Cola formula. Pepsi claimed
that the new coke mimicked Pepsi in taste, which promoted an outcry from loyal customers to
bottlers. And, this forced the Coke to bring back its original formula.

Pepsi mainly concentrated on advertising and marketing with film-stars to sports celebrities
for promoting their products, which became very successful. Many other new players followed this
later.
In terms of marketing, the rivalry between Coke and Pepsi heated up with Pepsi Challenge
in Dallas. This was responded (by Coke) with an ad campaign questing the validity of the test. It also
introduced rebates and retail price cuts.
In terms of Retail channels, Coke and Pepsi fought over fountain sales to acquire more
national accounts. Competition remained vigorous: In 2004, Coke won the Subway account away
from Pepsi, while Pepsi grabbed the Quiznos account from Coke. Coke however continued to
dominate the channel with 68% share of national pouring rights, against Pepsis 22% and 10% for
Cadbury.
In 1966, Coke had market share of 33.4%, Pepsi with 20.4% (Cadbury was not launched
then) and in 2004, Coke has 43.1%, Pepsi has 31.7%, Cadbury with 14.5% and other companies
with 5.2%. The Intra-rivalry has had an impact on the sales figures of industry players. The discounts
given to the retailers, reduced the over all profit margins. This forced the companies to search for
alternative supplies (like corn syrup instead of sugar).
Coke introduced 11 new products like Diet Coke, Caffeine Free Coke, Sprite etc to try and
attract new customers. In response, Pepsi also introduced 13 new products similar to that of Coke
like Diet Pepsi, Mountain Dew etc.
Through out the history of CDS industry Coke and Pepsi fought for higher market share and
survived in the intra-rivalry.
.

The bargaining power of suppliers:

Powerful suppliers capture more of the value for themselves by charging higher prices, limiting
quality or services, or shifting costs to industry participants.
1.

In this industry, the bargaining power of suppliers is low, as there are many suppliers in this
industry. And required commodities like flavor, caffeine or additives, sugar, and water are basic
goods that are available quite easily. So, producers have no power over the pricing hence the
suppliers in this industry are weak.
2.
But, in case of product suppliers for firms with dominant position and that is only viable
source for the supply of a product in the market, their bargaining power is strong. Ex: In Coca-colas
case, that purchases acesulfame potassium from Nutrinova Nutrition Specialties & Food Ingredients
and that is considered the only viable source by Coca-cola.
3.
Generally, the supplier group can credibly threaten to integrate forward into the industry. But,
here, the supplier would become a new entrant facing many difficulties, so the threat from suppliers
is low.

The bargaining power of buyers:

Powerful customers can capture more value by forcing down prices, demanding better quality or
more service and can cost industry profitability.

The threat of substitute products or services:

A substitute performs the same or a similar function as an industrys product by a different means.
The threat of substitution is downstream or indirect, when a substitute
replaces a industrys product.
1.

This industry has large numbers of substitutes like water, beer, wine; coffee, milk, tea, juices
etc are available to the end consumers.
2.
The soft drink companies diversify business by offering substitutes themselves to shield
themselves from competition.
Ex: Pepsi produces Mug Root Beer (1.4% market share), Slice fruit juice (0.3% ) and Tropicana
fresh juices. Coke produces Barqs and Diet Barqs (0.4%), Minute Maid brands producing fresh
fruit juices(1.5 %). By diversifying the business, the market share of the company raises to
greater high. Coke recorded a high of 43%, after diversifying from 33.4%, when it was restricted
to only Coca-cola. And Pepsi rose from 20% to 31%. And Cadbury rose from 4.7% to 14.5%.
3.

Threat of substitute product is countered by soft drink industry by huge advertising, brand
equity, and making their product easily available for consumers, which most substitutes cannot
match.

Case Study- Cola Wars Continue: Coke and Pepsi in 2010

Summary:

Threat of Entry:
The several factors that make it very difficult for the competition to enter the soft drink market
include:

Bottling Network: Both Coke and Pepsi have franchisee agreements with their existing
bottlers who have rights in a certain geographic area in perpetuity. These agreements
prohibit bottlers from taking on new competing brands for similar products. Also with
the recent consolidation among the bottlers and the backward integration with both Coke
and Pepsi buying significant percent of bottling companies, it is very difficult for a firm
entering to find bottlers willing to distribute their product.

The other approach to try and build their bottling plants would be very capital-intensive effort
with new efficient plant capital requirements in 1998 being $75 million.

Advertising Spend: The advertising and marketing spend (Case Exhibit 5 & 6) in the
industry is in 2000 was around $ 2.6 billion (0.40 per case * 6.6 billion cases) mainly by
Coke, Pepsi and their bottlers. The average advertisement spending per point of market
share in 2000 was 8.3 million (Exhibit 2). This makes it extremely difficult for an entrant
to compete with the incumbents and gain any visibility.

Brand Image / Loyalty: Coke and Pepsi have a long history of heavy advertising and
this has earned them huge amount of brand equity and loyal customers all over the
world. This makes it virtually impossible for a new entrant to match this scale in this
market place.

Retailer Shelf Space (Retail Distribution): Retailers enjoy significant margins of 1520% on these soft drinks for the shelf space they offer. These margins are quite
significant for their bottom-line. This makes it tough for the new entrants to convince
retailers to carry/substitute their new products for Coke and Pepsi.

Fear of Retaliation: To enter into a market with entrenched rival behemoths like Pepsi
and Coke is not easy as it could lead to price wars which affect the new comer.

Power of suppliers:

Commodity Ingredients: Most of the raw materials needed to produce concentrate are
basic commodities like Color, flavor, caffeine or additives, sugar, packaging. Essentially

these are basic commodities. The producers of these products have no power over the
pricing hence the suppliers in this industry are weak.
Power of buyers:
The major channels for the Soft Drink industry (Exhibit 6) are food stores, Fast food fountain,
vending, convenience stores and others in the order of market share. The profitability in each of
these segments clearly illustrate the buyer power and how different buyers pay different prices
based on their power to negotiate.

Food Stores: These buyers in this segment are some what consolidated with several
chain stores and few local supermarkets, since they offer premium shelf space they
command lower prices, the net operating profit before tax (NOPBT) for concentrate
producers in this segment is $0.23/case

Convenience Stores: This segment of buyers is extremely fragmented and hence have
to pay higher prices, NOPBT here is $0.69 /case.

Fountain: This segment of buyers are the least profitable because of their large amount
of purchases hey make, It allows them to have freedom to negotiate. Coke and Pepsi
primarily consider this segment Paid Sampling with low margins. NOPBT in this
segment is $0.09 /case.

Vending: This channel serves the customers directly with absolutely no power with the
buyer, hence NOPBT of $0.97/case.

Threat of substitutes: Large numbers of substitutes like water, beer, coffee, juices etc are
available to the end consumers but this countered by concentrate providers by huge advertising,
brand equity, and making their product easily available for consumers, which most substitutes
cannot match. Also soft drink companies diversify business by offering substitutes themselves to
shield themselves from competition.
Intensity of rivalry:
The Concentrate Producer industry can be classified as a Duopoly with Pepsi and Coke as the
firms competing. The market share of the rest of the competition is too small to cause any
upheaval of pricing or industry structure. Pepsi and Coke mainly over the years competed on
differentiation and advertising rather than on pricing except for a period in the 1990s. This
prevented a huge dent in profits. Pricing wars are however a feature in their international
expansion strategies.

Issues and Recommendation:

The main issue with carbonated soft drink industry is that the smaller
brands are loosing because of the entry barriers. As we can see sometimes
smaller brands are even better in taste. But it can fail to make its existence
in market due the amount of marketing efforts and investment in distribution
channels done by Coke and Pepsi.Innovation is the key to success but not for
the price of losing the current loyal customer. A Positive Innovation always
helps in improving the current market. Coke and Pepsi should always try to
positively innovate their product through different campaigns and strategies.
The move by Coke to introduce new favor in the market was completely a
negative innovative strategy. Instead they could have invested more on
marketing strategies and increased their distribution channel or provide
promotion in sales. Brand name is the most important factor for profitability
and that comes for loyal customers following the brand. Consumer might be
willing to pay a premium price to get their favorite drink but wont appreciate
any change in the most liked product.
The concentrate business is more profitable than the bottling business
and bottlers are vulnerable to the decisions taken by the concentrate
business. It is not so clear whether the cola wars really took place and that
both businesses profited from that. The tools used in this war were ranging
from marketing campaigns to the enhancement of the delivery services and
the modernization of plants, introducing new flavors and packing.
The effects of this war were on the industry's profitability. The
competition for supermarket shelf space led to a decrease in retail prices and
as a result of intense competition, bottlers saw an increase in capital
requirements followed by a decrease in margins. Sustaining profits in a
market which is giving more and more importance to the non-carbonated
drinks can be difficult task to achieve, but there are some measures that
could help both companies in reaching it: diversification, marketing, focus on
core products, emerging markets, innovation, market research etc.

THREAT OF SUBSTITUTE PRODUCTS

Over time, other beverages, from bottled water to teas, becamemore popular,
especially after 1980s

Companies responded by expansion through

alliances (e.g. Coke and Nestea),

acquisitions (e.g. Coke and Minute Maid),

internal product innovation (e.g. Pepsi creating Orange Slice).

q
This Proliferation did threaten the profitability of bottlers,
q
As they more frequent line set-ups, increased capitalinvestment, and development
of special management skills formore complex manufacturing operations and
distribution.
q
Bottlers were able to overcome these operational challengesthrough consolidation
to achieve economies of scale.
q
Overall, because of the CPs efforts in diversification,

thus, substitutes became less of a threat

THREAT OF ENTRY OF COMPETITORS

The tremendous marketing muscle & a century old marketpresence of a few
q
These companies had intimate relationships with their retailchannels
q
would be able to defend their positions effectively throughdiscounting or other
tactics.
q
Entering bottling, meanwhile, would require substantial capital

investment, which would deter entry

q
existing bottlers had exclusive distribution territories
q
Regulatory approval of exclusive territories,

via the Soft Drink Inter-brand Competition Act-1980.

Thus, making it impossible for new bottlers

to get started in any region

where an existing bottler operated

DHAVAL POPAT (PGDM-IB, 10) Strategy Assignment

~1~

Cola Wars Continue: Coke and Pepsi in 2010

Strategy Implementation and Execution

Question 1: Analyze the CSD industry for its key economic dominant features,
industry driving forces and critical success factors required for concentrate suppliers
and bottlers.

Answer 1:

Economic Dominant Features

Market Size

Scope of competitive rivalry (global)

Market Growth rate

Position in business (PLC)

No. of rivalry and sizes Industry fragmented / competitors

No. of buyers and relative sizes

Backward or forward integration

Types of distribution channel to access consumers

Pace of technological change Production and process innovation

Product differentiation

Economies of scale in activities

Key industry participants / Clustered or not?

Learning and experience curve

Capacity utilization

Capital requirement

Ease of entry exit

Industry profitability

Industry Driving Forces

Increasing globalization (emerging markets)

Changes in growth rate in industry

Consumer behavior changes (who buys)

P roduct innovation

Technological change

Marketing innovation

Entry and exit of major firms

Changes in cost and efficiency

Growing buyer preferences for differentiated products

Changing societal concerns, attitudes and lifestyles

Critical Success Factors for Concentrate Suppliers:

Technology related

Manufacturing

Distribution

Marketing

Skills

Organization capabilities

Other types goodwill, brand

Question 2: Analyze the CSD industry attractiveness for concentrate suppliers and
independent bottlers

For concentrate Suppliers

Intensity of Rivalry: It is high. As there is presence of many other private-label

manufacturers and other national and regional producers.The concentration of the
market share owned by national brands Coke and Pepsi added upto 72% in the US
for 2009, followed by Dr. Pepper at 16% and Cott Corporation .
Threat of New Entrants: It is moderate because there requires low capital
investment to set up concentrate manufacturing process.There is heavy investment
in innovative campaigns.Presence of trademarks by companies makes entry
difficult.The significant costs of marketing, advertising, promotion and market
research to create brand awareness for new products employing large staff for sales
force and operations.The operating margins of about 32% in the industry

Threat of Substitutes: It is low since there are no substitutes for concrete

suppliers.

Bargaining Power of Suppliers: It is high.There is high bargaining power as

negotiating is required for raw materials along with plastic canisters for the
manufacturing of concentrate which was often taken up by the carbonated soft
drink brand .
Bargaining Power of Buyers: It is moderate.The buyers had no bargaining power
due to fixed pricing mechanisms earlier which did not consider the change in prices.
For Bottlers
Degree of Rivalry: It is high because the rivalry was increasing as the number of
bottlers was decreasing but concentration was increasing with few players having
greater market share. Therefore, the carbonated soft drink brand owners started
building nationwide bottling franchises.

Threat of New Entrants: It is moderate.As capital intensive industry it involved

setting up high speed production lines, bottling and canning lines cost anything in
the range of $4mn to $10mn each multiple line and automated warehousing
required hundreds of millions as capital.Operating margin in the industry is also low
i.e about 8%.
Threat of Substitutes: It is low since there are no substitutes as such other than
fountain sales .
Bargaining Power of Suppliers: It is high.The concentrate suppliers had high
bargaining power as the costs of the ingredients.Importance of the concentrate as
the core product for the (CSD) carbonated soft drink production also gave them
higher bargaining power.The CSD brand owner negotiated on behalf of the bottlers
with the metal can suppliers as they were the biggest customers and thus the
suppliers .Later financial incentives were offered by the concentrate suppliers to
encourage investment
Bargaining Power of Buyers: It is high.Retailers like Walmart had Target and had
high bargaining power as they bought in bulk and had high market access through
their expansive retail stores network.National and local accounts like Burger King
also has high bargaining power in fountain sales due to large network of their food
joint.
Analyzing the CSD(Carbonated soft drink) industry for its key economic
dominant features , industry driving forces, key success factors for
concentrate suppliers and bottlers.
For concentrate suppliers
Economic dominant features:

Market size: 30% of beverages

Scope of competition rivalry: very low as the concentrate suppliers are

few and unique

Market growth rate : 3-4% growth rate

Number of rivals and their relative sizes-is the industry fragmented or

segmented?- industry used to be fragmented but now more
concentrated, 2 big players coke and pepsi

Whether and to what extent industry rivals have integrated backward

and/or forward:

Coke initiated and Pepsi followed the forward integration, consolidating bottlers and
stated distribution

The type of distribution channels to access customers : retail stores,

restaurants

Whether the products and service of rivals firms are highly

differentiated : th product is more or less similar with rivals, somewhat
different in tastes and very low differentiated

Key industry participants are located in the particular cluster : US is the

largest consumer and now developing countries like china and India is
on target

Capital requirements : $50 million- $100 million

Whether industry profitability: above par.

Driving Forces:

Increasing globalization of the industry : coke is operating in more than

200 countries now and getting 80% of revenue outside the home country
US

Changes in the long term industry growth rate : growing at only 3% and
per capita consumption was 46 gallons per year in 2009 in USA which is
lower than 1989

Product innovation : coke adopted new concentrate formula and allowed

bottlers to add sweeteners open to the market, new products like diet
coke, diet Pepsi and diversified into non carbonated products

Marketing innovation : huge money spent on promotional events, shelf

space allocation in retail store through CDA, direct store door delivery
(DSD)

Changes in the cost and efficiency : switching from sugar to fructose corn
syrup in concentrate

Changing societal concerns, attitude and lifestyle :health awareness

increases Reduction in uncertainty and

business risk: obesity and health concern are the main risk in the
business

Key success factors:

Technology related :product innovation capability like : sprite, mountain dew

etc and coke invented soda machine as well

Manufacturing related : low cost production

Distribution related : Taken care by bottlers otherwise they sell directly to the
retailers warehouses bypassing bottlers

Marketing related : implement and finance the marketing programs jointly with
bottlers

For bottlers
Economic dominant features:

Market size: decreasing from 2000 in 1970 to 300 in 2009 ,100 plants
nationwide of coke and Pepsi each

Scope of competition rivalry : very high as bottlers are more and coke
and Pepsi are unique

Market growth rate and position in the business : very low and taken
over by concentrate suppliers

Number of rivals and their relative sizes-is the industry fragmented :

CCE has the major chunk in the coke and PBG and PepsiAmericas has
major contribution in terms of bottlers in PepsiCo

Whether and to what extent industry rivals have integrated backward

and/or forward : Very inflexible industry, very high switching cost in
terms of concentrate supplier

The type of distribution channels to access customers

The pace of technological change in both production process

innovation and new product introduction

Whether the products and service of rivals firms are highly

differentiated

Key industry participants are located in the particular cluster : no

cluster, territorial rights are given

Whether industry profitability is above/below par : gross margin is 40%

but net profit is 8% only

Capital requirement : very high, depends on volume and package type

Driving Forces:

Changes in who buys the products and how they use it

Product innovation : franchise agreement with both coca cola and Pepsi
allowed bottlers to handle non cola brands of other concentrate
producers

Marketing : 50 % of advertising cost is provided by concentrate suppliers

only, in 2009 coke contributed $540 million in marketing support

Changes in the cost and efficiency : price adjusted quarterly according to

changes in sweetener pricing

Growing buyer preferences for differential product instead of commodity

product

Regulatory influences and govt. policy changes : in 1980 in US congress

enacted the soft drink interbrand competition act, which preserved the
right of concentrate makers to grant exclusive territories.

Reduction in uncertainty and business risk : Concentration supplier are

going for forward integration which is a kind of risk for the bottlers, may
be in future bottler eliminated

Key success factors:

Manufacturing related
-

High speed production lines involved

Distribution related
-

Gaining ample space on retail outlets

Accurate delivery (direct store door)

Other KSFs
-

Patent protection

POLITICAL
Government influence all 5 forces of porters model. There is trade, tax
policy, labor laws, amount of permitted goods and services by government.
Political Condition in international market change in government .There is
inability to penetrate market due to conflict, war .Government charge fines
for different rules & regulations . Laws & regulation keeps on changing .There
is land acquisition and permits and import export regulations.

ECONOMIC Growth rate, interest rates, employment rates, currency exchange

rates, inflation rate Purchasing power of customers Revenue Accounting

standards Cost incurred- raw material, wages Fuel Prices- Distribution network
Fluctuation in market, money supply, business cycle Different Strategy forunderdeveloped, developing, rural-urban ex. Net operating profit for coca cola
outside US stands 72%. Companies uses 64 various types of currencies

1. 16. ECONOMIC Growth rate, interest rates, employment rates, currency exchange rates,
inflation rate Purchasing power of customers Revenue Accounting standards Cost
incurred- raw material, wages Fuel Prices- Distribution network Fluctuation in market,
money supply, business cycle Different Strategy for- underdeveloped, developing, ruralurban ex. Net operating profit for coca cola outside US stands 72%. Companies uses 64
various types of currencies
2. 17. SOCIAL Lifestyle changes- its base in advertising campaign Company has to adjust
with changing society Adopting management strategies to adopt the social trends
Important to know culture before entering the market Consumer & Gov. are increasing
awareness of public health consequences, mainly obesity Diversity management Age
distribution of country Main consumer- young & children Old celebrates with alcohol Age
37-55 years- concerns nutrition Time saving product for many homes Ex. Coca cola
donates 1% of profits to charity in spain & creates friendly company range Coca cola has
been awarded Social & Corporate governance award for best practices in corporate social
responsibility in 2009
3. 18. TECHNOLOGICAL Production & Distribution cost control and up gradation Availability
whenever and wherever with affordable price. (ex. vending machine) Labeling & Packaging
( recyclable bottles, cans, plastic bottles) Marketing & promotion programs (internet, TV.)
New machineries for higher production with minimum costs, top quality Newer & attractive
Designs Social networking sites Supply chain management & improve efficiency ex.
Sodastream international limited- do-it yourself, beverage carboration system
4. 19. LEGAL Change in laws and regulations may results in change in costs & capital
expenditure Company must ready to future changes in laws and ready to adopt
Discrimination laws, customer laws, employment laws, antiturst laws, health & safety laws
Advertising and labeling laws Environmental protection act ex. Federal food, drug and
cosmetic act, trade commission act, occupation safety, health act Sales, distribution,
production all come under different acts in different countries.
5. 20. ENVIRONMENTAL Pollution & global warming issues Sales variation with Weather
conditions & seasons Local, national, world environmental laws Waste management
Recycling- renewable plastics ex. Coca cola developed innovative energy managing system
that delivers energy savings of up to 35%
6. 21. Porters Five Forces Model Barriers to Entry - High Competitive Rivalry Bargaining power
of buyers - Low Threat of substitutes Bargaining power of Suppliers - Low
7. 22. Intensity of competitive rivalry Duopoly with Coke and Pepsi Unequal size competitors
Growth rate of the soft drinks market Fixed storage cost Differentiation

8. 23. Bargaining power of buyers Different buyers Fast food fountains high Vending
machines low Convenience stores low Supermarkets and food stores medium End
customers low switching cost, not an essential product
9. 24. Bargaining power of suppliers Few inputs like phosphoric/citric acid, natural flavors,
caffeine, sweetener, etc which are basic commodities Easily accessible to manufacturers,
thus switching cost is low
10. 25. Barriers to entry Advertising and marketing Customer loyalty/brand image Significant
margins to retailers Huge investments in bottling
11. 26. Threat of substitutes Many substitutes: tea, coffee, juices, water, beer, etc and switching
cost is low Massive advertising and brand loyalty Large distribution network making
products easily accessible to customers
12. 27. S.W.O.T Analysis - Strengths Opportunities Weakness Threats
13. 28. S.W.O.T - Strengths First mover advantage. Dominator of fountain market with 65 % of
market Share More loyal customer base. Large market share of 44.1%. International
Brand recognition. Huge distribution network. Strategic move during world wars. Efficient
diverse global operations Guerrilla Marketing strategies. More focus on young generation.
International Brand recognition. Huge distribution network. Innovative advertising
strategies. More flexible franchise network.
14. 29. S.W.O.T - Weaknesses Moving away from core competencies. Brand Failures
Product Recalls Smaller market than Coke. Slower take off in international markets.
Imitation of Coca-Cola.
15. 30. S.W.O.T - opportunities Entry into new developing international markets. Introduction
of newer brands. Innovative advertising strategies. Introduction of Pepsi Health Drink.
Entry new developing international markets. Introduction of newer brands.
16. 31. S.W.O.T - Threats Fear of losing market share due to rapid market fluctuations.
Barriers of entry in international markets. Decreasing brand loyalty among consumers.
New age beverages. Fierce competitors in local markets; Private labels at low prices.
17. 32. VS The Battle For India
18. 33. Introduction Both Coke and Pepsi departed India prior to 1987, Coke in 1977 and Pepsi
in 1961, and were to return in 1993 and 1989 respectively. Indian Soft Drink Industry
Estimated US$380 million annual sales volume. 75% market share is with Parle group.
Tea was a popular substitute to Cola. Parles Thums Up held 36% in Cola segment Soft
drinks were sold at variety of retail channels.
19. 34. Entrance of Pepsi First Entry Proposal 1985 35% equity by Pepsi Other
stakeholders PCI ,Duncans, PAIC Import of Pepsi concentrate to be sold to local bottlers
and marketed throughout the country. Denial of proposal and raised opposition Second
Entry Proposal 1986 39.9% equity by Pepsi Other stakeholders Voltas and PAIC
Local manufacturing of soft drinks. Export import ratio 5:1 In 1994, pepsi had 32%
market share in Indian market.
20. 35. Entrance of Coke Entry in 1993 via agreement with Parle Exports and purchase of
Parles local brands. Construction of concentrate plant and bottling operations. 60%
market share from Parles brands and used Parles bottlers as franchise. Broke-even in one
year and then targeted national distribution.

21. 36. Porters Six Forces Model Barriers to Entry - High Competitive Rivalry Bargaining power
of buyers - Low Threat of substitutes Bargaining power of Suppliers - Low Government
22. 37. SWOT(PEPSI) STRENGTHS International Brand and Global Experience Benefitted
by learning from Coca Cola mistakes in India from 1958 to 1977 Good Market Research
on Indian market Willingness to comply with stringent Indian Laws WEAKNESS Lack of
Experience in Indian market OPPURTUNITIES Early entry (1980) facilitated no
competition from any major International Brand India huge size market with availability of
raw materials locally (vegetables) In 1988, local brands forced to withdraw from market
due to carcinogenic ingredient (BVO) THREATS Unfriendly political environment and
Indian legal framework. Competition from local manufacturers Low demand in Indian
market for carbonated drinks Heterogeneous nature of Indian market Poor infrastructure
especially in rural India
23. 38. SWOT(COCA-COLA) STRENGTHS Well established Global Brand Prior knowledge
of Indian market (1958-1977) Tie up with local players (Britannia Ltd) Strong Fiscals to
acquire local business (bottling plants/local brands) WEAKNESS Improper appreciation of
existing Indian Laws at entry time OPPORTUNITIES Liberalization of Indian economy after
1991 Availability of better infrastructure Local bottling plants were available for sale
Better acquisition opportunities (purchase of brands such as Thums Up, Limca, Citra, Gold
Spot & Maza from Parle) Scope for marketing diversified products (fruit drinks, soda and
packaged water) THREATS Strong Competition from Pepsi and other local brands due to
late entry (1993) Stricter legal framework (40% equity to Indian Investors) Decreasing
popularity of carbonated drinks in India Threats of disclosure of concentrate formula
MERCHANDISE 7X to local partner.