So no scope for future competitors due to high capital costs in setting up a new plant. * Advertising: Huge advertising costs by Pepsi and Coke which cannot be matched up to. * Brand Image/Loyalty: It is virtually impossible for a new entrant to match this scale in the market. * Retail Distribution: Significant margins of 15-20% for the shelf space. New entrant finds it hard to convince the retails for this space. * Price Wars: New entrant does not stand a chance due to the large scale production of Pepsi and Coke. Commodity Ingredients: Basic commodities are Sugar,Additives,Colour,Flavour. The producers have no say over the pricing hence the suppliers are weak in this industry due to alternative such as HFCS in sugar prices go up. Soft drink industry diversifies itself by offering substitutes to shield them from competition. 2. Compare the concentrate business to the bottling business in terms of profitability and level of vertical or horizontal integration? The concentrate business is highly profitable as compared to the bottling business.
Firstly, there are a higher number of bottler’s as compared to the concentrate producer’s which leads to competition of the bottler’s to get a contract with the big 2 of the industry. This leads to reduced margins in the bottling section. Secondly, huge capital cost to set up a bottling plant whereas the capital costs required in the concentrate business are minimal. Costs of distribution and production account for 65% of the price while in the concentrate business it accounts for only a mere 17%. Thirdly, most important of all the brand equity remains with the concentrate producer.
Possible Reasons for Vertical Integration: * A drastic decrease in the number of bottler’s in the coco-cola company from 2000 in 1970 to less than 300 in 2000,this indicated that the concentrate producers were apprehensive about the bottler’s gaining power and possible networking with different concentrate producers and made them to start acquiring stakes in the bottling business. * Packaging could be another reason for vertical integration. * Pepsi and Coke mainly over the years competed on differentiation and advertising rather than on pricing except for a period in the 1990’s.
This prevented a huge dent in profits. * To shield the business by preventing new competition from entering they could control the bottling section too. 3. Compare and contrast the distribution options? The major channels for the Soft Drink industry 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 somewhat 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 producer’s in this segment is $0. 23/case * Convenience Stores: This segment of buyer’s is extremely fragmented and hence has to pay higher prices; NOPBT here is $0. 69 /case. * Fountain: This segment of buyer’s 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 customer’s directly with absolutely no power with the buyer, hence NOPBT of $0. 97/case. 4. Has the competition between Coke and Pepsi affected the industry’s profits? Yes, the competition between Coke and Pepsi has indeed affected the industry’s profits. In the 60’s and 70’s Coke and Pepsi invested heavily on advertising and marketing strategies’. “The Pepsi challenge” is an example of this where Pepsi used blind tasting to differentiate itself as a better cola than coke.
But in the 90’s bottlers of these Cola’s used lower priced strategy in supermarkets to compete with the store brands. The bottlers of these colas were most affected by this strategy because their profits took a beating. Net profits stooped to as low as a single digit. However Pepsi and Coke were able to maintain the profitability through Frito Lay and International sales. The bottling companies soon decided to abandon this price war which was hampering the industry as a whole by raising prices. 5. What are your recommendations to Coke & Pepsi?
As I see it Coke and Pepsi are readying for another cola war. This war unlike the previous one will not be for the US territory alone but for its capture and dominancy in the international market. Different countries have different policies and both these companies are trying to make use of this to suit their own advantage. My recommendation to Coke and Pepsi is to play fair and not use the guerrilla warfare method that Pepsi is known for. Innovative advertisements should be encouraged and not come up with advertisements demeaning the other brand.