Corporate Evolution and Strategic Management MBA PT- Vth Semester

Assignment

Cola Wars Continue: Coke and Pepsi in 2010

Submitted to: Dr. J. K. Mitra Faculty of Management Studies University of Delhi.

Submitted By: Group 1 Amit Batra Anjanee Kumar Srivastava Mukul Grover Pankaj Garbyal Ruma Saxena Sunil Manohar Singh Syed Sarfarazul Haque Vikas Arora S-5 S-10 S-36 S-40 S-57 S-71 S-76 S-81

Question 1. Why, historically, has the soft drink industry been so profitable?
Answer. Historically, the Cola industry has been profitable due to the advantages created by Porters five forces.

Barriers to Entry
First mover advantage - The first reason for this profitability was high barriers to entering the carbonated soft drink (CSD) industry. Barriers to entering the CSD industry began almost as soon as the industry itself, as courts barred imitations and counterfeit versions of Coca-Cola under trademark infringement. In 1916, courts barred 153 of these imitations, demonstrating the prevalence of the desire to enter the CSD industry, as well as the extreme difficulty to do so. This barrier to entry allowed Coca-Cola to dominate and almost single-handedly develop the CSD industry, and almost excluded Pepsi-Cola from the industry, until Pepsi-Cola won the 1941 trademark infringement suit that Coca-Cola had filed against it. Brand loyalty - Historically, the second 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 coupled this mass availability of Coke with an advertising campaign that emphasized the role of Coke in a consumers life, the combination of which developed brand loyalty through increasing both the availability of and the desire for Coke. 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. Coca-Colas efforts to increase brand loyalty were so

successful early on that in order to gain market share and develop brand loyalty of its own, Pepsi-Cola had to rely very heavily on price differentiation and sold its 12-ounce bottle for five cents, the same price that Coca-Cola charged for its 6.5-ounce bottle. Successful Vertical Integration - The third significant historical barrier to entering the CSD industry was the successful vertical integration of nationwide franchise bottling networks of Coca-Cola and Pepsi-Cola, beginning in 1980. Coca-Cola recognized that most of the family-owned bottlers that it used no longer had the resources to remain competitive in the industry and began buying up the poorly-managed bottlers, reinvigorating them with capital, and selling them to better-performing bottlers. In 1985 Coca-Cola bought two of its largest bottlers and in 1986 created an independent bottling subsidiary called Coca-Cola Enterprises, which allowed the company to consolidate its territories into larger geographic regions, placed it in a better position to negotiation with suppliers and retailers, and merged redundancy. In the late 1980s, Pepsi-Cola followed Coca-Colas lead, first attempting to operate its bottlers for a decade before shifting to a bottling subsidiary, Pepsi Bottling Group, which went public in 1999. By 2009 Coca-Cola Enterprises handled about 75% of CocaColas North American bottle and can volume and Pepsi Bottling Group produced 56% of PepsiCos total volume. Further, this vertical integration created the additional barrier to entry of increased dependence on the Pepsi and Coke bottling networks for product distribution. Franchise agreements since 1987 had allowed bottlers to handle non-competing brands of other concentrate producers, but this consolidation of bottling networks limited the flexibility of bottlers to handle alternative brands, and thus heightened the barriers to entering the CSD industry. Economies of Scale - 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. In the 1980s Coke introduced 11 new products including Caffeine-Free Coke in 1983 and Cherry Coke two years later and Pepsi followed suit and introduced 13 new products during the same period. By the end of the 1980s, both Coke and Pepsi offered more than 10 major brands in at least 17 container types, squeezing existing concentrate producers out of the market and creating a significant barrier to entry because Coke and Pepsi were creating new products before other potential rivals could create them to compete and because Coke and Pepsi had such efficient economies of scale that it would be difficult for competitors to be able to profit from entering the industry.

Buyer Power
Bottlers Customer Fragmented. Price-sensitive. No switching cost, but substitute not available. Some loyal customers. High switching cost. Franchise agreement locked them with exclusive deal.

Retail outlets Limited shelf space - The buyers in the CSD industry are the various retail outlets for CSDs, including supermarkets, fountain outlets, vending machines, mass merchandisers, convenience stores, gas stations, and other outlets. Overall, there is a moderate amount of buyer power in this industry, because the buyers have significant power because they determine the shelf space and visibility of the industrys products, but their power is also limited by the

significant sales of CSDs of $12 billion annually, or about 4% of total store sales in the U.S. Buyer power is also limited by the fact that CSDs are a big traffic draw for many of these outlets. The balance of power creates a moderate buyer power relationship with retailers.

Supplier Power
Basic Ingredients Supplier power is low for this industry because the factors of

production for both the concentrate aspect of the industry and the bottling aspect of the industry are basic commodities like caramel coloring, natural flavors, and caffeine for concentrate and packaging and sweeteners for bottling, none of which require specialized suppliers. Metal Cans - Coke and Pepsi are among the metal can industrys largest customers, and it is often the case that two or three can manufacturers compete for a single contract with the companies, giving Coke and Pepsi a large advantage, and therefore creating a situation of low supplier power. This lowers expenses and therefore increases profits for CSD producers.

Substitutes
Not conveniently available - Historically, the threat of substitutes to the CSD industry has been low to moderate. There are many substitutes, including alcoholic beverages, coffee and tea, sports drinks, and several other beverages, as well as noncola CSDs such as lemon/lime and root beer, but the availability and variety of CSDs make the CSD industry nearly impervious to this threat. Impulse buying by soft drink user. Addiction is also reported. Lifestyle choice In this fast paced life, people prefer to soft drink than some juice as making juices is rather a long process. Though this is changing with greater awareness about benefit of juice and their availability.

Status symbol People presume drinking soft drink as a status symbol. People would rather carry a pet bottle of soft drink than a tea or coffee or other beverages. College student too like to hold soft drink in order to be in the crowd of happening people.

Finally, the threat of substitutes is low because the CSD industry has already introduced several products, such as diet versions and flavor variations of classic products, creating its own substitutes for those classic products and absorbing the subsequent profits.

Rivals
Rivalry is extremely high in the CSD industry and has been a contributing factor to the profitability of the industry. The two primary CSD companies, Coke and Pepsi, have been engaged in cola wars for over a century, which has led to innovation in the industry ranging from new lines of products and vertical integration to marketing campaigns and novel packaging. High rivalry has driven innovation and led to the historical profitability of the CSD industry. They have carefully avoided downward spiral seen in other industry. All the rivals in this industry know that opportunity of gaining advantage is short term. Major players are capable of imitating each other on almost every dimension. Rivalry is more to keep the fizz.