C: Cola Wars Continue: Coke Vs Pepsi in 1990s

Learning Objectives: 1. Economics of Soft Drinks (SD) industry and its relationship to average profit. 2. Relationship of different stages of the Value Chain (Value Stream) in an industry --- incentive for vertical integration. 3. Relationship between competitive reaction and industry profit. 4. Globalization

What are the various parts of SD industry?

Why it is necessary to know the various parts specifically in SD industry?

Ex 3.3
CPs Gross Margin Pretax Profit Investment 83% 29% $ 5- $10 Bottlers 43% 09% $20- $30 for small plant, $30-$50 for efficient large plant 02%

Ad and Marketing

39%

 How and what tool(s) we can use for analyzing economics/attractiveness of each part of industry? If CPs are profitable, why so few firms have entered over last century? What are the barriers to entry?

Barriers to Entry

What are the first Mover Advantages?

Even it is hard to enter, are there any substitutes available? What do they Cost? Why they don't have much effect on Price?

Substitution:

How do the SD cos get away with charging 70C when subs are free?

 Do suppliers have any real power vis-vis CP manufactures? Who are they?

Suppliers:
What really goes into typical conc?

Who the buyers? How much power they have? Who are the buyers for CPs?

May be the biggest puzzle about rivalry; how can cos make money in the middle of war? Who has won the Cola wars? Who has lost? What have been the weapons of the war?

Rivalry

Summary CPs attractiveness

Smaller brands losing Constrained Competition, High BTE (barrierto-entry), Locked-in-buyers, secret ingredients, lots of subs, but ad and dist have impact; GREAT BUSINESS

How the economics of Bottlers differ from CPs?

BTE is high

If you cld be a bottler would you choose NYC or Oklahama (Mumbai or Nasik)?

Who are the buyers?

What about suppliers? Do they have power?

Who are Substitute?

What about Rivalry?

Summary
BTE is high, substitute is limited, rivalry only other brands,, but can fierce in certain market Supplier no threat appropriated by Coke and Pepsi Buyer vary with distribution channel

 Why VI (vertical integration) when CP business is so profitable than bottlers? Case gives two obvious rational:

Implication of Changes
Globalization, Demographics, new age beverage, private level. Growing power of distribution channel

Impact of Globalization
Expand primary market --- less head to head, big fast mover advantage

What we have learnt?

How firm can and exercise market power To understand opportunity, one needs to know the upstream and down stream parts of the industry Coke and Pepsi just not inherited business, they created it; they have not only created the business but the industry itself. In other words industry is not always exogenous, it can be endogenous Coke and Pepsi are classic case of smart competitors; when they go for war, they kill bystanders, not themselves