Cola Wars Continue: Case Analysis

The Profitable Soft Drinks Industry

• Since 1970 consumption grew by an average of

3%
• From 1975 to 1995 both Coke and Pepsi
achieve average annual growth of around 10%
• Head-to-Head Competition between both Coke
and Pepsi reinforced brand recognition of each
other. Thus marketing added to profits rather
than eating them up.
• Very large market share. 53% in year 2000.
• Average 10.65% net profit in sales for both
Pepsi and Coke.
 Concentrate Business - Porter Five Forces
Barriers to Entry
-Recipe development
-Manufacturing plant
-Brand establishment
-Distribution networks
-Intense Competition
-Economies of Scale

Supplier Power Buyer Power

-Raw Materials/ -Competitive Rivalry -few big bottlers
Ingredients -Coca-Cola -partly owned by
-Price Sensitivity -Pepsi concentrate producers
-Cadbury

Substitutes
-Non-carbonated drink
-Pricing of NC drinks
-Mature Market
 Bottlers Business - Porter Five Forces
Barriers to Entry
-Capital Intensive
-Exclusive Franchises
-Contracts
-Packaging Technology
-Switching Barriers
-Limited Shelf Space

Supplier Power -Competitive Rivalry Buyer Power

-Weak commodity -PBG -Food Chains & fragmented
suppliers -CCE convenience stores
-Powerful concentrate -Relationship based sales
-etc.
suppliers

Substitutes
-New packages for line
extensions/new products
-Direct sales
-Automatic Dispensers
 The Bottling Industry Life Cycle:
Rivalry over Time
1970: 2000

# of Industry
1910: 370
players
2000: 300

Introduction Growth Maturity Decline

Time
Profitability/Attractiveness of Bottling Industry
HIGH ATTRACTIVENESS
• Gross profits 40% & Operating Margins 9%
1. Exclusive geo territory rights/ decision freedom
2. Large role in trade/consumer promo
3. DSD Relationship with Retailers
4. Capital intensive = barrier to entry
5. Franchise agreements CPI index = power of buyer
(bottler)
6. “Soft drink act”= barrier to new entrants
7. Bottlers service soda fountains & buy vending
machines
8. Packaging represents 40% of COGS but has little
power vs CP
9. Metal cans as commodities= power of buyers (bottler &
CPs)
LOW/HIGH ATTRACTIVENESS
Patented “Skirt” Coke bottle= barrier to entry
Diversified Product Portfolio (hot-fill and Water)
 raised capital requirements & Margins 
threat/barrier of new entrants
Anchor bottle model (consolidation) 
increased power of supplier (CPs)

TODAY’S ATTRACTIVENESS
Internationalization  imitation strategies 
power of bottlers  localized competition
 Topline to Bottomline: CP v/s Bottler

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Sales Cost of SalesGross Profit
Advertising & Marketing
Operating Profit

Concentrate Producer Bottler

Sustainable Profits??

• It should not be a problem to sustain their profits

through the next decade. The challenge would
be to sustain their historical rate of growth. To do
so they need to seek out new markets and
increase consumption in currently developing
markets such as China and India.