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The competitive battle in the soft drink industry is one most ubiquitous business rivalry known to our generation. Capturing market share within a behemoth $66B global industry is undoubtedly attractive.
The industry has historically been profitable because of several significant factors. Americans have consumed, and continue to drink more CSDs than any other beverage (Exhibit 1). Furthermore, since 1970, consumption of CSDs grew by an average of 3% per year. In the 1970s through mid-1990s, both Coke and Pepsi maintained an average growth rate above 105 per year. Pepsi and Coke combined have enjoyed roughly 50-70% of the CSD market share since 1970 (Exhibit 2). Both companies provide products that are enjoyed globally; there is no limit to their market. Additionally, rivalry between Coke and Pepsi and strong marketing campaigns have reinforced brand recognition and boosted sales.
An industry analysis using Porter’s Five Forces reveals that the CSD industry has historically been favorable for positive profitability, as exemplified by both Pepsi and Coke’s financial results. The intensity of rivalry is ultimately determined by the relative strengths of these forces.
The CSD industry enjoys a low threat of entrants. Creating and bottling CSDs requires a significant capital investment. Also, new competition would need to conquer the tremendous marketing strength and market presence of Coke and Pepsi.
Bargaining power of buyers has historically been moderate, yet increasing. Negotiating power is growing with fountain supermarkets and mass merchandising, both of which have been increasingly successful in forcing down prices paid. Undoubtedly, bargaining power is nonexistent with vending machines. However, profits are higher where bargaining power is greatest and lower where bargaining power is the lowest.
Suppliers have relatively low bargaining power. CSDs are primarily made of sweetener, water, and packaging. All of the suppliers involved in the supply chain are relatively ubiquitous; therefore competition among suppliers is fierce. In turn, this creates lower prices, reliable supply, and shorter delivery lead-time.
The CSD industry is experiencing threats of substation. For years both Coke and Pepsi benefited by having their brand names synonymous with “colas” in the minds of consumers. In the 1990s and 1990s, the industry experienced steep competition from noncarbonated beverages. Teas, water, sports drinks, and juices grew in popularity and cut into market share previously owned by CSDs. This forced Coke and Pepsi to expand their product lines and expand their product portfolios. Consequently, because of product diversity, substitutes have become less of a threat.
Rivalry among Coke and Pepsi is extremely large. This competition pushed the CSD industry into a duopoly that produced positive economic profits. However, the duopoly endured fierce competition for market share that ultimately hampered profitability. For example, both companies experienced reduced profit margins in the 1980s due to pricing wars. This circumstance consequently adversely impacted the CSD industry’s profits.
Although part of the same industry, the economics of CPs and bottlers are quite different. The primary distinction between the two revolves around value-added activities and their role within the CSD supply chain. These activities produce noticeably dissimilar profits.
CPs add value to the supply chain through proprietary branding. The CPs enjoy the benefits of advantageous control over buyers and suppliers due to duopolistic competition. This helps manage COGS and prices charged by the supply base. CPs experience their largest expense with advertising and marketing, however, a typical CP gross profit is 83% compared to 40% for a typical bottler (Exhibit 4).
Contrasting from their CP counterparts, bottlers do not have branded products or unique concoction. Bottlers add value to the supply chain through continuous manufacturing processes and distribution. The bottlers experience a lower profit due to high fixed costs related to operations. Bottlers’ gross profits are high, but operating margins are relatively lean.
Going forward, Coke and Pepsi should certainly be able sustain their profits through the next century. Both companies may need to make minor adjustments to their business models while sticking with their core competencies of developing and producing beverages.
Overall, besides the last two decades, the CSD industry has experienced rapid growth for most of its existence. In order to support growth, both companies should focus on thinking globally. Globalization has provided a boost to the people in emerging economies to afford CSDs. By focusing on marketing to emerging international markets, the industry can maintain positive profits.
Furthermore, the CSD industry should be proactive about growing health concerns in the USA. Beverages high in sugars and carbonation have been recognized as being harmful to a healthy lifestyle and a source of obesity. Both companies should be cognizant of FDA activities that may alter distribution of products. Also, developing healthier ingredients will help attract the growing health-conscious population.
Both Coke and Pepsi have recognized the importance of offering lager portfolios of beverages. More and more, consumers are demanding variety. As previously identified, the largest competition in substation revolves beverages other than colas. Diversification will become increasingly more essential for growth.
Pepsi and Coke are favorably positioned to continue to remain profitable. The CSD industry has the necessary forces present to drive industry competition. A strong presence of competitive dynamics along with market growth will help both Pepsi and Coke maintain profits for decades to come.
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