Five Forces Analysis On Cola Wars & Soft drink Industry.

Soft drink industry:

The Soft Drink Industry is primarily engaged in manufacturing non-alcoholic, carbonated beverages, mineral waters and concentrates and syrups for the manufacture of carbonated beverages. Soft drink industry is very profitable, mainly for the concentrate producers than the bottler’s. The leading players of the market are Coca-Cola, Pepsi Cola, and Cadbury Schweppes.

In this industry, fierce rivalry between dominant producers Coca-Cola & Pepsi and the bargaining power of the buyers who place huge orders for soft drinks are strong, while the threat of new entry and the threat of substitutes are mild. And, bargaining power of the suppliers is conditional.

Threat of Entry:

New Entrants to an industry bring new capacity and a desire to gain market share that puts pressure on prices, costs, and the rate of investment necessary to compete.

Threat of a new entry is considerably low in today’s soft drink market.

In the initial stages of the industry, Coca-cola was the dominant leader of the market, and then new entrant Pepsi made a huge impact on sales and profits of Coke. But, today Cola-Wars between Coke and Pepsi are so dominant, that possible threat of a new entrant is relatively low.

The several factors that make it difficult for the new companies to enter the soft drink market include:

1. Role of bottlers:
• Bottlers purchase concentrate, add carbonated water and high-fructose corn syrup, bottle the resulting CSD product and deliver it to customer accounts. The bottling process is a capital-intensive and involve high-speed production line that are interchangeable only for products of similar type and packages of similar size.
• Companies like Coke and Pepsi have franchisee agreements with their existing bottlers which prohibit them from taking on new competing brands for similar products. A bottler involved in bottling a product of a company cannot support any other company, hence making it difficult for a new entrant.
• And, with the backward integration, where both Coke and Pepsi buying significant percent (nearly 100 plants in US to provide effective national wide distribution) of bottling companies, it is very difficult for a firm entering to find bottlers willing to distribute their product.
• Also, to try and build their own bottling plants, for a new entrant would be very capital-intensive and a difficult task.

2. Role of Retail channel :
• The distribution of CSDs took place through Supermarkets, fountain outlets, vending machines, mass merchandisers, convenience stores, drug chains and gas stations and other outlets.
• The main distribution channel is the Supermarket where bottlers fight for shelf space to ensure visibility for their products. In this ever-expanding array of products offered by existing players, there would be intense competition for the new entrant.
• The mass merchandisers include warehouse clubs and discount retailers like Wal-Mart. These companies sell popular and leading products like Coke and Pepsi, so for a new entrant to find itself, a merchandiser is difficult task.
• Competition for fountain accounts is very intense and often CSD companies sacrificed profitability in order to land and keep those accounts. Coke and Cadbury Schweepes have long retained control over fountain sales. Ex: Coke supplies for Subway, McDonald’s and Burger King whereas Pepsi took over Pizza Hut, Taco Bell, KFC. In this case, new entrant has huge competition to face.
• In vending channel, Coke and Pepsi have their dominance by giving financial incentives to encourage investment in machines. It would very challenging for a new entrant to compete.

3. Entry barriers:
• In many countries, production, distribution and sale are subject to numerous governmental regulations. All companies are subject to numerous environmental laws and regulations, which makes it difficult for a new entrant to enter the country’s market.

4. Brand Loyalty:
• Brands like Coke, Pepsi and Cadbury with a large market base charm the customers and acquire their loyalty. People avoid going in for any other brand, once accustomed to a particular brand like Coke or Pepsi.
• Heavy advertising contributes to huge amount of brand equity and loyal customers all over the world. This makes it virtually impossible for a new entrant to match these market leaders in the industry.

5. Advertising Expenditure:
• Coke and Pepsi spend huge amount on advertising and marketing of their products. Coke leads the charts by spending 246,243$ and Pepsi with 211,654$ (in thousands). They sponsor varied programs from TV shows to Sports programs. Pepsi was the official sponsor of Cricket World cup 2003. In this way, they retain their market share and make it extremely difficult for new entrant and force it to spend hugely on promotion and advertising.

6. Risk & Experimentation:
• The already emerged companies like Coke and Pepsi can step up to take risks and experiment by launching new variety of products. If it clicks, they obtain huge profits but, will not suffer great losses if failed. But a new entrant can not take such risks till it settles in the market.

Intra-Industry Rivalry:

The leaders of the industry are Coke, Pepsi, Cadbury Schweppes with huge market shares. The rivalry talked over is between the two market leaders Coca-Cola and Pepsi, called ‘The Cola Wars’. They have competed on various strategies like price discounts, extensive marketing, and automation of the bottling plants etc.

• Coca-cola was started way back in 1890s and after a period of nearly 40 years, in 1939 Pepsi was launched. When Pepsi was launched, it was called the ‘imitator’ by the coke group, but soon it became a dominant force in the of decline of coke’s market share. Pepsi mainly aimed on packaging. When it was launched, it came out with a campaign of--- “Twelve full ounces, that’s a lot. Twice as much for a nickel, too”, which forced Coke to launch three new packages: King-sized ten-ounce, the twelve ounces, and the twenty-six ounces Family size.

• In 1985, Coke announced that it has changed the 99-year old Cola formula. Pepsi claimed that the new coke mimicked Pepsi in taste, which promoted an outcry from loyal customers to bottlers. And, this forced the Coke to bring back its original formula.
• Pepsi mainly concentrated on advertising and marketing with film-stars to sports celebrities for promoting their products, which became very successful. Many other new players followed this later.

• In terms of marketing, the rivalry between Coke and Pepsi heated up with “Pepsi Challenge” in Dallas. This was responded (by Coke) with an ad campaign questing the validity of the test. It also introduced rebates and retail price cuts.

• In terms of Retail channels, Coke and Pepsi fought over fountain sales to acquire more national accounts. Competition remained vigorous: In 2004, Coke won the Subway account away from Pepsi, while Pepsi grabbed the Quiznos account from Coke. Coke however continued to dominate the channel with 68% share of national pouring rights, against Pepsi’s 22% and 10% for Cadbury.

• In 1966, Coke had market share of 33.4%, Pepsi with 20.4% (Cadbury was not launched then) and in 2004, Coke has 43.1%, Pepsi has 31.7%, Cadbury with 14.5% and other companies with 5.2%. The Intra-rivalry has had an impact on the sales figures of industry players. The discounts given to the retailers, reduced the over all profit margins. This forced the companies to search for alternative supplies (like corn syrup instead of sugar).

• Coke introduced 11 new products like ‘Diet Coke’, Caffeine Free Coke, Sprite etc to try and attract new customers. In response, Pepsi also introduced 13 new products similar to that of Coke like ‘Diet Pepsi’, Mountain Dew etc.

Through out the history of CDS industry Coke and Pepsi fought for higher market share and survived in the intra-rivalry.

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The bargaining power of suppliers:

Powerful suppliers capture more of the value for themselves by charging higher prices, limiting quality or services, or shifting costs to industry participants.

1. In this industry, the bargaining power of suppliers is low, as there are many suppliers in this industry. And required commodities like flavor, caffeine or additives, sugar, and water are basic goods that are available quite easily. So, producers have no power over the pricing hence the suppliers in this industry are weak.
2. But, in case of product suppliers for firms with dominant position and that is only viable source for the supply of a product in the market, their bargaining power is strong. Ex: In Coca-cola’s case, that purchases acesulfame potassium from Nutrinova Nutrition Specialties & Food Ingredients and that is considered the only viable source by Coca-cola.
3. Generally, the supplier group can credibly threaten to integrate forward into the industry. But, here, the supplier would become a new entrant facing many difficulties, so the threat from suppliers is low.

The bargaining power of buyers:

Powerful customers can capture more value by forcing down prices, demanding better quality or more service and can cost industry profitability.

Buyers are powerful if they have negotiating leverage with the companies and put pressure over price reductions. In this industry, buyers are strong, because there are many firms producing soft drinks; it is easy to find other supplier in the industry.

Large volume buyers are particularly powerful in this industry, including major retail channels like Supermarkets (32.9%), fountain outlets (23.4%), vending machines (14.5%), mass merchandisers (11.8%), convenience stores (7.9%), and other outlets (9.5%). The profitability in each of these segments clearly shows the buyer power and how different buyers pay different prices based on their power to negotiate.

1. Supermarkets: It is the main distribution channel for soft drinks. The buyers in this segment are consolidated with several chain stores and few local supermarkets, so providing the bottlers premium shelf space and they command lower prices. The bottlers fight for shelf space to ensure visibility for their products.

2. Convenience Stores, Small Grocery stores and Drug chains: This segment of buyers is extremely fragmented and hence has to pay higher prices.

3. Fountain: This segment of buyers is the least profitable. They attain power of negotiation depending on the amount of purchases they make. When the amount is large, company allows them to have freedom to negotiate. Coke and Pepsi primarily consider this segment “Paid Sampling” with low margins. Coke and Pepsi have entered fast-food restaurants, Pepsi supplying to Pizza Hut, KFC etc and Coke supplying to McDonalds, Burger King, Subway etc.

4. Vending: This channel serves the customers directly. Bottlers took charge of buying, installing, and servicing machines, and for negotiating contracts with property owners, who typically received sales commissions in exchange for accommodating those machines. This segment of buyers has absolutely no power with the buyer.

5. Buyers can credibly threaten to backward integrate and produce the industry’s product themselves if vendors are too profitable. This category includes Mass Merchandisers such as warehouse clubs and discount retailers like Wal-Mart. These companies form an increasingly important channel. These retailers often have their own private-label CSD, or they sold a generic label.

The threat of substitute products or services:

A substitute performs the same or a similar function as an industry’s product by a different means. The threat of substitution is downstream or indirect, when a substitute

replaces a industry’s product.

1. This industry has large numbers of substitutes like water, beer, wine; coffee, milk, tea, juices etc are available to the end consumers.
2. The soft drink companies diversify business by offering substitutes themselves to shield themselves from competition.

Ex: Pepsi produces Mug Root Beer (1.4% market share), Slice fruit juice (0.3% ) and Tropicana fresh juices. Coke produces Barq’s and Diet Barq’s (0.4%), Minute Maid brands producing fresh fruit juices(1.5 %). By diversifying the business, the market share of the company raises to greater high. Coke recorded a high of 43%, after diversifying from 33.4%, when it was restricted to only Coca-cola. And Pepsi rose from 20% to 31%. And Cadbury rose from 4.7% to 14.5%.

3. Threat of substitute product is countered by soft drink industry by huge advertising, brand equity, and making their product easily available for consumers, which most substitutes cannot match.

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