1. Is the industry that Coke and Pepsi compete in an attractive one? What about the CSD bottling industry? What have profits in each industry looked like historically?
Concentrate Manufacturing appears to be attractive with large margins and low capital requirements
Bottling has much lower margins and expensive capital requirements
Coke & Pepsi’s domestic operating margins have been increasing whilst international operating margins appear to be declining or stagnant.
Pepsi bottlers have a 29% margin vs 1.6 for coke –Non CSD products
Market power for screwing suppliers.
2. Perform a five forces analysis of both the concentrate and bottling industries. Try to come up with evidence for each of the following:
How intense is rivalry among firms in the industry? Why?
Concentrate – Very high rivalry built on brand management and consumer identification – Trying to differentiate constantly to avoid a race to the bottom on price
Bottlers – Pretty much a commodity product, although there is little competition from other bottlers due to licence arrangements. However heavily dependent on the benevolence of the concentrate suppliers. Individual firms can do better by having superior logistics and inventory management. Skills in negotiation with shop keepers/retailers can improve sales. Economies of scale helps in packaging price negotiation.
How much power do suppliers and customers have?
Concentrate - Suppliers are producing commodity products that are likely to carry low margins. Consumers – bottlers have very little bargaining power mainly due to exclusivity of contracts. Fountain market, consumers seem to have pricing power as Pepsi and Coke seem to engage in a price war for the business.
Bottlers – suppliers produced commodity products and hence also had limited pricing power. Consumers to bottlers have many available substitutes however, changes to supermarket prices showed that demand was quite inelastic hence the consumers seems willing to absorb price increases in the short term atleast.
How large are barriers to entry? * Concentrate – Building a brand takes time and money, Coke and Pepsi have shown that they can ward off competitors as shown by Cadbury Schweppes’s growth by acquisition rather than organic.
- Bottlers – Require large capital investment upfront and due to exclusivity of licensing, cannot grow organically without…