Cola Wars

Submitted By Esheetm
Words: 2573
Pages: 11

Courtney Bohen
Esheet Modi
MGMT E-5000
Section 2
Spring 2015

Cola Wars

Over time, the US carbonated soft drink industry has developed from a fragmented industry of many small players into one dominated by two key players: Pepsi and Coca-Cola. By 2009, these two giants generated 72% of the sales of the entire industry. (Yoffie & Kim, 2011, p. 2) However, the recent decline in US per capita CSD consumption (Yoffie & Kim, 2011, p. 1), now poses a threat to Pepsi and Coca-Cola’s most important lines of business, forcing the two firms to re-evaluate their current strategy to ensure future success.
Current State of the Industry

Despite the recently declining per capital consumption of CSD beverages, the industry does maintain some attractive qualities for incumbents. First, threat of new entrants into the industry is relatively low at this time, largely due to the strong brand loyalty consumers have developed to Pepsi and Coca-Cola products. These strong brand names have been developed over many years with many millions of dollars spent in advertising and marketing campaigns. Further, Coca-Cola and Pepsi have developed strong relationships with bottlers, even taking on ownership of many, an important vertical integration which would be difficult for a newcomer to replicate. Another force not of great concern to Coca-Cola and Pepsi at this time is the relatively low bargaining power of suppliers. Inputs to CSD concentrate production are mostly commodity products, such as sweeteners, which can be obtained from many sources. As for inputs to the bottling process, which Coca-Cola and Pepsi have recently become part of, plastic bottle and aluminum can manufacturers face intense competition in their own industry, with many producers vying for limited contracts. (Yoffie & Kim, 2011, p. 5) This intense competition is likely to put downward pressure on prices. Of greater concern to players in the CSD industry is the bargaining power of buyers. As purchasers of CSD concentrate, bottlers maintain an important role in the industry by maintaining relationships with retailers. This includes securing shelf space, positioning products, and setting up displays in retail stores. (Yoffie & Kim, 2011, p. 2) This role is critical to the CSD producer given the importance of supermarkets in distribution of their product, as 29.1% of industry distribution is to supermarkets as of 2009. (Yoffie & Kim, 2011, p. 4). Coca-Cola and Pepsi have both tried to minimize the power of bottlers as buyers of their CSD concentrate by acquiring their own bottling facilities, serving to increase their efficiency and control over this key value chain activity. The two strongest forces in the CSD industry at this time are the threat of substitutes and rivalry among incumbents. The obesity epidemic in America has become a real concern for consumers. This presents a challenge specifically to CSD producers as their products have been cited as “the largest source of obesity-causing sugars in the American diet” (Yoffie & Kim, 2011, p. 9). This perception has reduced demand for CSD’s by the end consumer. Substitutes for CSD beverages are numerous, including water, juices, and sports drinks. In addition, switching costs for the end consumer are relatively low, with non-CSD products sold in the same locations and at similar price points to CSD’s. With this industry dynamic in mind, Coca-Cola and Pepsi have both acquired product lines aimed at these substitutes.
Declining per capital CSD consumption serves to further intensify the already strong rivalry between Pepsi and Coke, an important dynamic present in the industry environment. These two firms have competed for market share for many years, even launching marketing campaigns aimed directly at the competition, as was the case for the “Pepsi Challenge” campaign launched in the 1970’s (Yoffie & Kim, 2011, p. 7). The intensity of competition has already begun to erode profits for both firms,