Cola Wars Continued * Coke vs. Pepsi in 2006
Reading the case, special attention should be paid to the underlying economics of the soft
drink industry and its relationship to average profits, the relationship between the different
stages of the value chain in the industry, the relationship between competitive interaction
and industry profits, and the impact of globalization on industry structure.
While preparing the case, you should start by carefully characterizing the carbonated soft
drink industry. To do this, clearly specify Coke and Pepsis market in the value chain of the
industry, their main suppliers and main buyers.
Both concentrate producers (CP) and bottlers are profitable. These two parts of the
industry are extremely interdependent, sharing costs in procurement, production,
marketing and distribution. Many of their functions overlap; for instance, CPs do some
bottling, and bottlers conduct many promotional activities. The industry is already
vertically integrated to some extent. They also deal with similar suppliers and buyers.
Entry into the industry would involve developing operations in either or both disciplines.
Beverage substitutes would threaten both CPs and their associated bottlers. Because of
operational overlap and similarities in their market environment, we can include both CPs
and bottlers in our definition of the soft drink industry. In 1993, CPs earned 29% pretax
profits on their sales, while bottlers earned 9% profits on their sales, for a total industry
profitability of 14% (Exhibit 1). This industry as a whole generates positive economic
profits.
Then answer the following questions.
1. Why is the soft drink industry so profitable?
Answer: Answer lies in viewing industry through the lens of competitive forces at play.
While competition in the industry is fierce, there are relatively few players and other
competitive forces are weak or have been reshaped by dominate industry players.
(i) Established Rivals: Low * Industry dominated by two companies and handful of niche
players (i.e. Cadbury Schwepps / Doctor Pepper).
(ii) Customer Power: Low * Although there is choice, the customer base
outside of fountain drinks is dispersed and therefore have limited to no clout in negotiating
lower prices.
(iii) New Entrants: Low * New entrants are deterred by high capital investments in
bottling, distribution and enormous marketing budgets of existing players.
(iv) Substitute Offerings: High but actively reshaped to Low * However, Soft drink
vendors reshape this force by improving availability and convenience of acquiring their
products through vending machines, fountain sales and convenience channels. In recent
years, soft drink vendors have diversified into new products that threaten to take share
