Cola Wars Continue: Coke and Pepsi in 2006: Case Analysis

Cola Wars Continue: Coke and Pepsi in 2006: Case Analysis

MGMT 4P90

Denis Ursov

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1. Soft Drink Industry (SDI) overview

The industry considered in this analysis is Soft Drink Industry (SDI). SDI serves customer needs for refreshing and cold non-alcoholic beverages, with main industry sectors being: carbonated drinks, fruit punches, and bottled water sectors. There are three dominant companies in the industry, namely: Coca-Cola, Pepsi, and Schweppes. The soft-drink industry includes the following four major types of participating companies:

* Producers of syrups and concentrates,

* Bottlers,

* Retail channels, and

* Suppliers.

2. Porter's Five Forces Analysis of the Soft Drink Industry (SDI):

Soft Drink industry's Carbonated Drink sector is 66 billion industry in US alone. Soft Drink industry remains very profitable, with pre-tax profits of 30% and 9% for concentrate producers and bottlers respectively. The following five forces analysis will attempt to show factors contributing to the profitability in the industry.

Risk of entry by Potential Competitors:

It is difficult for new entrants to enter the market because of few factors:

First, in order to produce soft drinks a new company would have to have bottling or some other kind of packaging capacities or contracts with bottlers or packagers. To build a new bottling plant is very capital intensive and to enter in a contract with existing bottlers is difficult if not prohibited by the Coca-Cola and Pepsi's agreements with existing bottlers. Because it is hard to find a bottling producer for their products, new firms would face a lot of difficulties in entering the industry.

Second, competition in the soft drinks industry it is usually associated with high spending on advertising and marketing. Both of the industry giants Coke and Pepsi spend significant amount of money on advertising and marketing. It is difficult for a new firm to measure up with the scale and cost of the advertising expenses.

Another barrier for a new entrant is that both Coke and Pepsi has established customer preferences for their brands. It makes it almost impossible for a new firm to take significant or threatening market share from the Coke and Pepsi's established brands.

Bargaining Power of Suppliers:

Since the components and the raw materials for soft drink manufacturing is widely available and can be purchased from many sources there is no real threat that suppliers can dictate prices or otherwise