Five Forces Analysis for CSD Cola wars c PDF

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Lorenzo Guglielmotti (Section O) Short Analysis Assignment #2: Five-Forces Analysis for the Concentrate Industry (Cola Wars Case) (1) 1. Threat of new entry: low It can be reasonably seen that the threat of new entrants is low due to the high entry barriers. In fact, huge capital requirements are necessary to enter the U.S. carbonated soft drink (CSD) industry, there is high competition in bottling process, which is a capital-intensive activity and involves high-speed production and significant costs are required for advertising, promotion, market research and bottler support. Analyzing the data showed by the case, Coke and Pepsi spent 234$ million and 136$ million on advertising in 2009, respectively, and the expense for share point were 15,294$ and 15,456$. In addition, the strategy to keep secret cola recipe make difficult the perfect imitation by new competitors and brand identification and customer loyalty to incumbent products represent high barrier to potential entrants because of the reputation advantage gained by Coke and Pepsi, which has been built up over many decades. Finally, during the latest years, the industry has lost part of its attractiveness: according to the statistics the demand for CSD leveled off, losing share in favor of healthier and non-carbs drinks. 2. The power of Suppliers: low supplier bargaining power The most valuable input in the making process of CSDs (concentrate) is provided by the soft drink companies, whereas the other inputs (sweetener, flavor, caffeine, carbonated water, packaging) required are commodities (nondifferentiated) and easily available in the market to every producer. Hence a large number of suppliers are available for the inputs supplied and the switching costs are low, based on needs and costs, making limited the supplier bargaining power. In support of that, it can be get that cost of goods sold is only 0.22$, representing 22% of the net sales for concentrate producers. Moreover forward integration by suppliers is not a credible threat because it requires high costs to get competitive and developed bottling and distribution channels. 3. Power of Buyers: low/weak bargaining power The category of buyers in the CSD Industry is represented by many players. The network of bottlers is fragmented and has limited negotiation power with concentrate producers: in fact, Coke’s Master Bottler Contract and Pepsi’s Master Bottler Agreement granted the two companies the right to determine concentrate price and other terms and conditions of sales with their top bottlers,. Moreover, the two companies have franchise agreements with their existing bottlers which prohibit them from taking on new competing brands for similar products.

During the last years, Coke & Pepsi integrated their value of chain buying significant percent of national bottling companies: in 2009 Pepsi bought two of its biggest bottlers and Coca-Cola Enterprises (CCE), independent bottling subsidiary, in 2009 Coke’s largest bottler (75% of Coke’s North American bottle and can volume and logged annual sales for more than 21$ billion) was bought by Coke in 2010. In addition, Coke and Pepsi lowered the power of national fountain accounts entering Fast-food restaurant business: Coke retained exclusively deal with Burger King and McDonald (the largest national account in terms of sales), Pepsi with Pizza Hut (1978), Taco Bell (1986), KFC (1986). Last, the final end consumer market is large and extremely fragmented, characterized by advertising-sensitive customers, in which no one customer tends to have bargaining leverage. 4. Threat of Substitutes: low/medium. The soft drink industry has large numbers of substitutes since many alternatives to CSDs exist (coffee, milk, beer, tea, juices, bottled water, energy and sports drinks) and popularity of non-carbs continued to grow (from 13% of U.S. non-alcoholic refreshment beverage volume up to 17%), due to the rising inclination of the consumers towards healthier drinks in response to the growing linkage between CSDs and issues such as obesity and nutrition. In addition, the customer switching costs are low (for example if the price of coke increased significantly, customers might easily shift to other soft drinks). However Coke and Pepsi reduced the threat by diversifying business non-CSD industries through the expansion of their products portfolio: they introduced different diet brands and sports drinks, developed their own versions of sweetener and introduced purified-water products. On top of that, by 2009 Pepsi and Coke had 43% and 32% of the U.S. non-carbs market share, respectively. 5. Rivalry among Existing Competitors: low/medium The soft drink industry is dominated by two major players, who have the majority of the market share: Coke & Pepsi claimed a combined 72% of the U.S. CSD market’s sales volume by 2009 (duopoly), followed by Dr Pepper Snapple Group (DPS), which in 2009 is expected to hold 16.4% of market share, and Cott Corporation (4.9%). Therefore the CR4 analysis show clearly the industry high concentration in which the four main competitors hold 93.3% of the market share. However it can be noticed that companies compete on differentiation rather than pricing, disallowing decline on profits and keeping the industry very profitable. In fact, according to the financial data ROE of Coca-Cola and PepsiCo are 27.5% and 35.4% respectively, by 2009.

(2) Given the strengths of the other Industry Forces, the level of rivalry seems to be what we should expect, since according to the Porter’s Five Forces model, the latter force is strongly influenced by the formers: the weaker the forces, the weaker expected competitive intensity. There is an evidence that the competition between the two companies is benign for the most part, focusing on non-price factors such as lifestyle advertising and product innovation rather than on price. Even if Coke and Pepsi faced price war during the 70s and 80s, then they preferred to differentiate their business in order to prevent falls in their revenues. (3) The force which is changing the most is the threat of substitutes, which is gradually intensifying. In fact, according to the statistics, in the late 1990’s demand of CSDs leveled off: Cola market is dropped from 71% in 1990 to 55% in 2009. In addition, looking at the annual change in market share between 2004 and 2009, on one hand Coke and Pepsi lost 3.5% and 5.5% of their share, while on the other healthier product such as Nestlè Pure Life and Lipton Tea gained 32% and 5.9% respectively. The reason of the decline in CSD consumption during the last 20 years is to research into a negative health perception of CSD which has been enhancing, making consumers looking for healthier alternatives, despite both the firms tried to face the dwindling through innovation and advertising. This perception was reinforced by Fed Nutrition Guidelines in 2005 which state CSD’s as largest source of obesity in American Diet....