Cola Wars: Profitability of the soft-drink industry Essay

847 Words Sep 28th, 2013 4 Pages
Cola Wars Case Study

Question: Why is the soft drink industry so profitable?

Historically, the soft drink industry has been extremely profitable. Long time industry leaders Coca-Cola and Pepsi-Cola largely drive the profits in the industry, relying on Porter’s five forces model to explain the attractiveness of the soft drink market. These forces allowed Coke and Pepsi to maintain large growth until 1999, and also explain the challenges that each company is currently facing. The relative duopoly that Coke and Pepsi share in the industry allows for higher profits, while also maintaining enough competition to promote firm improvement.

The first of Porter’s forces is the threat of new entrants. Coke and Pepsi have been largely
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High industry growth from 1975 to 1995 also provided a reprieve from the competitor pressure. Franchising and long-term contracts created higher switching costs, historically limiting the effects of rivalry on the two firms.

Porter’s third force is the bargaining power of buyers. This has always been low in the industry, and continues to diminish over time. The low number of suppliers does not afford buyers much room to negotiate. Furthermore, the abundance of distributor options prevented the bottling plants from applying pressure on Coke and Pepsi. Exhibit 8 also shows that both Coke and Pepsi were among the top five consumer brands most important to retailers, suggesting that they were on the losing end of the transaction relationship.

Porter’s fourth force is the bargaining power of suppliers. Coke and Pepsi have always set their price. Bottlers were forced to buy concentrate at set prices, usually negotiated in the favor of Coke and Pepsi. The small number of suppliers limited alternatives that could provide the necessary concentrate to bottling groups. Coke and Pepsi have continuously renegotiated contract terms to decrease their costs and enhance profitability. These contracts eventually eliminated marketing cost obligations for concentrate producers as well. Suppliers became so powerful that they eventually bought their own bottling plants.

Porter’s fifth force is the threat of substitutes. Initially, other products that could

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