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Cola Wars Continue: Coke and Pepsi in the Twenty-First Century

Cola Wars Continue: Coke and Pepsi in the Twenty-First Century. The major themes of the case are:. Understanding the underlying economics of an industry and relationship to average profits.

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Cola Wars Continue: Coke and Pepsi in the Twenty-First Century

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  1. Cola Wars Continue: Coke and Pepsi in theTwenty-First Century

  2. The major themes of the case are: Understanding the underlying economics of an industry and relationship to average profits. Understanding the relationship between different stages of the value chain in an industry,including an introduction to the incentives for vertical integration. The relationship between competitive interaction and industry profits. How globalization can impact industry structure.
  3. Structure of the case Prior version used to teach Industry analysis Competitive dynamics Vertical integration This case will cover History of competitive dynamics Historical pattern of vertical integration Discuss the economics of U.S. Soft drink industry.
  4. Structure of the case Concentrated Producers Gross margin 83% Pretax profit margin 35% Bottling Business Gross margin 35% Pretax profit margin 9% The bottling business was much less profitable than concentrate Why most of the profits are earned upstream in the concentrated business? Contd…….
  5. Structure of the case Suppliers including packaging and sweetener companies, except for the period of time when Searle had a monopoly on NutraSweet, suppliers had virtually no power in the industry. Coke and Pepsi negotiated with suppliers on behalf of their bottlers, creating much more buying power than a fragmented bottling network could offer.
  6. Structure of the caseHistory of Cola Wars, spanning 100 yrs Pepsi almost went bankrupt twice, but finally emerged in the 1930s. Pepsi managed to become a contender by selling 12 ounces of Pepsi for 5 cents, while coke was selling 6.5 ounces for 5 cents. Pepsi was fighting fiercely for share, and managed to double its share between 1950 and 1970 by focusing on supermarket sales. The take home market was not Coke’s core business, and Coke tended to focus on vending and fountain. In 1979, Pepsi passed coke in food store sales for the first time. During this period, Coke amended its bottling contract so that it could increase the price of concentrate. Pepsi countered this move by increasing the price of concentrate to its bottlers. Contd…….
  7. What the problem the case poses? Is this the end of an era, or just another blip in a century- long march to growth and ever-greater profitability? Can (or should) Coke and Pepsi make the transition to the non-CSD segment?
  8. Assignment Questions? Why is the soft drink industry so profitable? Compare the economics of the concentrate business to the bottling business: Why is the profitability so different? How has the competition between Coke and Pepsi affected the industry’s profits? Can Coke and Pepsi sustain their profits in the wake of flattening demand and the growing popularity of non-carbonated drink?
  9. Introduction How can companies that sell colored, sugar water – which some “experts” can’t even identify accurately – be so profitable for so long?
  10. Analysis of the Industry Potential Entrants Threat of new entrants Bargaining Power of Buyers Bargaining Power of Suppliers RivalryofFirms Suppliers Buyers Threat of substitute products or services Substitutes Porter’s Model: Forces Driving Industry Competition
  11. Analysis of the Industry Barriers to entry First mover advantages – what are they? Brand equity Limited shelf space, vending slots, and fountains The franchise system Scale economies in advertising
  12. Analysis of the Industry Substitution Many substitutes Water Coffee Fruit juice, Etc
  13. Analysis of the Industry Suppliers Of the commodities which go into concentrate… Not sugar (added by bottler) Not water (added by bottler) IT’S A SECRET! NO ONE KNOWS? How much do you think the ingredients cost? NOT MUCH!
  14. Analysis of the Industry Buyers The immediate customer The bottler The final consumer
  15. Analysis of the Industry Rivalry First focus area: Structural characteristics of rivalry Number of players Degree of differentiation in the product The concentration and Balance of competitors Next focus area: How the war has been fought and who has won and lost.
  16. Analysis of the Industry: Summary Barriers to entry (BTE): High Rivalry: Can be fierce in certain markets where Coke and Pepsi are fighting Suppliers: Coke and Pepsi appropriate most of the returns Buyers: Vary with the distribution channel
  17. Summary Coke and Pepsi are clear examples of how firms can create and exercise market power. We have to look at the underlying economics of the firm and the industry, and its related (upstream and downstream). Coke and Pepsi did not just inherit this business; they created it. Coke and Pepsi are the classic case of smart competitors – when they go to war, they kill the bystanders- not themselves…
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