The case study "Cola Wars Continue: Coke and Pepsi in the Twenty-First Century" focuses on describing Coke and Pepsi within the CSD industry by providing detailed statements about the companies’ accounts and strategies to increase their market share. Furthermore, the case also focuses on the Coke vs. Pepsi goods which target similar groups of costumers, and how these companies have had and still have great reputation and continue to take risks due to their high capital. This analysis of the Cola Wars Continue case study will focus mainly on the profitability of the industry by carefully considering and analyzing the below 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 drinks?
The soft drink industry is a highly profitable industry and its success is due to the large consumption of non-alcoholic beverages through which both concentrate producers and bottlers are profitable. Given the U.S. Industry consumption Statistics, Exhibit 1, it is clear that, after deducting beer and wine, soft drinks account for about 90 % of the total liquid consumption, while Coke and Pepsi account for about 75 % of the soft drink industry. The high consumption of CSDs is related to the soft drink industry selling to consumers through five principal channels: food stores, convenience stores, vending, fountain and other. Out of the five channels the case describes vending as the most profitable channel for the soft drink industry as Coke and Pepsi bottlers sell directly to the consumers through vending machines owned by the bottlers.
Barriers to entry is another factor that accounts for the high profitability of the soft drink industry. As stated in the case, it is nearly impossible for new concentrate producers or bottlers to enter the industry. The new producers would not require high capital to enter (low cost of capital to produce concentrate), however the entry would be impossible due to patents and the presence of Coke and Pepsi which have nearly century old established names. Meanwhile entering bottling is very capital intensive, and the existing bottlers have exclusive territories in which they distribute their products.
Provided the above stated facts it is clear that the soft drink industry is a highly profitable industry. Moreover, in Exhibit 5 it is easily observed that in 2000 the Concentrate Producers (CP) earned 35% profit on sales whereas the bottlers earned 9% profit, which account for a total positive industry profit of 14%.
The data listed in the case shows how the soft drink industry in itself is very profitable, however the profitability of the concentrate producers is much higher that that of the...