Cola Wars Continue: Coke Versus Pepsi In The 21st Century. Industry Structure And Competitive Interaction

1123 words - 4 pages

Industry Wrap.The soft drink industry is largely a duopoly. Coke and Pepsi were among the first to launch carbonated soft drinks (CDS). For over a century other companies tried to enter the market but had to face fierce competition and lawsuits from Coke and Pepsi. The worldwide demand for soft drinks in 1999 was 31 billion cases. Coke and Pepsi together held 74% of market share followed by Cadbury Schweppes at 6%. In this duopoly, participating firms are assured of high long-term economic rents, and there are high barriers of entry. Being the established sellers, Coke and Pepsi can persistently raise prices above competitive levels without any significant threat of new entrants (e.g. 1978 Coke had a significant price hike, and Pepsi followed by 15% price increase). Even though, in recent years, demand for CSDs seems to have levelled off in USA, other countries have the potential to offer significant growth opportunities. New challenges of the 21st century included boosting flagging domestic cola sales and finding new revenue streams. Both firms also began to modify their bottling, pricing, and brand strategies. They looked to emerging international markets to fuel growth and broaden their brand portfolios to include noncarbonated beverages like tea, juice, sports drinks, and bottled water. Additionally, the soft drink industry is knowledge intensive; most of the significant costs are for advertising, promotion, and market research. Any innovation costs have been sunk in the past.1. Compare the economics of the concentrate business to the bottling business. Why is the profitability so different?From Exhibit 5, a typical concentrate producer's gross profit is 83% compared to 35% for a typical bottler. Similarly, pre tax profit for a concentrate producer is 35% and it is 9% for a bottler. The cost of goods sold for a concentrate producer is significantly lower than of a bottler (65% of Net Sales). Packaging is half and concentrate is one-third of a bottler's COGS. In addition to higher COGS, bottlers are responsible for delivering the product to customers, which involve delivery personnel placing and managing the CSD in the store. The associated costs are typically around 21%. On the other hand, the significant cost for a concentrate producer comes from advertising and marketing expenses (39%). So the profitability of the concentrate business is evidently higher, almost four times, than that of bottlers, even though concentrate producers have pretty high advertising and marketing expense.Compared to concentrate production, soft drink bottling is not very profitable. The concentrate business is successful because of the Coke and Pepsi duopoly and their subsequent power over buyers and suppliers (see appendix 5 forces analyst and key threats to profitability). The companies are able to maintain profitable pricing for their concentrate products. The bottling businesses suffer because they have no bargaining power with their suppliers and diminishing...

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