Cola Wars Continue: Coke Vs. Pepsi In The 1990s (Cola Wars)

1934 words - 8 pages

Question 1The concentration producing industry has one buyer and through its value chain. Instead, costs for advertising, promotion, market research, and bottler relations were significant. On the other hand, bottling industry is the mid-way player in the soft drink industry. There are two suppliers and one buyer involved in its value chain (Exhibit 1).Whether two industries are profitable depends on soft drink consumption, which had increased for more than 20 years and plateaued in the 1990s.The economics of the CP and bottling is very different from each other in terms of number and size of rivals, and the scope of competitive rivalry. There are two giants competing head to head on the CP industry, smaller national producers, such as Seven-Up and Dr Pepper, are relatively trivial. There are a lot of players of same size in the bottling industry. Unlike the furious competition between Pepsi and Coke, no sense of competition can be felt in bottling industry. Reasons are that, first, Pepsi and Coke control the majority of bottlers in 1990s; second, intrabrand competition is restricted by the franchise agreement, which is protected by 'Soft Drink Interbrand Competition Act'.From the view of capital requirement, it is easier for others to enter the CP industry than to enter the bottling industry, since comparing to $30-$50 million dollars requirement to establish a bottling plant covering only one 80th of ability to serve the entire US market, the requirement for one CP plant with a nation-wide capacity is only $5-$10 million dollars. In addition, brand loyalty is low in the CP industry since consumers are sensitive to price and there is little switching cost. There are many substitutes for soft drinks, such as tea, beer, and milk. There is no substitutes existing in the bottling industry, and no customer loyalty and switching costs for bottlers since they could only use packages authorized by the franchiser, which means no distributors can tell the difference of the same brand provided by two bottlers, and easily switch among different bottlers.Cost and financial structures of a CP and a bottler illustrate that high cost of sales is one of the major reasons behind the relative low profitability of the bottling industry. The ratio of cost of sales over net sales is 40% higher than that of CP. One possible reason is that bottlers heavily depend on CPs, and thus, CPs use bottlers to diversify expenses. Another reason is that bottlers hold much more inventory than CPs do since bottlers receive soft drink concentrates according to its processing capacity, while they sell products based on selling capability. Also, bottlers have plant and equipment that are ten times more than that of CPs, and a good will that is roughly 45 times more, which means that bottlers have to deduct more depreciation from gross profit than CPs do.One of the reasons why bottlers are backward integrated by CPs is that, as the Cola-war heating up, small bottlers were no longer...

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