Travis have been profitable over many decades by

Travis Vance 

Cola
Wars Continues

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Coke and Pepsi have been profitable over many decades
by selling what is essentially flavored sugar water. There has been industry
analysis to assess how it is that Coke and Pepsi have been so profitable and to
help identify the path going forward in the future as health concerns and
regulations have taken effect. It is quite clear that there was a battle between
Coca-Cola and PepsiCo. Starting in the 1950s, these companies were in full
swing to make it strong impression in their advertising that competition
existed between them. According to Roger Enrico, former CEO of PepsiCo, “the
brand would have a tough time being an original and lively competitor if it
wasn’t for Coke. In fact, this statement proves the existence of a war, but it
also proves that both companies actually benefitted from this war.”

1.
Why has the soft drink industry so profitable?

This war has be perceived as a continuous battle
without blood. The soda industry is so profitable in many ways and by looking
at Porter’s five forces we can see why.  Porter
classifies five main competitive forces that affect any market and all
industries. It is these forces that determine how much competition will exist
in a market and consequently the profitability and attractiveness of this
market for a company. Through sound corporate strategies, a company will aim to
shape these forces to its advantage to strengthen the organizations position in
the industry.

The profitability of the soft drink industry is
sustained by favorable forces within the industry. First, is the threat of new
entrants but can be looked at a low threat because there are multiple barriers
to entry. The primary competitors in the field have a large amount that needs
to be put toward investments in development for plants, and their production
costs have a scale advantage. To have a large scale with a production/bottling
facility costing upwards of $50-100 million. Coke and Pepsi control most of the
market and can survive compared to their smaller competitors.

Suppliers Power have little power in the production because
raw materials such as sugar, chemicals and sweeteners are cheap. When we look
at bottlers and packing suppliers they have no power also. This is because the
products they can choose from such as glass bottles, cans, and plastic. Buyers
or the customers have a larger amount of power, as they are highly responsive
to changes in price, and there is no cost difference to switch between brands. This
effects the deep rivalry between Coke and Pepsi. Each company focuses and
spends large amounts on marketing and drives the brand loyalty instead of
actual taste variance meaning customer could be willing to pay a premium to get
their brand.

2. Compare the economics of the concentrate
business to the bottling business: why is the profitability
so different?

 

The concentrate
business is not as profitable as the bottling business.  The concentrate produces were needed for the
bottling network of these two competitors. Starting and maintain the manufacture
involves little capital investment in machinery, overhead and labor. The net
sales, gross profit and operating expenses are all less in the concentrate
business than in the bottling business. Cost also come from marketing and
promotion, and research as well.  

Bottlers have a more
direct hit with the retailers that would carry the CSD. These operations were
very costly to run and had high production rates. Packaging, labor, overhead,
concentrate and syrup were the major cost for the bottlers.

 

3. How has the competition
between Coke and Pepsi affected the profits of other players in the industry?

The competition between Coke and Pepsi affected the profits of
other companies in the industries in several ways. The first affect owning most
of the market space and not allowing small companies to expand into the market.
Also these giant’s rival increased advertising budgets by companies. For more
than 100 years Coke and Pepsi were a “throat share” of the world beverage
market. The market for the industry was 74 billion dollar just in the US.
 Soft drink bottlers falling from more than 2,000 in 1970 to less than 300
in 2009, the competition in the carbonated soft drink (CSD) market is more
competitive than ever (Kim & Toffie, 2011). Coke and Pepsi being the
leaders of the industry controlled 72% of the market and only allowing other
players in the industry to have 18 percent (Kim, 2011). They were big enough to
ride out this low phase by owning shelf space and ads. They also created
reductions in reduction in CSD manufactures.

4. Can Coke and Pepsi sustain their profits in the wake of
flattening demand and the growing popularity of non-carbonated drinks? What
steps would you take as the CEO of Coke or Pepsi to try and ensure this?

Coke
and Pepsi are trying to sustain their profits in the wake of flattening demand
and the growing popularity of non-carbonated drinks due to the fact the FDA is
making companies customers aware of what is in their products. Also the risk of
health issues such as diabetes and over weigh kids are starting to take more
notice now. I believe it will be hard for them to keep their profits unless
they kept up with the market trends. I believe they will have to look for other
alternatives products. Being the CEO I would create healthier option such as
flavored water products or tea. Coke and Pepsi produce bottled water, Dasani
for Coke and Aquafina for Pepsi, and both are their top selling alternative to
their regular CSD’s (Kim, 2011).   Looking at adapting to the times
the US government suggested a 20 percent tax could cut the sugar intake. As of
April 2010, 29 states have already taxed soda. (Kim, 2011). Being the CEO I
would create TV commercials and marketing at sporting events that show the
healthier options but I would still try to own the most shelf market in the
stores.  I may also try to acquire other water products and tea or coffee
makers. As CEO I would looking at global stands and how the markets are
culturally very unalike and with substitutes available. The consumption is very
low in the emerging markets is smaller than to the US market. Much of the
markets are culturally very different and vast numbers of substitutes are
available, added to the fact that soda products are not the first choices to
quench thirst in these cultures present. Comparing the intake of these products
compared to overseas is much less. A large amount of money would need to be focuses
into these markets. So I would put much focus on it because the US market is
already here and somewhere else like China could be the next huge market.

 

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