Coca_Cola_Wars

Mature market with geographic expansion and growth opportunities in selected markets (e.g., China, India, ...) Minimum regulated market. Value Capture – CSD Industry Barriers to Entry – High barriers to entry at the top of the value chain due to a limited number of concentrate producers but increased competition and a reduction in the barriers to entry as we move down the value chain Competition – significant competition for market share across the value chain Supplier power – The suppliers in this case would exert limited power due to the significant buyer power exerted by the concentrate producers on behalf of the bottlers. Buyer_ power_ – Power concentrated at the top of the value chain as concentrate producers ‘s exerts significant influence right down the value chain e.g., negotiate for key raw materials for bottlers. Possibility of generating significant margins at the top and the bottom of the value chain but increasing squeeze on margins in the middle of the value chain *Position – *Cola Cola is a well established productwith a leading position in the Carbonated Drinks market. The Cola companies have exceptionally strong brand names within the industry and continue to diversify their operations in to other segment of the drinks market. Capabilities of Cola *Q: Evaluate Cola’s (*)* strategy of buying bottlers, making them stronger, and then selling them again. Would you change this strategy*'* Do you agree with it' Cola’s strategy for vertically full integration, as opposed to the tapered integration it had pursued previously, along its value chain by acquiring bottlers was to create additional value downwards in the value chain. The key thinking behind this strategy can be analyzed by looking at the impact this had on the existing value chain within the Carbonated Soft Drinks (CSD) industry as the overall buying/supplier power Cola increased significantly down the value chain as a result of this acquisition. In terms of bottlers Cola’s power increased significantly at it now was able to refinance underperforming bottlers but also ensure control over promotional spend and long term product spending with retailers, a part of the value chain that it had previously had no influence on. In terms of the power over suppliers Cola had in the past negotiated more favorable terms from the bottler suppliers on their behalf, due to its pricing power within the value chain, and therefore the full integration of the bottlers had minimal impact on the overall power of Cola on this part of the value chain. {draw:frame} Source: Cola Wars Continue: Coke and Pepsi in the Twenty Century The key strategic reasons why Cola pursued such an acquisition can be summarized as follows: Cost Reduction Generate economies of scale from integrating smaller bottling operations that had become inefficient/unreliable and thereby providing additional quality control/reliability and consequently increase the bottlers power in their negotiations with retailers Eliminate any (non essential) costs that Cola had agreed to under previous contracts with bottlers and would be able to eliminate by acquiring and integrating bottlers e.g. the right of bottlers to have the final say in pricing, design, marketing etc. Defensive Market Power Allow Cola to have additional power down the value chain by ensuring that it can dictate the marketing/promotions strategy, the final price and the negotiations with retailers in regards to product placement and visibility. Dictate the type and brand of beverage produced by Cola owned bottling operations Increase the quality of the production process and protect any capital investment made by Cola to modernize the production process and create increased efficiencies Potentially increases the barriers to entry for new entrants to enter the market as result of Cola’s supplier power and retail power. Through brand building and legal protection of the trademarks Cola created increased value over time. In order to capture the full extent of this value, Cola, pushed for bottlers to invest in additional marketing and technology and create more efficient delivery channels. When the majority of bottlers were unable, for financial or management reasons, to fulfill this request Cola felt it would only capture the necessary value and leverage in the market if it owned its own bottling operations. Offensive Market Power Provide Colawith the possibility of entering new product markets, such as non carbonated drinks which would require increased capital investment to bottle/produce Promote more aggressive strategies down the value chain with retailers through direct impact on the sales and marketing strategy with retailers Allow Cola to put together a more aggressive strategy to gain increased market share through better knowledge of the costs/profits across the value chain (the effect of this would in part be mitigated by the strong involvement of Cola in negotiating contracts on behalf of suppliers and their participation in the marketing/promotion costs of the bottlers) Allow Cola greater power in negotiating with independent bottlers by having the option of bottling in house The vertical integration strategy pursued by Cola was very effective in achieving the aims discussed above and the IPO of Cola’s bottling operation, new subsidiaries allowed Cola to continue acquiring bottlers but simultaneously selling them to their subsidiaries afterwards. To articulate how this strategy was beneficial, all the subsequent analysis will be based on Coca Cola. These are the reasons: Cost Increase In terms of Coca Cola, margins were significantly impaired as a result of the acquisition of various bottlers due to not only the significant acquisition costs which were mainly funded by debt but also in the increased capex in machinery and technology. Cola’s sales grew from US$5,475 in 1980 to US$5,879 in 1985 and then US$10,23 in 1990 but at the same time its long term debt/assets grew from 10% in 1980 to 23% in 1985 before falling to 8% in 1990 (as a resulted of the public listing of its CCE bottling operations in 1986). Flexibility The industry risks of a potential downturn and reduction in demand would be in part minimized due to the reduced (financial) exposure down the value chain. The ability of using independent bottlers may be curtailed in markets were in house production is not yet feasible. Therefore by IPOing the bottling operations as opposed to selling then outright allowed them to keep the costs of the bottling operations off their books while ensuring that they maintained quasi integration/control of that part of the value chain through continued acquisitions at an attractive price for CCE, preferential agreements with CCE and managerial influence at CCE. We agree with the adopted strategy as, back in the 1980s, it made strategic sense to take the bottling operations in house as: Having quasi control of the bottling operations gives Coca Cola additional power to upgrade the bottling plants, create economies of scale through costs savings/rationalization and ensure that they had a bigger say in negotiations over pricing and promotion with retailers (the 1978 agreement had severely curtailed Coca Cola’s ability to influence this) Because of the importance of larger bottlers Coca Cola needed to ensure that it would not lose out on bottling contracts to Pepsi if its largest bottlers were sold to outside financial bidders. Coca Cola was the largest player in the fountain part of the market which had the lowest margins and by vertical integration the bottling operations they gained access to the higher margin part of the bottling business e.g. food and convenience stores. After the IPO of CCE it still made strategic sense for Coca Cola to acquire bottlers and subsequently sell them on to CCE as it allowed Coca Cola to maintain the benefits of a quasi integrated value chain while mitigating (some) of the financial risks associated with a quasi integrated value chain. One can conduct same analysis for Pepsi Cola which will result in similar conclusions. Based on the above points we would not have changed Cola companies’ strategy.