Cola_Wars

Cola Wars Profitability in the cola industry has its advantages. Porter’s five forces model has shown how the industry has been able to excel in the marketplace (Hill, Jones, 2012, p 141). The carbonated soft drink (CSD) industry has created a barrier to entry so that imitated versions of Coca-Cola were not copied under trademark infringement. The courts made it difficult to enter the cola industry, due to imitations of Coca-Cola. Brands of cola, including Coca-Kola, Koca-Nola were counterfeit versions of Coca-Cola that was taken off the market. Trademark infringement has prevented these products from being in the marketplace. It was difficult to enter the CSD industry because Coca-Cola dominated the marketplace. Robert Woodruff, in 1923, emphasized brand loyalty, coupled with advertising, also created this barrier to enter the marketplace. Woodruff also made the soft drink easily assessable, including vending machines, open-top coolers, and fountain dispensers. (p.5) When Pepsi-Cola entered the market, they relied on price differentiation and sold its product with more per ounce in their bottling than Coke. (p. 6) This approach was used to compete in the marketplace and share in the brand loyalty that Coke has been successful in doing. Pepsi-Cola and Coca-Cola, since 1950, shared 57% of soft drink market in the United States. Their shared volume reached 54.5% in 1970, 63.7% in 1980, 73.5% in 1990 and 75.5% in 2000. (Exhibit 2) Smaller brands found it difficult to compete with the growth of Coke and Pepsi. Another barrier to entry to entering into the CSD industry was Coca-Cola recognizing that most family-owned bottlers it used had few resources to be competitive in the industry. It was difficult to convince bottlers to keep up in marketing and promotion programs, upgraded plant and equipment because they no longer had the resources to keep reinvesting in their companies. (p. 8) Therefore, in 1980, Coca-Cola announced it would refranchise bottling operations. This allowed Coke to expand its operation. This created Coca-Cola’s independent bottling subsidiary called Coca-Cola Enterprises. Coca-Cola, at this point, was able to negotiate its bargaining power with suppliers. Following suit, Pepsi Cola attempted to do the same trying to operate its own bottling company. Pepsi Cola in turn launched Pepsi Bottling Group. Between the two, Coca- Cola Enterprises handled approximately 75% Coca-Cola’s bottle and can industry, while Pepsi Bottling Group handled 56%, respectfully. (p. 9) To further contribute to economies of scale, Coca-Cola continued to introduce new products, like Caffeine-Free Coke and Cherry Coke. In all, Coke launched eleven new products in the 1980’s. Pepsi also launched thirteen new products in the 1980’s. This kept potential rivals from competing in the marketplace because Coke and Pepsi were always launching new products before the competition could create and launch products of their own. (p. 8) Buying power plays a significant role in CSD industry. Buyers have the power to determine where product is positioned on the shelf in establishments. The buyers have the power includes supermarkets (29.1%), fountain outlets (23.1%), vending machines (12.5%), mass merchandisers (16.7%), and convenience stores and gas stations (10.8%). (p. 4) Bargaining power for suppliers in the CSD industry is low. Parts of the CSD industry do not require specialized suppliers to provide for the industry, such as basic commodities like natural flavors, caramel coloring, and sweeteners. Also, the metal can industry supplies a large amount inventory to Coke and Pepsi. There are about two or three manufacturers that compete for a contract with the companies. This gives Coke and Pepsi an advantage in the marketplace. Substitutes come in a variety of choices, including coffee and tea, alcoholic beverages, sports drinks, milk, and beer. U.S. consumption of some of these products has changed since 1970. The consumption of beer was 22.8 gallons per capita in 1970 to 21.0 per capita in 2009. The consumption of milk was 18.5 gallons per capita in 1970 to 21.5 per capita in 2009. The consumption of coffee was 35.7 gallons per capita in 1970 to 15.8 gallons per capita in 2009. This was a significant decline in per capita consumption. The most significant change has been in tap water/hybrids/all others. The consumption decreased 68.0 gallons per capita in 1970 to 31.8 per capita in 2009. On the other hand, CSDs consumptions have increased in the U.S. Consumption has increased from 22.7 gallons per capita in 1970 to 53.0 in 2000. However, it has dropped to 46.0 in 2009. Because CSD industry has several products on the market, it appears that the industry do not view other beverages as threats. The data given also do not have an effect on the consumer’s choices of substitutes to CDSs. (Exhibit 1) According to Porter’s model, close substitutes is a strong competitive threat. Consumers are always looking for an alternative that satisfies similar needs, due to cost. Prices are limited to what a company can charge for their product. Therefore, consumers will switch to substitutes if prices are raised by the industry for there product (Hill, Jones, 2012, p. 65). According to Porter’s five competitive forces, the intensity of rivalry among established companies exists and struggle to gain market share from each other. Competitiveness can be fought in several ways by companies seeking an advantage in the marketplace. Companies fight using price, product design, advertising and promotion spending. More intense rivalry lowers prices and raises costs. This takes profits out of an industry (Hill, Jones, 2012, pg. 61). Rivalry in the CSD industry contributes to the profitability of this market. Coke and Pepsi have been in “cola wars” for over a century. These are the two primary CDSs in the industry, but there are others that exist. Dr. Pepper Snapple Group shared 11% of the market in 1970 to 16.4% in 2009. (Exhibit 2) Coke and Pepsi continue to compete in the beverage industry to gain more shares of the market. Even though both companies are successful in CSD products, coke and Pepsi companies have alternative products they have been introduced to compete in the non-CSD market. Pepsi’s first approach was more aggressive. Between 2004 and 2007, Pepsi released 77% non-carbs and Coke released 56%. However, Coke expanded its non-carb product through acquisitions of a $4 billion purchase of Energy Brands. Coke also entered the coffee and tea business. The competition of these two companies continued to grow in the bottled water industry. The bottled-water product is in the $14 billion category. Pepsi released Aquafina in 1998 and Coke released Dasani in 1999. However, in the late 2000, consumers turned to other alternative, cheaper brands of water because of the downturn in the economy. Both companies’ profits slipped in this category. Cokes market share slip from 22% in 2004 to 15% in 2009 in bottled water industry. Pepsi’s market share slipped from 14% to 11% in the same year (pg.10). This shows that even the most brand-loyal consumer will switch products due to cost.