Competitive Rivalry:
Revenues are extremely concentrated in the duopolistic market of soft drinks. “Among national concentrate producers, Coca-Cola and Pepsi-Cola, a soft drink unit of PepsiCo, claimed a combined 76% of the U.S. CSD market in sales volume in 2000” (Yoffie, 2002:Exhibit 3). To be sure, there was tough competition between Coke and Pepsi for market share.
The biggest source of added value for CPs is their branded products. The Coca-Cola and Pepsi brand images are widely recognised in the world and have become a symbol of successful global marketing. As a result of strategic and operational management practices, Coke and Pepsi have value that will be hard to replicate.
Bottlers have significantly less added value. Unlike their CP counterparts, they do not have branded products or unique formulas.
Through the early 1960s, soft drinks were synonymous with “colas” in the mind of consumers. However, in the 1980s and 1990s, other beverages, from bottled water to teas, became more popular. Coke and Pepsi responded by expanding their offerings. The increasing number of substitute’s brands did threaten the profitability of bottlers, as line set-ups increased capital investment and development of special management skills for more complex manufacturing operations and distribution. Bottlers were able to overcome these operational challenges through consolidation to achieve economies of scale. Overall, because of the CPs’ efforts in diversification, substitutes became less of a threat.
The bottlers are “buyers” from the CP’s perspective; and the concentrate producers are “suppliers” from the bottler’s perspective.
The inputs for Coke and Pepsi’s products are primarily sugar and packaging. Sugar can be purchased from many sources on the open market, and if sugar became too expensive, the firms could easily switch to corn syrup. Aspartame (sweetening agent used in the diet soft drinks) is available from several sources. In the can and plastic bottling business, there were more suppliers than major contracts, so direct negotiation by the CPs was effective at reducing supplier power.
Bottlers’ added value stems from their contract relationships with CPs, which grant them exclusive territories and share some cost savings. Exclusive territories prevent “intrabrand” competition, creating oligopolies at the bottler level, which reduce rivalry and allow profits. CPs pass along some of their negotiated supply savings to their bottlers. Coke gives 2/3 of negotiated aspartame savings to its bottlers by contract, and Pepsi does this in practice. This practice keeps bottlers comfortable enough, so that they are unlikely to challenge their contracts. Bottlers’ principal ability is to use their capital resources effectively.
The soft drink industry sold to consumers through food stores (35%), convenience stores (9%), fountain outlets (23%), vending machines (14%) and other outlets (20%) (Yoffie, 2000:Exhibit 7).
The supermarkets were the principal customers for CDS. Pepsi and Coca-Cola bottlers offer “direct store door” (DSD) delivery, this includes delivery to the store, stacking the products on the shelf space to ensure visibility and accessibility for their products. Storage, transportation, merchandising, labor – created additional costs to the bottlers.
Vending machines, meanwhile, was the most profitable channel for the soft drink industry. Bottlers were offered to supply and service them, and property owners were paid a sales commission. Essentially there were no buyers to bargain with at these locations, where Coke and Pepsi bottlers could sell directly to consumers through machines owned by bottlers. However, the industry enjoyed substantial profitability because of limited buyer power.
Barriers to entry are low at a production level, but very high for a company trying to create a national brand, let alone an international one. It would be impossible for either a new CP or a new bottler to enter the industry. New CPs would need to overcome the tremendous marketing obstacles and market presence of Coke, Pepsi, and a few others. Through their DSD practices, these companies had intimate relationships with their retail channels and would be able to defend their positions effectively through discounting or other tactics.
So, although the CP industry is not very capital intensive, other barriers would prevent entry. Entering bottling, meanwhile, would require substantial capital investment, which would prevent companies from entering the industry.
Further complicating entry into this market, existing bottlers had exclusive territories in which to distribute their products. Regulatory approval of “intrabrand” exclusive territories, via the Soft Drink Interbrand Competition Act of 1980, ratified this strategy, making it impossible for new bottlers to get started in any region where an existing bottler operated, which included every significant market in the US.
From Porter’s Five Forces we can clearly see that profits of the concentrate businesses and the bottlers businesses are different. Concentrate business has high margins, high returns and high cash generation. While bottling business’s features are low margins, low return, capital intensification and high debt creation. Bottlers have less profitability as CPs have more market power through efficient barriers to entry, and effectively price discriminate through various retail channels. These businesses are interdependent and profits of one business depend on the success of another. The closest possible coordination between the CPs and their bottlers is one of the most strategic assets.
Can Coke and Pepsi sustain their profits into the future in the wake of flattening demand and the growing popularity of non-carbonated drinks? Justify your answer.
The Coca-Cola Company is the world’s largest beverage company and is the leading producer and marketer of soft drinks. According to Financial World, Coca-Cola’s trademark is the world’s most valuable brand – worth $47.99 billion. Its leading rival is multinational PepsiCo, a company that dwarfs The Coca-Cola Company in terms of total turnover (which includes snack foods and restaurants), and whose beverages division reached sales of $11.5 billion in 1998 (James, 1998:3). As we can see both companies were profitable over the last years, but will these multinational brands like Coke and Pepsi sustain their profits in the future? Is there future potential for the soft drinks market?
The soft drinks market as a whole is still showing dynamic growth in most regions of the world. The lowest rates of growth in volume and value terms were in Germany and generally in more mature and developed markets of Europe and Japan, while the highest rates were in the emerging markets (where it recorded a double-digit growth). Mexico and Poland with 47% and 46% increases, respectively, in volume term and Mexico with 105% value term increase present high volume and profit opportunities for the soft drinks companies (Hilliam, 2001:4).
The largest market and the highest per capita consumption level were found in the US. The fastest rises, however, are in the emerging markets, where standards of living and consumers’ disposable income are rising more rapidly. The development of the market in the less developed economies or with traditional food and drinks is the good opportunity for the future growth of Coke and Pepsi. Latin America (Argentina, Brazil, Mexico), Eastern Europe (Poland, Russia, Czech Republic), Asia (India, China, Thailand) and countries of Africa and Middle East have large future potential, as per capita consumption is still very low. The population of these countries is big and young and that make them of the bigger interest to the soft drinks companies. “For example, while the average American drank 874 eight-ounce cans of CSDs in the 1999, the average Chinese drank 22” (Yoffie, 2002:14).
However, heavy investment in these countries is quite risky because the economies are not fully stable. As well the companies can face with different barriers in international operations, including language and cultural differences, political risks and instability, regulations and price controls, lack of infrastructure and fluctuations in exchange rates. However, all the difficulties can’t prevent companies from entering these markets because the profit opportunities are too high.
The soft drinks market is being influenced by social and consumer changes, their tastes, attitudes and lifestyle. Around the world, consumers become more interested in health and wellness. They are more concerning about sugar, artificial sweeteners and acids; this is a big disadvantage for some drinks. There has also been considerable interest in drinks fortified with beneficial ingredients, like herbs, vitamins and minerals. Health awareness has also risen the popularity of organic carbonated and still drinks and juices. There is a pronounced trend away from the traditional sweet, fizzy soft drinks towards drinks containing natural ingredients.
In the view of happening changes, most of the leading carbonates companies have moved into other sectors of the soft drinks market. Both Cola-Cola and PepsiCo diversified into the non-carbonated industry as this sector offers a great opportunity for them.
1) Bottled water:
Water has been the fastest growing beverage segment of the market in the last few years, reflecting consumer concerns over the quality of tap water. In 2000 the bottled water industry grew on 8.3% per year. The market reached 58 litres per capita, but per capita consumption varied considerably from 167 litres in Italy and 130 litres in France to 8 litres in Japan and 17 liters in both Mexico and Argentina (Hilliam, 2001:16). In general, water is becoming more popular as lighter and healthier alternative to carbonated drinks.
Both companies have heavily invested in the bottled water market, and both of them Coca-Cola with Bonaqua and Dasani, and Pepsi with Aquafina are holding 2% of market shares. Aquafina became the number one brand of bottled water sold in the United States.
2) Fruit juices and drinks:
Fruit drinks were taking share from pure juices in many countries until recently, when the market turn back to juices and their shares rose. Nectars are also loosing shares, as a preference for natural unsweetened lines started to develop. The market for fruit juices and fruit drinks, with their healthy image, has benefited.
In 1998 Pepsi Co bought Tropicana UK LTD to become the world’s leader in fruit juice. Tropicana was the number one brand of not-from-concentrate orange juice, with a market share of 6% by value, ahead of Coca-Cola’s Minute Maid with 3%.
3) RTD (Ready to drink) tea and coffee:
The RTD tea and coffee market is still relatively small outside Japan and the US. RTD coffee, in particular, is only sizeable in Japan. Coca-Cola and Nestle formed a joint venture to market the two companies’ brands, including Nestea and Nescafe. At the same time, PepsiCo teamed up with Unilever to market Lipton RTD tea. A Pepsi-Starbucks partnership also developed and launched the Frappuccino iced coffee brand, and it is now market leader.
- Development of new areas:
Coke and Pepsi can sustain profit by developing new areas of the market, such as alternative drinks, new style or new-age drinks. These include wellness (fortified) drinks, sports and energy drinks, flavored waters and adult fruit drinks – non-carbonated lines. Consumers generally have broad tastes in drinks and are prepared to try some new types of soft drinks.
4) Sports and energy drinks:
The sports and energy drinks market has also been growing rapidly, reflecting the demand for products for an active lifestyle. Energy drinks tend to be widely regarded as fashion and lifestyle product, and are also popular on the “club scene”. The only sizeable US brand is Coca-Cola’s Powerade, with a market share of 9%. Coca-Cola also has its multinational Aquarius brand, available in a number of European markets and Japan. In 2000 PepsiCo took over of Quaker, including its market-leading Gatorade sports drinks brand. Many analysts projected Gatorade’s sales could grow as much as 20% annually between 2000 and 2010 (Strickland, 2003:C-530).
Innovation in the drinks has resulted in a steady stream of hybrid, cross-over drinks, which can create their own markets. These include the most prominent RTD drinks, such as Oasis (from CCSB) and wide range of exotic hybrids. Products containing blends of mineral water and fruit juices have also emerged. These drinks target at sophisticated adult markets as alternatives to alcohol and hot beverages.
In the standard market sectors – carbonates, juices and fruit drinks, and water – developments are likely to center on new flavors in carbonates, exotic blends and fortification in juices, and fortification, flavoring and carbonation levels in water. Products such as adult RTD beverages, sports and energy drinks have illustrated the opportunities available for carefully targeted marketing to specific consumer groups. A feature of soft drinks development is the stretching of established brands to cover new or specialist consumer demand.
Coca-Cola and Pepsi companies expressed confidence in the future growth of the companies and the growth of their profits. Pepsi’s vice-president expressed the new strategy of the company: “If Americans want to drink tap water, we want it to be Pepsi tap water” (Yoffie, 2002:13). The late Roberto Goizueta came up with useful analogy: in English-speaking countries, the C on the kitchen tap stand for cold water and H for hot, but Mr Goizueta said he would never rest until the C stood for Coke. “We are just getting started!” (James, 1998:13)
References:
Hilliam, M. (2001), The Soft Drinks Market: Global Trends and Developments. London: Leatherhead publishing.
James, A. S. (1998), Key Players in the Global Soft Drinks Industry. London: Leatherhead publishing.
Strickland, T. (2003), Strategic Management: Concepts and Cases, New York: McGraw-Hill/Irwin.
Yoffie, D. B. (2002), “Cola Wars Continue: Coke and Pepsi in the Twenty-First Century”, Harvard Business School. March 1 2002, 1-24.
