Cola Wars Continue Essays

Cola Wars Continue Essays Cola Wars Continue Paper Cola Wars Continue Paper Cola Wars Continue: Coke and Pepsi in 2010 1. Why, historically, has the soft drink industry been so profitable? Soft drink industry is profitable because the industry has concentrated revenues between 2 major players and it is virtually impossible for a new player to compete with the key players. The industry giants wield power over the retail outlets. Convenience stores, vending machines, fountains are widely distributed and hence they dont have the power to bargain over pricing issues and they also contribute to about 80 of the sales. This ensures that the companies quote a maximum price and still have the final say in the matter. 2. Compare the economics of the concentrate business to that of bottling business. Why is the profitability so different? A concentrate producer has to blend the raw materials and ship them to bottlers in plastic canisters. A typical concentrate manufacturing plant has an initial capital investment of 25-50 million and is capable of meeting the needs of an entire nation. Therefore the concentrate producer’s main line of work shifts to advertising, research and bottler support which ensures them a gross profit of 80. The concentrate producer also enjoys added value in the form of access to branded names and unique formulas. A bottler manufacturer, on the other hand has a capital-intensive business on hand, which has high costs to deal with-concentrate producers and packaging activities being the major costs (up to 90. The bottlers profitability is therefore considerably reduced with a gross profit of about 40. Added to this the bottler also invests in distribution networks as a result of which the operating margins drop drastically to 7-9. Therefore there is a wide disparity in the profitability of a concentrate manufacturer and a bottler manufacturer 3. How has the competition between Coke and Pepsi affected the industry structure? The cola giants Coca-Cola and PepsiCo have, through their Cola Wars, brought about a revolutionary and welcome change in the industry. Both companies in vying with each other for the top spot have managed to create high quality products spread over a wide range. Kicking off as soft drink manufacturers the companies diversified to other packaged foods and drinks thus increasing their consumer base as well as the industries. The introduction of the diet coke, for example, was lauded as the most successful consumer product launch in the 1980s. The aggressive entry of PepsiCo into the food business in the latter part of the 1990s also contributed handsomely to the company and as a result to the industrys profit. 4. Can Coke and Pepsi sustain their profits in the trend of flattening demand and growing popularity of non-carbonated drinks? Yes, Coke can Pepsi can sustain their profits in the industry because of the following reasons: The industry structure for several decades has been kept intact with no new threats from new competition and no major changes appear on the radar line. This industry does not have a great deal of threat from disruptive forces in technology. Coke and Pepsi have been in the business long enough to accumulate great amount of brand equity which can sustain them for a long time and allow them to use the brand equity when they diversify their business more easily by leveraging the brand. Globalization has provided a boost to the people from the emerging economies to move up the economic ladder. This opens up huge opportunity for these firms Per capita consumption in the emerging economies is very small compared to the US market so there is huge potential for growth. Coke and Pepsi can diversify into non–carbonated drinks to counter the flattening demand in the carbonated drinks. This will provide diversification options and provide an opportunity to grow.