Sudhanshu Shekhar ROLL NO.

27 Cola Wars : in 21st century Review

Economic dominant features of the concentrate suppliers are as follows: 1. Market size and growth rate In recent times even though the market sizes of the two concentrate suppliers was 55% in 1999. This is a fairly dominant market share but the growth has been thwarted due to reasons such as healthy lifestyle and other substitutes. 2. Number of rivals The CSD industry is fairly consolidated with two major players, Coca Cola and Pepsi dominating the market. Others are smaller brands and private labels of large retail stores which sell on cost advantage. 3. Scope of competitive rivalry The CSD faces more challenges from non cola products rather CSD players themselves. So the future rivalry will be a battle between non cola and cola drinks. 4. Buyer needs and requirements The current consumers are health conscious and do not mind shelling extra for healthier products including drinks. CSD needs to watch out for that. 5. Product innovation/differentiation Coca cola and Pepsi have both tried to innovate and differentiate themselves on the basis of the product offerings, but havent been successful. Economic dominant features of the bottlers are as follows: 1. Market size and growth rate Bottlers have been consolidated by Coke and Pepsi either by contractual agreements or franchise. There are exclusive territory rights for bottlers and most terms are dictated by the CSD players. Therefore growth is limited. 2. Number of rivals: The number of rivals is more in terms of different brands of bottlers rather than within the same company bottlers. This is to do with exclusive territorial rights. 3. Scope of competitive rivalry There is not much to the rivalry in bottling industry in the future unless some major innovation takes place. 4. Buyer needs and requirements This factor is aligned with the consumption of soft drinks. So as long as there is a requirement for soft drinks, the bottlers will be needed. 5. Product innovation/differentiation The bottlers have innovated for the last couple of decades, experimenting with different raw materials etc. More innovation would depend on R&D of these firms.

Sudhanshu Shekhar ROLL NO. 27 Cola Wars : in 21st century Review

Industry driving forces for the CSD industry are as follows: 1. Globalization: Increased globalization has been highly advantageous to the CSD industry as the markets in the US were reaching a saturation point. Market growth was slowing down as people were switching to substitutes. Globalization helped CSDs and bottlers alike to expand in emerging economies and be dominant players in these countries. 2. Product/Marketing Innovation: It will be important for the CSD industry to continuously innovate themselves in terms of products and image. In this industry, branding of the company becomes a game changer. 3. Changing societal concerns, attitudes and lifestyles: There has been a tremendous change in the consumer behaviour patterns. People are shifting to healthier drinks and avoiding high calorie unhealthy soft drinks. This has led to players like Pepsi and Coke to move into diet cola and non cola categories in order to cater to the changing demands of the consumer.

Key Success Factors of the CSD industry are as follows: 1. Manufacturing KSF High utilization of fixed assets due to standardization of the products sold by CSD industry. Low-cost production efficiency which helped achieve economies of scale. 2. Distribution KSF A strong network of wholesale distributors and dealers. Also they managed to gain ample shelf space in the retailers outlets. 3. Marketing SKF Breadth of product line and product selection after both Coke and Pepsi entered into the snacks and water bottling segments too. Also clever advertising and branding helped both of them attain market share. Industry attractiveness of concentrate suppliers and independent bottlers. Industry attractiveness for the concentrate suppliers is as follows: 1. Bargaining power of suppliers: The powers of suppliers are low for the CSD as the suppliers are fragmented. Materials like colouring, citric acid and caffeine have no differentiation. Also the switching costs to these are really low and these commodities are easily available in the market. Also there is minimalistic threat of forward integration. 2. Bargaining power of Buyers: Bottlers have very low bargaining power as both Coke and Pepsi determine the terms of the contract for pricing and other conditions. Also they have retained exclusive deals with food outlets. As a matter of fact, most voluminous

Sudhanshu Shekhar ROLL NO. 27 Cola Wars : in 21st century Review

bottling accounts were owned by these companies which gave them large negotiating powers. 3. Threat of substitutes: Threat of substitution is very high as there are numerous alternates to CSDs. There is a change in consumer behaviour and people are switching to healthier drinks. The switching cost for the consumer is also really low. 4. Threat of new entry: There are high entry barriers as the investment for research, branding, advertising is very high. Also it is difficult to gain distributor access. And naturally there will be retaliation from existing dominant players in the strategic group. Therefore threat to new entry is low. 5. Threat of rivals: There is high intensity of rivalry due to slow industry growth and changing consumer tastes. Two equal sized companies competing for leadership makes the rivalry very high. Dimension of rivalry is based on price premium but more on branding. Industry attractiveness for the bottlers is as follows: 1. Bargaining power of suppliers: The strength of the suppliers is medium because CSD have consolidated small bottlers. CSD also maintain relations with multiple bottlers and vice versa. It is also true that CSD producers sales depend on the bottlers competitiveness in the market. 2. Bargaining power of buyers: The strength of buyers is high as there are substitutes available. The switching costs are very low. Also that the markets in the developed nations are saturated. 3. Threat of substitutes: This threat is relatively low, as bottlers cannot be easily replaced by other marketing channels. Also fountains cannot be made available everywhere. Bottling component of sales is very high. 4. Threat of new entry: Barriers to entry are high because bottling is not really a profitable industry. Markets are saturated; its hard to gain distribution share/shelf space. Bottling is a very capital intensive industry. Also Coke and Pepsi have exclusive share of territories. 5. Threat of rivals: There is rivalry among bottlers of different brands rather than same brands because the territory has been exclusively divided by Coke and Pepsi. Also the exit barriers are high, which makes the rivalry intense. Non marketing forces for CSD industry: 1. Media Big brands like Coke and Pepsi heavily depend on media to cover them positively as media is a major influencer. Any negative publicity by the media can lead to public outrage like it happened in India some years back. Therefore media is a major force.

Sudhanshu Shekhar ROLL NO. 27 Cola Wars : in 21st century Review

2. NGOs/Activist Groups Many of these activists group question the sustainability practices of major MNEs who only seek profits and do not bother about natural resources and the environment. In India, Coke was accused of using too much water for their production. Therefore, NGOs also play a major role in the CSD industry. 3. Public There is a widespread public opinion that cola drinks lead to obesity and diet colas are carcinogenic in nature. This may have an adverse effect on the sales of these products. 4. Government The US govt. has banned the selling of cola drinks in school premises due to health concerns. Also governments of other countries might object on similar grounds, making entry difficult for the CSD industry. Therefore, the role of the government is also an important force for cola companies. Vertical integration of CSD, bottlers and suppliers. Degree of Vertical Integration: Many of their functions overlap in the industry for instance, Concentrate Producers do some bottling, and bottlers conduct many promotional activities. The industry is already vertically integrated to some extent. They also deal with similar suppliers and buyers. The vertical integration of franchise bottling networks of Coca-Cola and PepsiCo, began in 1980s. The fact that most of the of the family-owned bottlers that Coca-Cola used, did not have the resources to remain competitive in the industry and it began buying up the poorly-managed bottlers, giving them new life with capital, and selling them to better-performing bottlers. By 2009 CocaCola Enterprises handled about 75% of Coca-Colas North American bottle and can volume and Pepsi Bottling Group produced 56% of PepsiCos total volume.

Major cost drivers for the bottlers The cost drivers for the bottlers were as follows: 1. Bottlers had a direct store door arrangement, which increased the cost of transportation and labour because their own personnel did the driving, unloading and stacking. 2. Retail stores were paid by bottlers for promotional activities and discount levels. 3. The bottling process in itself was highly capital intensive requiring high speed production lines etc. 4. The other main costs were the concentrate and syrup. This cost was dependent on CSD suppliers and market price for sugar/corn syrup. 5. The bottlers heavily invested in trucks and distribution networks apart from routine expenses like packaging, labour and other overheads.

Sudhanshu Shekhar ROLL NO. 27 Cola Wars : in 21st century Review

Coke and Pepsi managed the rivalry in the CSD industry in terms of concentrate suppliers Coke and Pepsi managed the rivalry in the CSD industry by following some of the below mentioned tactics over a couple of decades: 1. Pepsi started focusing more on take-home sales to target family consumption. For this they introduced the 26-oz bottles. 2. Pepsi started with an aggressive marketing campaign called Pepsi Generation to promote and increase sales among the youth. 3. Pepsi also worked to modernize plants and improve store delivery. 4. Pepsis bottlers were concentrated and were larger than Cokes. This gave them an advantage over Coke. 5. Pepsi used to sell concentrate at 20% lower than Coke, promising to spend the extra income on promotion after equaling Cokes prices. 6. Both Coke and Pepsi experimented with cola and non cola flavours and new packaging options. Non returnable glass bottles were introduced along with metal cans. 7. In the 1970s Pepsi came up blind taste tests called Pepsi Challenge and Coke countered it with rebates and retail price cuts. 8. During this period, Coke renegotiated with its bottlers to bring in more flexibility in pricing of syrup and concentrates. 9. Coke also switched to lower priced high-fructose corn syrup later on. Pepsi followed suit. 10. Coke started with Diet Coke and in a couple of years Pepsi came out with a similar product. Coke and Pepsi Rivalry : Coca Cola and Pepsi should focus on growth related strategies rather than devising tactics to outdo each other for shorter periods of time. The long term focus would not only be profitable in the future but also be highly sustainable. Some of the ways this can be done is as follows: 1. Continue expansion into emerging markets. As the buying power of consumer increases, so would the sales of these brands. 2. Both of them should start using healthy sweeteners in order to counter the claim of aerated drinks leading to obesity and other health problems. This would not take much investment and as the trend for healthy living grows consumers will be relatively insensitive towards price. 3. Have a green strategy (like environmentally friendly factories, recycle of the bottles, water cleaning systems). This will have a positive effect on customer loyalty and will help in the brand building process.

Sudhanshu Shekhar ROLL NO. 27 Cola Wars : in 21st century Review

4. Continue to churn out newer products and bring about innovation in these products. Innovation to be based on geography, occasion, target demographic group and ingredients. 5. For retailing strategies, increase shelf space, install more and better equipments in the market and also expand availability into new outlets and channels.