Question# 1

Analysis

Executive Summary

The carbonated soft drink industry has been one of profitable industry, regardless of this
reality, during the flourishing period a “cola wars” initiated between the two major cola players
that is Pepsi and Coca-Cola, though the soft drink industry has faced many challenges in
promotion and rivalry period. There were several factors supported the profitability of this
industry, Over the years, these factors also enable to examine why the concentrate side
profitability of the industry has been so much greater than the bottling side. The concentrate
producers have experimented with different levels of vertical integration in the structure of
their processes to make the product more successful and famous in comparison with other
similar products available in the market.

a. Why Coke and Pepsi are so profitable, which perspective would you take and how
would you explain their elevated profitability

When we define this industry then we will consider both concentrate producers (CP) and
bottlers are profitable. These two parts of the industry are interdependent bodies and essential
role player of company’s success, other parts they do is sharing costs in procurement,
production, marketing and advertising promotions and distribution. Many of their functions
they performed with combined efforts like concentrate producers implemented and financed
marketing programs jointly with bottlers. Beverage substitutes would have threatened both CPs
and their associated bottlers. Among national concentrate producers, Coke and
Pepsi claimed a combined 72% of the U.S. CSD market’s sales volume in 2009, followed by Dr
Pepper Snapple Group (DPS) and Cott Corporation, (Exhibits 2, 3a and 3b). Consumption of
these soft drinks was found at peak in 2000 which was 29% (Exhibits 1). This industry as a whole
generates positive economic profits.
Rivalry Beginning:
The Cola war begins in 1950, though revenues are extremely concentrated in this industry,
with Coke and Pepsi, altogether with their associated bottler. Coke and Pepsi began to
experiment with new cola and non-cola flavors, and with new packaging options, in the 1960s,
there was tough competition between Coke and Pepsi for market share, and this occasionally
hampered profitability. During 1980 price wars resulted in weak brand loyalty and eroded
margins for both companies. The Pepsi Challenge was launched in 1974 which never affected
market share without hampering per case profitability, as Pepsi was able to compete on
attributes other than price. Over time, however, some other beverages like bottled water and
flavored teas became more famous publically during 1980s and 1990s. Meanwhile, Coke and
Pepsi responded by expanding their offerings .Coke also introduced 11 new products, including
Caffeine-Free Coke and Cherry Coke. While Pepsi launched 13 products in market, including
Lemon-Lime Slice and Caffeine-Free Pepsi-Cola and alliances (e.g. Coke and Nestea). Expansion
in the number of brands did threaten the profitability of bottlers during 1986 with modification
in it, but due to increased capital investment and development in special management skills for
more complex manufacturing operations and distribution. Concentrate producers and bottlers
were able to overcome these operational challenges through consolidation to achieve
economies of scale.
Conclusion
The soft drink industry like coke and Pepsi industry is most concentrated industry which stem
their roots fixed in global market, every big super marts, local stores and even food chains have
their soft drinks racks due to increased demand, due to expansion in demand, this industry is
growing fast even facing some critical challenges.

b. How do you explain the difference in profitability between the concentrate

business (Coke and Pepsi) and the bottling industry?

Introduction

As entry into this business is much difficult and tough because they are playing major role in
soft drink industry even the intense rivalries has not destroyed the profitability of the industry.
Suppliers and buyers have had not much influence on the industry because of the strong
marketing and promotion efforts of this industry, even the most closed substitutes failed in
playing significant role in holding their market share.

Profitability Analysis

Concentrate Business (Coke and Pepsi)

By 2009, it is reported that the average American drank 46 gallons of concentrated soft drinks
per year and the consumption is increasing steadily per year which also have increased the
number of buyers. Due to meeting up this consumption challenge, industry has developed good
long term relationships with suppliers. The switching cost is also low for the Pepsi and Coca-
Cola and they can easily switch to the desired supplier. The main reason for the success of this
industry is the marketing efforts and value added services to their product especially more
focusing on the packaging to attract more consumers in the market. This is the reason; it is the
most demanding product on the dinning of every home.

Bottling Industry

There are some entry barriers for bottling industry, as concentrated soft drink industry is the
most dominated industry in terms of effective price and quality of the drink. High investment
cost and switching required for the bottling industry. Bottlers also did an arrangement of a
“direct store door”, which also increased their labor and transportation costs. The cost of
corn/sugar syrups also depends on the concentrated suppliers; these factors engulf the bottling
industry in terms of low profitability. Consumer proffered to stick on reliable brands like Pepsi
and Cola.

Conclusion

So it can be concluded that coke and Pepsi are still more famous for the years due to the
capability of their branding and promotion efforts rather than focusing on price.

Question 2
1. Rivalry and intense competition generally decreases industry profitability. So how
then can Coke and Pepsi make so much money while competing so intensely?

Introduction:

The Pepsi and coke industry faced some hard challenges due to rivalry factors, though the
tough time arrived and they survived, both companies struggled for keeping their names up and
famous through bringing different varieties of soft drinks under the same brand name. Coke
dispute begins in 1950 when a former Coke marking executive Alfred Steele became the CEO of
Pepsi. Meanwhile, Coke and Pepsi launched new flavors to make their brands more competent
and successful in consumer market.

Analysis

In 1974, Pepsi challenge made the brand more prominent and dominant but the coke bottlers
came in front of Pepsi bottler and competed against the Pepsi bottler. The war heated up in
1980, coke and Pepsi speeded up their marketing and promotional efforts like branding and
advertisement of their brands during 1980-1984 and launched several new flavors. During this
period, Coke and Pepsi, each offered more than 10 major brands and 17 or more container
types. The other reasons for the soft drink industry being so profitable even though, they
having strong rivalries among them. First it is cheap to produce concentrate for bottling
companies like Pepsi and Cola. They have their direct distributors. Companies offer packaging
and production of concentrate through their own subsidiaries companies, which have some
rights and contracts with certain restaurants, and gas station chains through contracting
procedures. The soft drink industry remains profitable while establishing strategic brand
partnerships by providing some discounts on other brands for consumers who consume gallons
of soft drink per year.
Conclusion
The success of profitability and consistency remained in the soft drink companies is due to
major involvement of companies in utilizing effective marking strategic management policies
for the product success in tough competitive environment of market.
Question 3
2. Coke and Pepsi have created a very profitable industry that has lasted more than a
century. What are some likely challenges to this in the coming decade?

Introduction

As Pepsi and Coke created profitable industry. Both of the brands also looked for global
expansion. Coke flourished, and also play vital role in international markets far more than Pepsi.
Through the expansion remained steady, Coke obtained about 80% of its sales from
international markets. Pepsi, on the other hand relied on the U.S. for approximately half of its
total sales. International market led the Pepsi and Coke to broaden the variety of the
carbonated drinks by bringing innovation in it. This also created some challenges to sustain the
brand with different flavors as well as the health issues also concerned with these carbonated
drinks.
Analysis
There might be some serious challenges for carbonated drink industries; the one which is
important is health related issues connected with the too much consumption of these
carbonated drinks. As consumption of these beverages is increasing steadily almost every single
person consume gallons of carbonated drinks per year, which is alarming and bringing health
issues like nutrition and obesity in a society. CSDs contain high amount of fructose or sugar
content which is extremely dangerous for health and is a source of diabetes. The awareness of
such drastic outcomes can make a shift in profitability case of this industry. People may
turnover to other drinks like non carbonated drinks and juices. As the industry is also involved
in innovations so the second challenge is to keep the price strategically maintained with
concentrators and bottlers to run the whole supply chain network effectively.
Conclusion
Though, Pepsi and Coke industry is internationally recognized and famous but still, they are
having some challenges which need to be resolve with authentic and viable solutions for long
term sustainability of these brands.