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Cola Wars Continue: Coke and Pepsi in 2010
A case discussion note
January 17, 2012
1. Historically, why has the soft drink industry been so profitable?
Historically, the soft carbonated soft drink (CSD) industry has been valued at $74 billion in the United States. In order to understand the reasons why the industry has been hugely profitable despite the ‘Cola Wars’, an examination of the CSD industry with Porter’s five forces analysis will be conducted. As market leaders, the analysis will be centred on both Coke and Pepsi (hereafter “C&P”).
Threat of new competition: Barriers to entry in the CSD industry are extremely high and there are various factors to support this. Firstly, both C&P spend gargantuan amounts of funding of advertisement. According to Exhibit 8, in 2009 alone, both C&P spent $234 million and $145 million respectively in advertising expenditure. Therefore, while the actual initial capital investment needed to start up a CSD company is relatively economic, the amount required by new entrants to continually push their brand and gain visibility is extremely high. Due to these extreme levels of expenditure on marketing and brand awareness, the two cola companies have accrued exceedingly high levels of brand equity and consumer loyalty worldwide. As such, even with sufficient funds for start-up and subsequent advertising, new entrants are unlikely to sway persisting consumer tastes. Because of the sheer scale of both CSD companies, both C&P have pre-existing contracts with their bottlers, thus limiting their bottlers’ ability to produce similar products with rival brands. Additionally, through the use of extensive consolidation through the use of acquisitions and re-franchising of their bottlers, both C&P have made it essentially impossible for new entrants to find bottlers for the distribution of their drinks. In the event that the new entrants decide to build their own bottling plants (which is quoted to potentially
A case discussion note
January 17, 2012
1. Historically, why has the soft drink industry been so profitable?
Historically, the soft carbonated soft drink (CSD) industry has been valued at $74 billion in the United States. In order to understand the reasons why the industry has been hugely profitable despite the ‘Cola Wars’, an examination of the CSD industry with Porter’s five forces analysis will be conducted. As market leaders, the analysis will be centred on both Coke and Pepsi (hereafter “C&P”).
Threat of new competition: Barriers to entry in the CSD industry are extremely high and there are various factors to support this. Firstly, both C&P spend gargantuan amounts of funding of advertisement. According to Exhibit 8, in 2009 alone, both C&P spent $234 million and $145 million respectively in advertising expenditure. Therefore, while the actual initial capital investment needed to start up a CSD company is relatively economic, the amount required by new entrants to continually push their brand and gain visibility is extremely high. Due to these extreme levels of expenditure on marketing and brand awareness, the two cola companies have accrued exceedingly high levels of brand equity and consumer loyalty worldwide. As such, even with sufficient funds for start-up and subsequent advertising, new entrants are unlikely to sway persisting consumer tastes. Because of the sheer scale of both CSD companies, both C&P have pre-existing contracts with their bottlers, thus limiting their bottlers’ ability to produce similar products with rival brands. Additionally, through the use of extensive consolidation through the use of acquisitions and re-franchising of their bottlers, both C&P have made it essentially impossible for new entrants to find bottlers for the distribution of their drinks. In the event that the new entrants decide to build their own bottling plants (which is quoted to potentially