The soft drink industry is very competitive for all companies involved.
Recently the competition between established firms has only increased with the market nearing its saturation point. All companies in the industry, especially those thinking about entering, have to think about: rivalry among establish firms, risk of entry by potential competitors, substitute products, suppliers, and buyers.
When talking about market share, PepsiCo and Coca-Cola have the lions share. They have dominated the industry over the past 40 years with Coca-Cola leading in the category in 2004.With little resistance from Cadbury Schweppes, the distant third largest company in the industry, the two companies’ main focus was to increase market demand by outdoing each other in promotions, advertisements, and corporate acquisitions. Rivalry and power struggle have defined the existence of PepsiCo and Coca-Cola, looking for a competitive advantage to gain an edge on the competition. This rivalry has been to the benefit to the companies, the industry, and its consumers as a whole.
Both have learned to not only stay afloat, but flourish in an industry that has constantly grown since Coca-Cola began advertising in 1891.They did this by increasing the demand in their products, and gaining brand loyalty by their consumers. In some instances, they were selling cases of Dasani (Coca-Cola) and Aquafina (PepsiCo) for less than the cost of bottling it. The risk of entry by potential competitors isn’t a strong competitive pressure in the industry. PepsiCo and Coca-Cola dominate the industry with their brand name and distribution channels, which makes it difficult for new entrants to compete with these existing firms. High fixed costs of production facilities, logistics, and economies of scale also deter entry.It’s difficult for a new firm with a small production capacity, and a high cost structure to compete when, as soon as their product is introduced to the market, the two leading firms drop prices below your cost structure.
Pepsi and Coke’s economies of scale allows them to do this since it costs so much less for them to produce their products than it would a new company. Substitute products come from competitors outside of the soft drink industry. These include: coffee, sports drinks, bottled water, tea, and juices. This is an increasingly growing force since consumers are becoming more health conscious in society.Most people are thinking about what carbonated soft drinks do to their bodies and replace them with sports drinks which appear to be healthier. These drinks also allow for a larger variety of flavors the appeal to different consumers. Coffee and tea may also be substitutes for the consumer who drinks soda for the caffeine they contain.
Consumers can switch to coffee to decrease the amount of sugar and carbonation. These also come in a larger variety of flavors provided companies, such as Starbucks, that have become extremely popular over the past 20 years.These substitutes are a large and powerful force in the industry, especially since the switching costs (the cost to switch from one product to the next) are essentially zero. In the beginning of 1990 Roberto Goizueta developed the following mission statement: “To create consumer products, services and communications, customer service and bottling system strategies, processes and tools in order to create competitive advantage and deliver superior value to: * Consumers as a superior beverage experience Consumers as an opportunity to grow profits through the use of finished drinks * Bottlers as an opportunity to grow profits in volumes * Bottlers as a trademark enhancement and positive economic value added * Suppliers as an opportunity to make reasonable profits when creating real value-added in an environment of system-wide team work, flexible business system and continuous improvement * Indian society in the form of a contribution to economic and social development. * Refresh the World…
In body, mind, and spirit * Inspire Moments of Optimism…Through our brands and our actions * Create Value and Make a Difference… Everywhere we engage.
” (coca-colacompany. com, 2010) “The companies values statements have guided their employees and include 7 separate ideals: (1) leadership: “The courage to shape a better future” (2) passion: “Committed in heart and mind” (3) integrity: “Be real” (4) accountability: “If it is to be, it’s up to me” (5) collaboration: “Leverage collective genius” (6) innovation: “seek, imagine, create, delight” (7) quality: “What we do, we do well” (Coca-cola. com). The company as been built upon ethically sound principles which are timeless in nature and has guided them to the top of the beverage market. ”( thecoca-colacompany. com, 2010) The goals Coca-Cola in the early 1990 were: increasing our numbers of consumers who enjoy the Coca-Cola products and brands and expand the global business. To be reaching these goals the company would effectively use their financial resources: capital, brands, and customers.
These resources are already in existence, one may think that we need only to draw on them to reach these goals, but this is completely wrong.Supplies to the industry don’t hold much competitive pressure. Bottling and packaging of the product don’t hold much of a bargaining position in the industry. Coca-Cola’s CEO Roberto Goizueta looked to consolidate a large number of bottlers in 1986, creating an independent bottling subsidiary called Coca-Cola Enterprises (CCE), went public and sold 51% of its shares while retaining the remaining which enables Coke to have separate financial statements from CCE. This vertical integration essentially made Coke its own bottler, which almost cut out suppliers entirely.Pepsi Co soon followed suit in the late 1980s with the Pepsi Bottling Group (PBG) and went public in 1999, retaining 35% of its shares. By 2004 Coca-Cola had CCE bottling 80% of its North American bottle and can volume, while PepsiCo had PBG bottling 57% of their beverages in the region.
These consolidations took away much of suppliers’ bargaining power. (pepsico. com, 2010) The buyers of soft drinks range from Supermarkets, to mass retailers and supercenters, to gas stations. Soft drinks are sold to these stores which are, in turn, resold to consumers.The power that buyers have in the industry is very strong. Larger stores like Wal-Mart purchase soft drink in large volumes allowing them to buy at lower prices.
Gas stations have lower bargaining power since they buy smaller quantities.
Although soft drink demand is beginning to plateau which could cause a shift in bargaining power to the buyer because of decreasing demands in both Pepsi and Coke. Porter’s 5-Forces model completely encompasses all factors of the soft drink industry. It has shown that industry has been very profitable in earlier years, especially to Pepsi and Coke.Demand for soft drinks is beginning to level off because of a new health conscious trend by the consumer will inevitably affect profits. The industry has also been defined by intense rivalry by the two largest firms which leave little room for new entrants. The soft drink industry has reached its peak in society and will soon begin to decline soon because of the consumers decrease in demand for the product and increased demand in other healthier products. For both companies to stay profitable, they will have to curtail their products to the new health conscious trend of the consumer.
The value created by the soft drink industry is distributed and apparent across the industry in a variety of ways. Pepsi and Coke at first only produced their cola products, two companies each with one product line. The success of both companies led them to diversify their production capabilities and produce different flavors of soda; Fanta, Sprite, and Tab (1960-63) from Coke, and Teem, Mountain Dew, and Diet Pepsi (1960-64) from Pepsi. These expanded product lines proved to be highly profitable and were continued and expanded on in the years to come.By the late 1980s Coke and Pepsi each offered more than 10 major brands of soda in 17 or more sizes. This product proliferation increased profitability, rivalry, and barriers to entry. Soon drinks sports drinks such as Gatorade and PowerAde, juices and juice drinks, energy drinks, tea based drinks, and bottled water will break into the industry.
These new product lines all had substitute products from the other company to battle with. Pepsi and Coke had a vast understanding on game theory and demonstrated it with their sequential and simultaneous move games.This led to an enormous selection for the consumer, whose only problem was choosing a flavor. Both Pepsi and Coke both have secret recipes to their flagship cola. Coke was the first to be imitated in its early years. The company constantly fought trademark infringements in court. There were as many as 153 barred imitation of Coca-Cola in 1916 alone.
When Pepsi proved to be a viable competitor to Coke, the company filed a suit against Pepsi claiming it was an infringement on the Coca-Cola Trademark. From that point on the two companies engaged in competitive marketing campaigns to gain market share.In 1950, Coke controlled 47% of the US market, while Pepsi’s was only 10%. Coke and Pepsi are two gigantic companies that have flourished throughout their existence. They can be described as the definition of rivalry and competition in the modern business world. They are exact substitutes of each other and have battled to control the carbonated soft drink industry for over a century. From the 1950s-present, the carbonated soft drink industry has steadily increased in terms of consumption by person in the US.
Both companies have spent billions in marketing, research, acquisitions, and promotions to meticulously exchange percentage points in the $66 billion a year industry that they have created. Unfortunately times are changing, and the superiority that the carbonated soft drink industry once held among beverages is slowly fading. Schools are banning sodas from being sold in them, claiming they are unhealthy for children. People in today’s society are more health conscious than they were in prior years. This is why you see a health clubs left and right, and “0g Trans Fat” labeled on snack foods.A majority of the US population is very health conscious, which leaves little room for the sugary carbonated soft drinks that used to dominated beverage consumption. The stability of the Soft drink Industry as a whole is in jeopardy.
Coke and Pepsi will have to find alternatives to increase market share, or break into new markets, if they want sales to keep increasing like they have in the past. Non-carbonated beverages, such as juices, sports drinks, and energy drinks, are beginning to grow more rapidly than when they first were introduced, while carbonated beverages are leveling off.This health conscious shift will lead Coca-Cola and Pepsi executives to focus in these once thought auxiliary components of their business to pick up the slack that the carbonated industry is leaving behind. Coke and Pepsi will not be able to repeat their success with carbonated beverages in the water segment. Water can’t differ like soft drinks can. There are simply too many similar substitutes for customers to turn to, and the brand loyalty diminishes. A mere 10% of consumers say they choose a brand of water because “it’s my favorite brand” when compared to the 37% of carbonated beverage consumers.
To compete in this new market, Coke and Pepsi will need a new competitive dynamic to stay profitable, one that won’t end in price wars. Fortunately for the market it is much cheaper to bottle and sell water than it is carbonated soft drinks, so competitive advantage will need to inevitably be realized in other parts of the business. Environmental factors A growing trend in the world today as we move into the future is in regards to the environmental factors that businesses have on the planet.Coca-Cola is no exception in that they have developed awareness programs and have taken action in regards to reducing waste and energy. As such a large corporation Coca-Cola is aware the effect that little things such as water conservation has on the global environment. Water is vital to Coca-cola’s business and the company has donated their time and resources in streamlining operations to utilize their water waste. The company also has developed partnerships with companies such as the World Wildlife Fund, the CEO Water Mandate, and the United Nations Global Compact which helps to preserve freshwater.
Goodman, 2007) Several years ago a ban has been placed on Coca-Cola from doing animal experimentation. The People for the Ethical Treatment of Animals (PETA) had discovered that the company’s labs had used animals for taste testing and health claims. Coca-Cola also was providing scholarships and grants to colleges which were conducting tests and research on rats with their products. Because of the pressures of PETA and the negative publicity that has arisen, both Coca-Cola and Pepsi-Co have agreed to ban any future testing of their products on animals.Coca-Cola has also discontinued their grant programs (Goodman, 2007). Macroeconomic outlook The financial outlook for Coca-Cola is a promising one apart from the turmoil of the United States financial markets. The company’s stocks stand at 7 out of 10 rating because of Coca-Cola’s high ranking in the soda industry.
They have a steady growth rate. Economists are expecting the beverage industry to climb to $650 billing on revenue by 2010. (Goodman, 2007) Therefore, Coca-Cola Company believes that their company will experience steady growth for five to ten years to come.In order to achieve sustained growth the company believes they must address five key opportunities where they believe will have the most growth impact. First off the company believes that they will need to sustain growth in “sparkling beverages”. Sparkling beverages are the carbonated drinks such as their Coca-Cola, Diet Coke, Coca-Cola Zero, Sprite, Fanta, etc. The sparkling beverages have been Coca-Cola’s largest selling products since the company’s inception.
Recently, however the company has experienced a decline in sales and growth across the US in the sparkling beverage market.Coca-Cola Company is concerned on what the effects of the current social health trends will have on their company. Besides the current slide in the US market overall the company increase the sales of these beverages by 5% in the second quarter of 2008 due to the emerging markets such as China, Russia, Europe, and South Africa where volume sales grew at double digits rates (coca-cola. com, 2010). Coca-Cola Company believes that the company will continue to experience growth in the foreign markets despite the poorer performance in America.Secondly, a great opportunity for Coca-Cola Company is to expand into many of the emerging markets such as the sports drinks, coffees, teas, juices which many of these drinks because of their natures are high margin products. Coca-Cola Company believes the largest opportunity of growth in the company is in the area of the still brands.
These items include the coffees, teas, waters, energy, and juice products. In the recent quarterly statement the volume of sales in these areas increased 13% which is an indicator of the company’s current buying trend (coca-cola. com, 2010).Third, the company plans on renewing their strength in their flagship market, North America, through advertising and marketing their products to the ever growing middle class consumers. Fourth, the company will continue to develop streamlining of their inventory’s to be more profitable and develop machinery and innovations to speed up processing and improve processes. Recent information the company has disclosed is that Coca-Cola Company forecasts an annual savings of between $400 to $500 million dollars due to productivity initiatives the company has begun to implement relating to the streamlining of processes and redesigning key processes.Other areas included in these initiatives include aggressively managing the company’s operating expenses.
This cost savings will allow the company to be able to invest in growth of the company (coca-cola. com, 2010). And lastly the company wants to focus on building deeper customer relationships with their clients, franchise owners, bottlers, and employees to ensure lasting growth. The company’s five vision reminders of people, planet, portfolio, partners, and profit are in line with the company’s five largest opportunities listed above.As the company strives to build deeper relationships with their clients and customers they relate to how Coca-Cola wants their customers to feel and to be inspired. Their relationships with their partnerships and franchisers and influenced by a strong focus on people. The company is mindful of maximizing profit and recognizing their responsibility and relationship to the shareholders.
As the company continues to strive to engineer and pose new products on the market and focus on their current opportunities in foreign markets Coca-Cola Company strives to build a stronger portfolio.And the company’s environmental awareness through streamlining processes and minimizing resources help to build a better planet. Long Range Objectives Coca-Cola Company’s opportunities have opened up a path to a set of long range objectives the company should strive to achieve that can be measured. First off, the company measures sales growth in unit case volumes (coca-cola. com, 2008). With the potential growth of sparkling beverages in the international market Coca-Cola Company’s wants to achieve an increase of 3% growth in unit case volume globally in the next five years which would be a total growth of 15%.Secondly, in still products the company is growing 13% per year; however Coca-Cola Company wants to see this at 15% per year unit case volume increase in still products each year for a total growth of 75% by 2012.
Next the company has forecasted a reduction in costs by $400 to $500 million per year by 2011. Coca-Cola Company is recognizing the potential impact of this savings and believes that the projection is probable. Coca-Cola Company wants to move forward with the implementation of these initiatives and take advantage of these new technologies and process improvements.And lastly, the company feels that in order to stay competitive in this market they need to be constantly bringing new technologies and products to market. Coca-Cola believes that the current trends in the marketplace are moving in the direction of the healthier line of products. Therefore, Coca-Cola Company proposes that they company will introduce a new line of drinks that are zero to low calorie, that have healthy effects on the body and are able to provide energy without the use of caffeine and other controversial ingredients and brought to market by the year 2012.Coke-Cola should strengthen the brand image for examples; dispose of a global brand architecture, and Coca-Cola should keep the local markets to help develop their own brand strategies and adapt more quickly and efficiently to the ever changing customer demands.
According to a recent surveys customers’ will buy is based on products, which are, familiar to however, keep offering different tastes like Cherry or other flavor. The key however, is the original brand and taste that the customers are familiar with. Consumers also purchase with the similar look f the product. The soft drink industries are continuing to change the look of the can and bottles. This keeps the consumers buying the product. The industry changes the look of the cans with the seasons, sporting events, ect. Middle managers will need to concentrate on the points of weakness, competitors, and what the consumers needs and want.
They need to focus on the organization’s marketing strategies and the improvements to the product. Middle managers at Coke-Cola need eliminate the much of the downsizing and re-engineering in the global market.