Cola Wars Continue Coke and Pepsi in 2010

Analysis

Coke and Pepsi are companies that operated in a carbonated soft drink (CSD) industry
(p.1). However, they have been introducing more of non-CSD drinks and becoming an overall
beverage industry. In order to further analyze the industry, Michael Porters five forces
framework, competitive strategies and resources and capabilities helps determine the
attractiveness of the overall industry.
Carbonated Soft drink industry analysis
Threat of new entry
Threat of new entrants is low since the industry has already developed a high barrier that
is difficult for new arrivals to enter or survive. The major companies in this market are Coke and
Pepsi that have made huge and risky capital investment throughout the years. One of the
spendings was towards marketing campaigns for advertisements, rebranding, sponsorships, and
promotion in their brand that created a strong brand loyalty for buyers to rely on and prefer over
new arrivals (p. 9-10). As well as, it is difficult for new entrants to gain buyers access, so entrants
should think of a way to get their products on the self-space, because running a successful
business is highly depends on how much sales they can generate. New entrants need have their
product to be innovative in order to enter in the industry because Coke and Pepsi already
established a strong uniqueness. Therefore, the threat of new entrants is relatively low for CSD
industry.
Bargaining power of buyers:
Buyers of CSD industry is the retail channels such as are supermarkets, vending
machines, fountain outlets, mass merchandisers, and more (p.4). These buyers have medium to

high power in the industry because some of these buyers contribute for huge part of the revenue
for Coke and Pepsi. For supermarkets, they generate $12 billion of CSD products in U.S., with
that high amount, it causes huge demand from CSD companies to display their products. Yet
there is strong self-space pressure since retailers only want to stock their self with popular
brands. So buyers have the options to switch and try other brands (p.4). Therefore, the bargaining
power of buyers is medium to high in CSD industry.

Bargaining power of suppliers

Suppliers in CSD are concentrated, sweeteners, and packaging. Commodities like
coloring, caffeine, citric acid, caramel, natural flavors, and metal cans are standardized materials
with no differentiation so they can be easily available in the market (p.5). As metal cans turn out
to be very attractive and friendly packaging materials, Coke and Pepsi became the largest
consumers of metal cans. To name few cans supplier are Rexam, Ball, and Crown Cork & Seal.
As the cans became an important component of the production, it was necessary for CSD
industry to establish a good relationship that is long term with the suppliers. Yet there were often
competition among the can manufacturers to get a single contract. Therefore, the bargaining
power of suppliers are low (p.5).
Threat of substitutes
There are many substitute products at that time, which includes milk, coffee, bottled
water, juice, tea, wine, sports drinks, and more. There were some health issues from drinking
CSD, like obesity and high fructose corn syrup as unnatural (p.9), causing some of the
substitute products to have few benefits compared to drinks from Coke and Pepsi. This causes
buyers to purchase healthier alternative drink, thus decreasing in sales for Coke and Pepsi. So
both companies changed the ingredient from corn syrup to natural sugar in drinks, which had
lower health issue (p.9-10). Consumers are buyers private label drinks, which is a cheaper price
compared to Coke and Pepsi (p.10). As a result, threat of substitutes is high for CSD industry.
Competitive rivalry

There are two major players in CSD industry are Coke and Pepsi. The competitive rivalry
is high because both companies could receive any updated information about any external or
internal changes being made from their rivals. For instance when both companies introduce new
flavours. Coke presented Fanta and sprite while Pepsi launched Mountain Dew (p.6). With that
both companies have spent amount of time and money in advertising and promoting which most
of the massages indicates the superiority of their own brand over other (p.7). Also both coke and
Pepsi were aggressively expanded their own non-carbs products to increase their sales and
eventually by 2009, Coke had captured 32% of U.S non-carbs market whereas Pepsi had 43%.
(p.10).
Competitive Strategy
The competitive strategy that Coca-Cola follows is Broad Differentiation Strategy. CocaCola differentiates by offering variety of products (such as Fanta, sprite and low calorie cola) and
by encouraging current customers to continue to purchase their products (i.e. Brand loyalty).
Cokes buyers were very precious and demanding about the unique taste of coke. For example,
when coke changed the 99 years old Coca-Cola formula, its long-term loyal customers and
bottlers expressed a strong disapproval toward the reformulation. Protests lead to diminish the
value of the Coca-Cola trademark and its brand started to lose market shares. Thus, before
matters get worse, coke launched its original formula back (p.8). Coke had heavily invested in
R&D activities. Due to the health concerns, coke has introduced some diet drinks. One is being
Coca-Cola zero, mainly marketed towards young men and referring it to as a real Coca-Cola
taste with zero calories (p.10). Cokes sales started to double due to the introduction of diet
drinks. Further, it had launched a new freestyle soda machine in 2009, which would help create
many different types of custom beverages. It had expanded its non-carbs product lines by
introducing energy brands and vitamin water drinks. Thus, 56% of U.S market in non-carbs were
cokes. (p.10)
Coca-Cola targets younger generation by putting more efforts in advertising and
marketing campaign. Since the early days of Coca-Cola, the company has put strong efforts in
diversifying its products and creating unique taste to attract customers and increase sales. Coke
also placed a greater emphasis on promoting its brands, such as spending $230 million in
advertising for its flagship Cola-Cola drink. Also Coca-Cola spends on sponsorships and global

marketing, to support the fact, in 2010 world cup, coke spent $600 million alone for sponsorship
and marketing (p.9). Coca-Cola also differentiated by using direct store door delivery method
whereas smaller brands like Shasta and Faygo distributed through food store warehouses (p.2).
Overall, the trade-offs is necessary because although differentiation strategy can be
beneficial for a company like Coca-Cola, this strategy can also fail for the following reasons.
First, with differentiation strategy, product or services can be easily copied. Second, a product
can fail if it does not deliver adequate value and so, the product becomes meaningless even if
they have attributes different from other brands. Third, overspending can also lower profitability.
If Coca-Cola chooses to increase their spending, they would have to increase their costs and
therefore making customers uncomfortable to spend extra (p.52). In order to maintain a balance
between cost and differentiation, a trade-off is necessary.
Resources and Capabilities
There are some resources and capabilities that are the key factors for success in this
industry. One resource is the demand from buyers because some of the buyers have huge
contribution in the profits for Coke and Pepsi, and with that comes in high demand from other
companies to sell their products to those buyers. The second resource is the bottlers operation
system because of the various drinks that coke and Pepsi sells, it is important to have an efficient
bottlers to be quick and carry out the demand and volume requirement. Another key factor is the
capability to be differentiated and innovative in achieving unique products and taste because with
the increase of being health conscious as a downfall in the CSD industry, both Coke and Pepsi
have launched diet CSD and non-CSD products to become an overall beverage industry.
Conclusion
According to the framework of Porters five forces and the competitive strategies, the
CSD industry is unattractive. Over the years, it has become difficult for any other new entrants to
enter in the market. Not only that, the bargaining power of buyers is medium to high from strong
self-space pressure, the threat of substitutes are high as the demand shifts to non CSDs, and the
alternative drinks available at cheaper prices. With that being said bargaining power of suppliers
are low due to availability of standardized materials and presence of few cans suppliers. Also, the
competitive rivalry is high causing a slow industry growth and aggressive growth strategy. To
succeed, companies need to be unique and innovative.