Coke/Pepsi Economic Case Study Essay

1. Why is the soft drink industry (i. e. , the cola concentrate industry) so profitable? The soft drink industry survives on the rivalry that has existed for over a century between Coca-Cola and Pepsi-Cola. The two brands are competing for the market share nationally and globally by trying to clinch the thirst of every person in the world. In Michael Porter’s five forces, the threat of rivalry pushes both companies to “out compete” with each other and drive up the fixed cost to enter the market.

By driving up the fixed costs for other new entrants, the profits stay with them and future competitors become more hesitant to enter the carbonated soft drink market. Porter’s force of buyer power explains that brand identity will help create a sizeable profit and reduce competition in the industry. Coke and Pepsi both use recognizable figures (celebrities) to advertise their cola concentrate product and help demolish new entrants from entering the industry. Supermarket chains continue to be one of the biggest buyers in the cola concentrate industry.

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Supermarkets have realized that the recognizable brand names of Coke and Pepsi are helping them to generate higher revenue for the store. When supermarkets are generating high profits form the two major cola industry producers, Coke and Pepsi, they are more hesitant to take a risk on the smaller, less “branded” cola names. By having this domino effect happen, Coke and Pepsi become more profitable and live the competition in the dust. Coke and Pepsi have used their brand identity to increase their profitability in the fountain drink area of the cola industry.

By supplying the cola to the most popular fast food chains in the country (McDonald’s, Burger King, Taco Bell, etc. ) they have taken their profits to a whole new level and taken the competition out of the market. The market share and profits are in their control. 2. How has the competition between Coke and Pepsi affected their profits? By the start of the early 2000s, the competition between Coke and Pepsi has drastically affected their overall annual profits. The two companies have almost become equal with their overall percentage of profit to sales output.

Their rivalry has grown to a whole new level; with whatever one company doing the other was doing the same thing a few years later (Aquafina vs. Dasani). Whether it was fountain drinks or the next branded celebrity, they were nose to tail each and every time. In the late 1990s, Pepsi aggressively pursued large national companies as a fountain drink supplier. Pepsi delivered a big hit to Coke by securing a contract in 1998 with Disney to supply soft drinks to DisneyQuest, Club Disney, and ESPN Zone chains.

However, Coke secured a huge contract with Burger King in 1999, but because of a heated bidding war with Pepsi, Coke had to make a large concession by doubling $25 million in rebates to Burger King. By the late 1990s to early 2000s, Coke began to lose the competitive advantage that it had on Pepsi in profit in the United States. While Coke still has higher overall profits than Pepsi, Pepsi has closed the gap over the last several years. Pepsi has finally caught on with their growth nationally and an image that could finally stand beside with Coke and compete. . Compare the economics of the concentrate business to the bottling business: Why are the differences in profitability so stark? What is causing concentrate producers to vertically integrate into bottling? The Cola industry has adapted to the family friendly consumption of the bottled cola. Bottling is cheaper for the consumer to purchase from the stores and it comes in bigger volumes (liter, 2 liter, etc. ) than normal aluminum cans or the ever famous fountain drink. In Porter’s five forces, buyers are the ones with all the buying power.

The bottled colas are more profitable for them and have become more marketable over the years. When convenience and food stores can make more than triple the NOPBT (net operating profit before taxes) than fountain drinks that have been popular for years, then you know that you have product that will last for years to come. The difference is in the price and marketability of the bottled product. The rivalry that has developed between Coke and Pepsi spread into the investment into bottling plants across the U.

S. By doing so, this increased the capital requirements necessary for new entrants to enter the market. Porter described that with less rivals in the marketplace due to increased capital investment, there will be less competition in the market and more profitability within the industry for those are already in it. Concentrate producers are vertically integrating into bottling because of the staggering profitability that it carries. Bottlers have more say so in the product and distribution of the product.

This creates the suppliers having more power in the market because they can control the volume of cola that is distributed out to the stores. Bottlers took concentrate producers out of business and helped to keep the distinct cola brands appealing and available for the ever changing tastes of the consumer. 4. Will Coke and Pepsi sustain their profits through the late 2010s? What would you recommend to Coke to ensure their success in the future? Pepsi? The new age of the cola industry has become extremely competitive and not just with Coke and Pepsi.

Substitutes are “drowning” the market share away from Coke and Pepsi. These substitutes are not always cheaper than the normal cola that you would buy at the grocery store, but people do enjoy the taste that they have more and more. Some of the major substitutes that the cola industry is now competing with to win back the control of the market share are the novelty coffees, teas, and alcoholic beverages. Another major substitute that Coke and Pepsi have to face is the “obesity factor”.

The media image has portrayed colas has one of the factors that contributes to obesity when consuming too much at once. That is definitely something that Coke and Pepsi do not want to hear. Sure, Coke and Pepsi can sustain their profits through the late 2010s, but it will be a bigger challenge than ever before with all the additional substitutes that has entered the market. Only time will tell. For Coke to ensure success in the future, they should continue to expand internationally into markets/countries that they are not currently in.

Coke also needs to emphasize more market share in the United States market and not let Pepsi overtake them. For Pepsi to ensure success in the future, they need to invest more in international sales to fully compete with Coke on a global basis. They should also continue to sustain their profits in the North American market as they continue to climb up the ladder of the cola market and surpass Coke. Pepsi should also consider concentrating more on the cola market and less on the Frito-Lay aspect of the company.