Michael Martin WPC 480 M 3:05 1
Strategy Analysis Summary
After careful assessment of the Cola Wars case, my analysis is that the U.S. carbonated
soft drink industry structure will be above average in industry profitability in the foreseeable
future. Coca-Cola and Pepsi have made key long-term decisions to solidify their position in the
market, however, increasing issues with buyer power and substitutes could plague the industry if
not dealt with swiftly and correct.
The leadership teams of Coke and Pepsi, with a little help from the Federal Government,
together built a difficult barrier to entry for the CSD industry. Congress’s enactment of the Soft
Drink Interbrand Competition Act preserved the right of concentrate makers to grant exclusive
territory. As the two longest operating concentrate producers, the companies commanded 72% of
the CSD market in 2009, followed by Dr. Pepper Snapple Group (DPS) at 16.4% and other small
firms making up the remainder. Coke and Pepsi could achieve economies of scale to offer better
discounts and lower prices than competitors, while maintaining substantial profits. The threat of
entrants is also low due to the vast distribution network and consolidation of bottlers. Creation of
Coca-Cola Enterprises (CCE) and Pepsi Bottling Group (PBG) hemorrhaged small concentrate
producers, who became increasingly dependent on these bottling networks.
The supplier power is extremely low for both Pepsi and Coke. Concentrate producers and
bottling networks require very few inputs but order a massive amount of them. With 56% of U.S.
CSDs being packages in metal cans, this became the metal industry’s number one customer.
Negotiating for their bottlers, both firms began to create long-terms relationships with major can
producers such as Ball, Rexam, and Crown Cork & Seal. Each of these producers were subject to
competitive bidding for a contract with Coke or Pepsi since production required a massive
Michael Martin WPC 480 M 3:05 1
quantity of cans. All other concentrate producers are much smaller in scale therefore, miss out on
opportunities to increase profit margins.
Buyer power poses one of the greatest risks to the CSD industry for Coke and Pepsi. In
the 1980s alone, Coke and Pepsi released 11 and 13 new CSDs respectively. Including all other
concentrate producers, consumers have the power to choose from tens to hundreds of products
ranging in flavors and nutrition with virtually no risk in switching. The range of competition
requires strategic pricing, promotion, and differentiation of products from the rest of the industry
group, especially for Coke and Pepsi. Standardization of prices for CSDs in the U.S. has also
brought struggle to firms in this industry group. On top of price sensitivity, to maintain dominant
market share these two firms must keep innovating drink ingredients such as because consumers
have more information to make a decision than ever before.
Substitutes also appear to have negative impact on the profitability of CSD in the future.
In 2009, the average American consumed 46 gallons of CSDs, the lowest amount since 1989.
The decrease in consumption of these drinks could be directly correlated to new products like
juices, teas, packaged water, and others. These substitutes are also more attractive to retailers
since the gross margin is typically around 5% higher than CSDs. The volume of cases sold of
these new products have only been increasing and don’t seem to be stopping anytime soon.
From my analysis, there are no real concerning environmental factors that could shake up
the CSD industry. The big three firms: Coca-Cola, Pepsi, and DPS, have a firm grip on the
market and have made it nearly impossible to seize. Brand identity gives these companies,
especially Coke and Pepsi, a competitive advantage against new or smaller businesses. The
rivalry has boosted sales for Coke and Pepsi through intense promotion and increased awareness.
Michael Martin WPC 480 M 3:05 1
In reiteration, I strongly believe the U.S. CSD industry will be below average in
profitability for the foreseeable future. Increasing buyer power and substitutes pose serious
threats to the industry of Coke and Pepsi. Without quick and successful innovation, these firms
will grow a disconnect with upcoming generations and their changing taste preferences.
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