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5_forces_industry_analysis.docxTianying Mao
Dr. Riley
MGM399
February 10, 2016
Five Forces Industry Analysis
Threat of substitutes is medium for both Coke and Pepsi. According to Cola Wars Continue, there are many different types of carbonated soft drink, including beer, mild, coffee, bottled water, juices, tea, powdered drinks, wine, sports drinks, distilled spirits, and tap water. Obviously, the Coke and Pepsi have a lot of substitutes. However, Americans drank more soda than any other beverage, that shows these two brands are irreplaceable. Even cola’s market shared dropped from 71% in 1990 to 55% in 2009, but Coke and Pepsi still occupied 72% of the U.S. CSD market’s sales volume in 2009. That is the reason I think the threat of substitutes is medium for Coke and Pepsi. If there must be something, I think Coke and Pepsi is the biggest substitute for each other.
Threat of new entrants is low for Coke and Pepsi. They are the two largest U.S. carbonated drinks industry. In fact, the trade barrier of enter the carbonated drinks industry is not high. Using high-fructose corn syrup to replace sugar is not a secret for carbonated drinks business. But Coke adopted this way in 1980, and Pepsi adopted this way in 1983. Obviously, they have gone a lot beyond the other carbonated drinks brands.
Bargaining power of buyers is low for Coke. Coke started business earlier than Pepsi, Coke’s reputation is not surprising that relatively large. In general, buyers’ bargaining power depends on brand’s name. Buyers might be willing to pay a higher price to buy their favorite drink, but they may not be able to buy a disliked drink. Bargaining power of buyers is medium for Pepsi. Pepsi has taken measure to compete with Coke in the price. For example, during the great depression, Pepsi lowered the price of its 12-oz bottle to a nickel, and the same price for Coke just has 6.5-oz bottle. In spite of this, Coke’s market share is still much higher than Pepsi. Thus, consumer’s loyalty is really important for a business.
Bargaining power of suppliers is medium for Coke and Pepsi. I think the two largest suppliers is bottle and sweetener. For these two suppliers, Coke and Pepsi has their own advantage. Pepsi’s Master Bottling Agreement requires bottle company purchase raw materials from Pepsi at prices, and on terms and conditions determined by Pepsi. This evidence shows Pepsi has advantage with his supplier in bottle. Coke found using corn syrup to replace sugar, this approach largely reduced Coke’s spending on sweetener.
Rivalry among existing firms is medium for Coke and Pepsi. According to my above discussion, can be seen in Coke and Pepsi is to compete with each other in the carbonate drinks business. According to Roger Enrico, former CEO of Pepsi, he said “Without Coke, Pepsi would have a tough time being an original and lively competitor”. Coke and Pepsi have a competitive and very strong, but there is no other competitors, so I think rivalry among existing firms is not high or low, it is medium.
Overall, according to my five forces industry analysis, I would expect Coke to be more profitable than Pepsi. But there is no big gap between them. Besides bargaining power of buyers is medium for Pepsi, and low for Coke. The other four forces are same in my analysis. The most important reason is Coke started its business much earlier than Pepsi. Therefore, Coke have more reputation for American buyers. The actual profitability of industry described in case is similar with my overall evaluation. Both of Coke and Pepsi have a high profitability, because these two brands occupied a large part of market share in the CSD category.
