Coke versus Pepsi

Media Management Spring Term 2011

Group 2a: Christine Alff (40202), Niklas Hägerklo, Martina Ketter, Aline Rauh Müller (40206)

Porter‘s Five Forces – Concentrate Industry

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Rivalry: HIGH

Duopoly

Fountain: high

Internationalization: moderate

Advertising: high

Bargaining Power of Suppliers: LOW• mainly commodity supplies and many suppliers available

Bargaining Power of Buyers• retailers: rather low• Fountain clients: high

power• Bottlers: low

Threat of SubstituteProducts or Services: HIGH• “Sometimes I think we even

compete with soup.”

Threat of New Entrants: LOW

• unequal access to bottlers

• saturated market

• current players resource strength

Attractiveness of the Industry

Profit potential of the concentrate industry

Reasons:

• Five forces: strong negotiation position towards buyers and suppliers

• Growth of consumption is increasing at a slower rate (80s: 5-7%; 2000: 0.2%)

• Huge potential in undeveloped markets

• Low capital costs (little investment in machinery, overhead, labor), low production costs

• Duopoly between Pepsi

Attractiveness depends on who you are and where you are As an established player such as Coke and Pepsi, it is an attractive market

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Five Forces – Bottling Industry

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Rivalry among the existing competitors

Low, they have their own bottlersBargaining Power of SuppliersLow, since the materials are considered as commoditities

Bargaining Power of BuyersRetailers: medium (depending on the brand), limited shelf space

Threat of Substitute Products or ServicesLow, (cans / bottles) as bottling companies are able to produce innovations, existing companies are already in the frontline of technology

Threat of New EntrantsLow as the market share of Coke’s and Pepsi’s bottling companies is very high -> development towards consolidation

Comparison - Economy of Bottling and Concentrate Industry

Profits - Concentrate producers have a margin of 35% while bottling companies have a 9% margin

Costs – Bottling has higher costs than the concentrate industry

Marketing - 39% of sales for concentrate and 2% for bottler

Bargaining Power: Higher for the concentrate industry as bottling companies are dependent on those two major concentrate clients.

Which industry is more attractive? Concentrate industry is more attractive, they both have higher margins and higher bargaining powers.

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Today‘s Challenges

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Challenges

Health trend-> rise of non-carbonated drinks

Decreasing consumption since 5

years in the US*

Ever increasing marketing costs?

Retailers launching own drinks

Globalization challenges

Source: Beverage Digest, 2010

Impact of Competition between Pepsi and Coke

• Consolidation of bottling industry

• Price war in the 80s had negative impact on margins and created a stronger duopoly

• Competition forced innovation (new products, package size) and growth“The more successful they are, the sharper we are. If the Coca-Cola company didn’t exist, we’d pray for someone to invent them”.

• Competition led to segmentation of markets and differentiation through branding

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Porter‘s Importance

How does Porter‘s framework contribute?

• To have a holistic perspective and not just see the company‘s point of view

• Industry structure becomes clearer as not only Coke and Pepsi are analyzed but also the bottling companies

• Understand the impact of the whole network on the profit potential (how everything is interrelated)

• The most salient force is not always obvious!

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...

THANKS

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Bibliography

Beverages Digest (2010), http://www.beverage-digest.com/pdf/top-10_2010.pdf, retrieved 21st of Jan, 2011

Porter, M.E., “The Five Competitive Forces that shape Competitive Strategy“, HBR, 2008.

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Backup

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Factors influencing profitability

• Price X sales – costs

• Costs:

• Material costs are rather low (strong negotation power due to commodities)

• Accelerating marketing costs

• finding new markets (+ efficient market segmentation)

• Launch of new products (e.g. non-carbonated drinks) -> decrease dependency on one single segment

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