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Cola Wars Continue Coke and Pepsi 2010 Case Solution
Ever since the growth of the beverages industry, Coca Cola and Pepsi Cola have occupied major positions in the market and have always competed against one another. It is said that these two organizations have engaged in various wars related to products, profitability, and pricing, etc. These wars were initiated in the US carbonated soft drink industry but expanded to other regions as well and nowadays, Coke and Pepsi also compete each other in the non-carbonated soft drink industry. The challenges faced by both the organizations were different and their strategies to respond to these challenges also varied accordingly (Yoffie & Kim, 2011). The case study of the Cola Wars highlights the history of competition through which the two companies have passed along with an insight into the current market situation and profitability of Coca-Cola and Pepsi. The following questions address the issues in detail by providing solutions to the case questions in the light of theoretical frameworks.
Following questions are answered in this case study solution:
Overview of Soft Drink Industry
Why, historically, has the soft drink industry been so profitable?
Compare the concentrated business to the bottling business? Why is profitability so different?
How has the competition between Coke and Pepsi affected the industry profits?
How can Coke and Pepsi sustain their profits in the wake of flattening demand and the growing popularity of non-CSDs?
Case Study Questions Answers
1. Overview of Soft Drink Industry
The global soft drink industry has always been dominated by Coca-Cola and Pepsi. Both these organisations have faced several internal and external challenges but at the same time, they have certain strengths that make them powerful in terms of profitability and market share (Jurevicius, 2013). These strengths and weaknesses can be summarised in the form of following SWOT analysis.
Porter’s Five Forces Analysis
Porter’s five forces is a model that depicts the impact of various factors on the industry. The five factors of the model exist rivalry among firms, the threat of new entrants, the threat of substitute products and the bargaining power of buyers and suppliers (Alkhafaji, 2003). The Porter’s analysis of Pepsi and Coke with respect to the soft drink industry is shown below.
Source: (SAR, 2015)
2. Why, historically, has the soft drink industry been so profitable?
The soft drink industry has always seen a wide range of customers because of increased demand and desire of people to buy these products on the everyday basis. The industry has been offering a huge variety of products other than just soft drinks which has added to its profitability. Moreover, Coke, Pepsi and other beverage companies kept on introducing new flavours, juices and energy drinks, etc. Due to increased variety, the customer demand increased and so did the profitability.
Historically, Coca-Cola and Pepsi have occupied the major share of the soft drink industry that has made it difficult for new companies to rise immediately. Even if new alternate products were introduced, they were not readily accepted because of customer satisfaction with the existing products. So, the competition and demand has usually remained confined to the two giants in the industry.
Furthermore, the case study showed that most of the profits in soft drink industry had always belonged to Coke or Pepsi. Customer satisfaction and brand loyalty were huge and with the passage of time, the number of sales of these two companies continued to increase not just in the US but internationally.
Another factor contributing to the profitability of soft drink industry in the past had been low pricing. The majority of the products offered by the organisations were low priced and it convinced the customers to buy them on a regular basis. So, the sales continued to increase thus leading to more industry profits.
3. Compare the concentrated business to the bottling business? Why is the profitability so different?
It is the category of soft drink business in which less investment is required as compared to the bottling one. The case study indicates that the concentrated business requires less capital and investment for Coca-Cola as well as Pepsi. The capital required in this category includes basic machinery, labour and maintenance, repair costs to carry out the day to day operations. The economics of the concentrated business is associated mainly with the research and development, marketing and advertising or products and the sales channels. Despite the simplicity of its operations, the concentrated business continues to generate millions of profits for both the Cola Companies.
There exists a difference between the strategies used by both the organisations to carry out their operations. On one hand, Pepsi maintains a balance between both its business categories and the prices are decided according to the CPI after consulting with the bottlers. Whereas on the other hand, Coca-Cola has a Master Bottling Contract, which helps in determining the sale prices of products. No matter which method is used to determine the prices, the concentrated business continues to make more profits and is considered quite successful internationally.
The bottling business is more capital intensive because it requires investments such as large bottling lines and machines. The case study shows that more investment puts pressure on company revenues and impacts profitability. Moreover, the bottling procedures depend on other operations within the company and can, therefore, not exist solely.
It shows that the concentrated, as well as the bottling business, contribute to revenue generation and profitability of the cola companies. However, the nature of operations, investment and sales depict that concentrated business is more profitable as compared to the bottling business. But at the same time, concentrated business is confronted with more risks whereas the bottling business is considered to be stable in the soft drink industry.
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