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Cola Wars

Principles of Strategy

Case Study 1 – Cola Wars

16.11.2004

1. Why is the soft drink industry so profitable?
The US soft drinks (including but not limited to wine, tea, coffee, milk & beer) annual consumption of gallons per capita grew from a sum of 114.5 in the year 1970 to a sum of 153.6 in the year 2000. Out of this, the annual consumption of gallons per capita of CSDs grew from a sum of 22.7 in the year 1970 to a sum of 53 in the year 2000 which reflects a growth of 230% of the consumption of these drinks. The production and distribution of CSDs involves four major participants: 1) Concentrate producers that the process of their job involves little capital investment where only one plant is enough to serve the entire US. 2) Bottlers that in spite the fact that their operating margins were razor thin their profits often exceeded 40% 3)Retail channels 4) Suppliers. The US soft drink market share of Coca Cola Company (hereto "Coke") and PepsiCo Inc. (hereto "Pepsi") grew from 53.8 % in the year 1970 to 75.5% in the year 2000. From this fact we can learn that the soft drink industry structure is a structure of two dominant firms holding the market power and a competitive fringe with many smaller firms acting as price takers. The above mentioned data regarding the soft drink market & industry in the US could explain why this industry is so profitable. However, we can understand better the reason for the industry being so profitable by analyzing the industry with Porter's five forces model.

1) Customers – as shown above, the consumption of soft drinks has a tendency of rising through the years. Due to the character of the soft drink as a product and the basic need it fulfills, the customers of this market are fragmented, meaning there are a lot of them and no buyer has any particular influence on the product's price. Another factor regarding the customers in the market is the distribution channels of the product that include supermarkets, discount...