Problem Set - Cola Wars

Question 1: Conduct a Porter's Five Forces Analysis on the soft drink industry and pull out strategic implications for each of the five forces. The threat of new entrants in the soft drink industry is relatively low. Barrier for entering the CSD industry is relatively high because the industry type is oligopoly, and consumers have high brand loyalty towards either Coke or Pepsi. The new entrants are facing large‐scale investment, or cost disadvantage, and the challenge of brand recognition.

The bargaining power of suppliers is low. ‐ "The concentrate for most cola consisted of caramel coloring, phosphoric or citric acid, natural

flavors, and caffeine." Coke and Pepsi have extremely low switching cost on these inputs. ‐ The two major inputs for bottlers are packaging and sweeteners. "The strategy toward can

manufacturers was typical of their supplier relationships. Coke and Pepsi even negotiated on behalf of their bottling networks, and were among the metal can industry's largest customers."

Coke and Pepsi face low switching cost, so the suppliers virtually have no bargaining power over pricing. The bargaining power of buyers (intermediate customers as bottlers and retail channels) is weak.

‐ Bottlers are locked into "franchise agreement" that give concentrate producers the right to determine concentrate price.

‐ Retail channels are highly fragmented, and the respective share of industry volume / index of bottling profitability vary from each other. Consequently, they don't have much power to reach a lower price with Cola or Pepsi.

The threat of substitutes such as bottled water, juice, and sports drinks is getting higher. The increasing challenge is due to the shift in consumption patterns. Even "Coke's 2009 annual report identified obesity and health concerns as the number one risk factor to its business". More and more "aware" consumers tend to buy non‐carbs drinks especially when there...