Cola Wars †The Carbonated Soft Drink Industry Essay

Threat of New Entry The existing players in the soft drink industry have much advantage relative to new entrants. First, supply-side economy discourages new entrants by forcing them to enter the market in large scale. CSD’s demand side benefits of scale also makes it difficult for new entrants to be accepted by the public. In 2002, a survey found that 37% of respondents chose a CSD because it is their favorite brand, while only 10% said so about bottled water. This demonstrates CSD customers’ high brand loyalty and their lack of desire to buy from new entrants. In terms of capital requirement, concentrate manufacturers only requires $25~$50 million to set up a plant that can serve the entire United States of America. Yet, new entrants may have difficulties competing with major players’ well-established brands and their large scale unrecoverable (therefore, hard to finance) spending on advertising. There is also unequal access to bottlers and retail channels for newcomers. Most bottlers are in long-term contracts with major CSD brands; also, the largest distribution channel, supermarkets, consider CSD a â€Å"big traffic draw†, thus provide little to no shelf space for newcomers. In addition, strong fear of retaliation from major players also makes newcomers hesitate to enter. Bargaining Power of Suppliers Required inputs for CSD are mostly raw materials such as caramel coloring, phosphoric or citric acid, natural flavors, caffeine, and fructose. Almost all suppliers of the CSD industry provide undifferentiated commodities and thus have little bargaining power and almost no strength to integrate forward. Bargaining Power of Buyers End consumers and retail channels can both be considered as buyers in the CSD industry. End consumers are likely to have brand loyalty to their CSD as analyzed in threat of new entry. Thus, consumers are expected to continue purchasing a brand unless there is a significant price increase or substantial change in flavor. Consequently, end consumers have little bargaining power. Retail channels, on the other hand, have more bargaining leverage since they buy CSDs in much larger quantities than end consumers. Yet, for retail channels such as supermarkets (making up almost one third of all retail volume), CSDs are considered a â€Å"big traffic draw†, thus reducing its bargaining power. In addition, fountain outlets (making up another 23.4% of retail channel) also have insignificant bargaining power since they rely on CSD companies’ heavy investment in dispensers, cups, point-of-sale advertising, and many other types of equipment. Threat of Substitutes CSDs are unique in terms of taste and properties. When a consumer craves CSD, it is difficult to find a replacement that can equally satisfy his or her desire. Even after CSD was identified as the â€Å"largest source of obesity-causing sugars in the American diet† in 2005, CSDs still â€Å"accounted for 73.1% of U.S. non-alcoholic refreshment beverage volume (down from 80.8% in 2000)† at around the same time. It is true that consumers are moving towards alternatives that have more natural flavors such as several tea-based drinks and bottled water; yet, CSD firms have quickly adapted to this shift and largely dominated the market of these alternatives. Rivalry Among Existing Competitors Even though rivalry among existing competitors – Coke, Pepsi, and Cadbury Schweppes seem intense, the profitability has not been weakened. This is largely because of the high concentration of competition and their focus on promotion, advertising, and other forms of branding instead of waging large-scale price wars. In a way, the success of Coke and Pepsi required the heavy competition on these dimensions. â€Å"Without Coke, Pepsi would have a tough time being an original and lively competitor. The more successful they (Coke) are, the sharper we (Pepsi) have to be.† says Roger Enrico, former CEO of Pepsi. The CSD industry profitability lies within the Cola War itself that forces major players to improve continuously. Through Porter’s five forces analysis, it becomes clear that CSD is so profitable because of the way its industry competition is shaped: high entry barriers due to newcomers’ unfavorable supply-side economies of scale, demand-side benefits of scale, and unrecoverable advertising spending; low bargaining power of suppliers and buyers since CSD requires mainly homogeneous commodities, buyers have high brand loyalty, and retailers rely heavily on CSD firms’ investments; well handled threat of substitutes; and healthy internal rivalry that is vital to continuous improvement.