Coke and Pepsi analysis

Coke and Pepsi have been operating in CDS market that has been shrinking over the years and where there are many substitutes for their products. The products sold by these two firms have to compete in a market this saturated with substitutes but they have managed to sustain their market share leadership and maintain profitability. Coke and Pepsi have maintained their lead in the market despite selling undifferentiated products (Dyer, Godfrey, Jensen, & Bryce, 2016). These companies have capitalized on the supplier power, buyer power and little new entrant threats to wade of threat of substitutes and new entrants into the market. The suppliers bargaining power asserts little pressure on these firms since they are not differentiated or concentrated. Moreover, the major ingredients for various soft drinks such as caffeine, carbonated water and phosphoric acid are readily available and easy to obtain in the market.

 At the centre of each firm are manufacturing plants for is concentrate so that raw materials can be blended and then packaged in containers for shipping to bottlers. Such strategies ensure that the firms eliminate threats that are normally presented by supplier bargaining power in raw materials market.  Firms that have tried a direct entry in the market have failed due the competitive advantage enjoyed by Coke and Pepsi.  An example is Virgin Drinks that engaged in a serious marketing and advertising in 1988 for its cola but was unable to compete with leading brands stocked in retail outlets.  The firm could not hold a grip on shelf space in retail outlets and grocery stores, an indication of how it is hard for new firms to break into the market (Dyer, Godfrey, Jensen, & Bryce, 2016). This implies that the Coca-Cola and Pepsi competitive strategies do not involve a differentiated brand but exploitation of the marketing strategies that are enhanced by a well organized distribution network facilitated by bottlers.

Another aspect is that the bargaining power of buyers is low given that bottlers for the buyers of the company’s products under contracts that prevented them from switching to other products. This has established an effective distribution network with its presence in various locations in their markets. This presence has enabled the firms to market products to a broad market and at the same time holding onto a local approach. As buyer these bottlers’ relationships with Pepsi and Coca-Cola are regulated by contracts, where the firms can dictate on bottling process (Dyer, Godfrey, Jensen, & Bryce, 2016). Despite their products being undifferentiated, the firms have dominance in the self space while their incumbent products have sustained popularity hence making the market very hard for new entrants. Though the CDS market has been shrinking, Coke and Pepsi have continued to maintain a large share with few firms that can wage price competition in the industry.

In addition, new firm cannot use aggressive marketing and advertising to gain market share in the concentrate industry. This is majorly because the industry has few differentiated products and other aspects such as distribution network and industry partnership inform a company’s competitiveness.  Coca- Cola and Pepsi have used franchising as strategy to maintain presence in the market and shelf space in retail outlets.  Forming a wide connection with bottlers and supporting their local marketing strategies and negotiation with retail stores as primary customers and local suppliers of raw materials has enabled the two firms to maintain a grip in the market. This means that a new entrant goal of acquiring a substantial market share cannot be maintained merely through active marketing and advertisement. The CDS market has to involve increased engagement with bottlers whereby they are able to obtain cost advantages and capital intensity. These connections can enable new entrants to reach large customers as Pepsi and Coca-Cola have managed to acquire McDonalds as a major customer.

The concentrate industry is far much attractive than the bottling industry in regard to quality maintenance and cost, and market control. Market control stems from the fact that concentrate industry offers buyers higher bargaining power while supplier have lower bargaining power.  The company operating as the supplier is able to maintain its superiority since it guards raw materials as high secrets, while only making them available to preferred buyers. In the case of the bottling industry, the supplier is able to maintain a high bargaining power since the manufacturing firm has to seek essential materials like glass bottle for packaging. In addition, the concentrate industry has low threat to new entrant given that large capitals are required and the Coke and Pepsi hold their contracts exclusively. The market has fragmented buyers, with retail outlets such as warehouse and supermarkets being more likely to form the biggest percentage of sales. The overall effect is that buyers’ bargaining power is low for the concentrate industry. In the bottling industry the bottling methods are mostly controlled by the bottler, which minimizes the threats of new substitutes in the industry. The end results are that the competitive rivalry is reduced in the concentrate industry and this makes Coke and Pepsi to prefer it to the bottling industry. The concentrate industry is also convenient in that it is possible to control quality of soft drinks by maintaining similar raw materials for the carbonated drinks for the whole market.

Despite the concentrate environment being attractive, Pepsi and Coke maintains their presence in the bottling environment to protect themselves from new entrants into this market. The bottling industry enables Coca-Cola to strengthen its brand through a consolidation of its distinct brand portfolio (Dyer, Godfrey, Jensen, & Bryce, 2016). Through this the firm is able to have a single cohesive brand image. In addition, the bottling business enables Coke to have more flexibility in managing niche brands and other brands. Pepsi engages in bottling industry to enable the shifting as customer tastes are changing and protect itself against smaller firms with established operations across the U.S niche markets. It is also important for the two firms to integrate into bottling so as to protect their businesses against retailer size shifts.  This contact with retailers has been important since they control the sale of many brands. The involvement in the bottling industry therefore enables Pepsi and Coca-Cola to have part of that control.

Conclusion

The case offers an insight into the CSD industry and how Coca Cola and Pepsi as major players have been able to remain market leaders in a shrinking market. The firms have used their brand equity and franchising system strategy to maintain their market share while dealing with undifferentiated products. Preferring to operate in concentrate industry while maintaining their presence in the bottling business has enabled the firm to maintain profitability in this shrinking market.

Reference

Dyer, Godfrey, Jensen, & Bryce. (2016). Strategic Management, Concepts, and Tools for Creating Real World Strategy: Concepts and Cases (1st ed., pp. 87-105, C12-C21). 978-0-470-93738-9: Wiley.

 

Soft Drink Industry