Presented to: Prof. Ajith Kumar | Presented by: Group J

Question 1

Why, historically, has the soft drinks industry been so profitable?

Salient points for analysis

• Industry Structure

• Industry Profitability Analysis using Porters’ Five Force model– Using years counting up to 2004 as the

timeline to determine historical soft drinks Industry profitability

The Soft Drinks Industry?

• Concentrate Producers• Bottlers• Retail Channels:

– Supermarkets– Fountain outlets– Vending machines– Mass merchandisers– Convenience stores– Gas stations

• Suppliers:– Packaging (cans, plastic bottles and glass bottles)– Sweeteners (high fructose syrup, artificial sweeteners)– Colouring agents, caffeine, natural flavors and other

ingredients

Threat of Rivalry• Major players – Coca Cola and PepsiCo

• Near Duopolistic with respect to the 2 rivals– From 1966 (53.8% market share) to 2004 (74.8%)

• Intense competition:– Price wars– Consolidation of smaller players like Seven Up and

Dr. Pepper– Advertisement / Marketing wars

• Example – ‘The Pepsi Challenge’

• Resulting Threat of Rivalry is High which reduces profitability

Threat of Substitute Products

• Alternatives like low carbohydrates or none, juices, sports drinks, energy drinks, tea based drinks and bottled water– Shift of consumer demand for healthy alternatives– Law suits, legislations to prevent sale of soft drinks

in school– In 2001, bottled water –> more than 100% of Coca

Cola’s growth and 75% of PepsiCo’s growth in volumes

• Overall Threat of Substitutes is Low because of diversification into competing segments– Increased Profitability

Power of Suppliers

• Substitutes in suppliers:– corn syrup, sugar– Low bargaining power

• For bottlers:– Can makers– Plastic makers– Coke and Pepsi dictated terms

• Overall Threat of Suppliers is Very Low– negligible impact on profitability

Power of Buyers• Supermarkets: (Low)

– Bottlers fighting for shelf space

• Mass merchandisers: (High)– Example: Wal-mart incurred additional cost

towards delivery

• Fountain outlets: (High)– Low margins for the carbonate soft drinks

companies– Companies fighting to enhance visibility through

national fountain accounts– Pepsi entered fast-food business

Power of Buyers

• Vending machines (Very Low):– Bottlers dictated terms through contracts– Commission based– Coke and Pepsi invested in developing vending

technology

• Buyer power is limited: – Power of Buyers is Moderate with impact on

profitability only through fountain outlets.

Threat of New Entrants• Concentrate Producers:

– Low capital intensity on the Concentrate Producer side

– Huge brand equity of major players– Established collaboration with retail channels

• Bottlers:– High capital intensity– Operating territories defined for bottlers– High inter-operability with Concentrate Producers

• Overall Threat of New Entrants is Very Low– Negligible Impact on industry profitability

Government – An Afterthought

• Federal nutrition guidelines:– Carbonated Soft drinks as largest source of obesity

causes– Political issues both international & in the US with

respect to concerns raised about health of children

• Threat of Government as a force is to be considered – Contamination concerns– Pepsi and Coke have used marketing campaigns to

assuage concerns

• Impact on profitability - Temporary

The 5 Forces

High

Very Low

Very Low

Moderate

LowThreats - LOW Profitability - HIGH

Conclusion

Threats LOW Profitability of Industry HIGH

Question 2

Compare the economies of the concentrate business to that of

bottling business: Why is the profitability so different?

ProfitabilityConcentrate

ProducersBottlers

COGS 17% 60%

Gross Profit 83% 40%

Selling & Delivery 2% 25%

Advertising & Marketing

43% 2%

General Administration

8% 4%

Pretax Profit 30% 9%

Key Differences

• Raw Material Costs: – significant part of the costs for Bottlers.

• Selling and Delivery: – Bottlers ‘DSD’

• Hence, more expensive

Key Differences

• Advertising and Marketing: – 43% of Concentrate Producers’ costs– Create Market Pull

• The overall costs are higher:– The profitability of the bottler is much

lower than for concentrate manufacturer.

Concentrate Producers

• Required lesser capital investment.

• Major costs incurred:– advertising, promotion, market

research, bottler support

Concentrate Producers

• Negotiating – Customer Development Agreements

(CDAs).– With bottler’s suppliers.

• Provided support staff for bottlers• Fragmented Consolidated

Bottlers

• Capital intensive

• Major Cost Incurred:– Cost of concentrate – Packaging

Why profitability so different?

• Value addition to chain greater by the Bottler vis-à-vis Concentrate Producers– DSD– Securing shelf space– Stacking CSD products– Point of purchase & end-of-aisle displays

Conclusion

Profitability for Concentrated Producers >

Profitability for Bottlers

Question 3

How has the competition between Pepsi & Coke affected the Industry

Profits?

Concentration / Mfg

Bottlers

Milestones affecting Profits

• Near Duopoly market– 43.1%(Coke) + 31.7%(Pepsi) = 74.8%

Market Share• Customer Development

Agreements(CDA)– Coke and Pepsi offered funds to retailers

for marketing, promotion, etc.• Franchise agreements:

• Bottlers to handle the non-cola brands of other concentrate producers

Contd..

• Mass merchandisers had their private labels / generic labels – Example: President’s Cola

• Intense competition on National fountain accounts:– low profitability (10 % lower than Can &

Bottle sales)

• Tie up spree:– Pepsi: Pizza Hut, Taco Bell, KFC– Coke: Wendy, Burger King, McD

Contd..

• Various pricing strategies to counter sales rival company

• Switch from using sugar to high-fructose corn syrup-lower priced alternative

• Increase in advertisement spend

Contd..• Proliferation of CSD Brands

– Coke : 11 new products-caffeine free coke,cherry coke

– Pepsi : 13 new products- lemon-Lime slice

• Consolidation of bottlers– 2000 plants to 300 from 1970-2004

– Coke’s re franchising bottling operations

– Buying Poor managed bottlers

– Infusing with capital

– Selling to large bottling plants

Conclusion

• Net profit margins shows a increase in the profitability

Question 4

Can Coke & Pepsi sustain their profits in the wake of flattening demand and

the growing popularity in non-CSDs?

Current Scenario

• Mature Market: – US– CSD sales growth in US market 1% or

less in the years 1998-2004– Series of strategic acquisitions and

consolidation taking place– Shift towards alternate beverages such as

Juices and juice drinks, sports drinks, energy drinks, tea based drinks, etc.

• Emerging Market:– Europe, Latin America, Asia Pacific, Africa

Middle East and North America

Mature Industry Strategy

• Product Innovation:– Development of new products such as energy

drinks, juices, bottled water, etc.– These new products have high profitability as

compared to CSD products.

• Process Innovation: – Creating a pull based market to reduce the

buying power of mega merchandisers such as Wal-Mart

– Integrating with Bottlers • This will ensure better profitability

Emerging Market Strategy

• First mover advantage:– Pepsi moved away from brushing head-

to-head competition to focusing on emerging markets

– International Division operating profit up by 25%

– International beverage volume up by 12% overall

Conclusion

• Though the growth for CSD has been stagnant but the growth of Non-CSD has increased

• Profitability of Non-CSD is higher than that of CSD

• Thus:– Coke and Pepsi can still sustain their

profits