Cola Wars 5 Forces

688 Words3 Pages
Question: Why is the soft drink industry so profitable? Porter’s Five Forces Analysis offers an overview of the long-term profitability of an industry. Since the power of each of the five forces is low for the soft drink industry, so this industry is relatively more profitable than other industries. The power for suppliers is low as the only inputs the incumbents need are the materials for making the concentrate such as caramel coloring, caffeine and citric acid. These materials are homogeneous, standardized and are readily available from a lot of suppliers. In addition, there is little switching costs involved for incumbents to switch from one supplier to another, so the incumbents have a lot of alternatives to choose from thus limiting the bargaining power of concentrate suppliers. Although end buyers of soft drinks have a lot of alternatives to choose from and have almost no switching cost from choosing among these undifferentiated drinks, they still possess low buyers’ bargaining power. Since there are numerous small consumers out there in the market, the choice of one consumer does not have much influence over the profitability of the whole industry. So buyers cannot force the price of soft drinks up if they threat to turn to other drink producers. Bottlers, on the other hand, who are also buyers of the concentrate, are mainly locked in with the concentrate producers are the price of the concentrate is also determined by the producers, so they also have low bargaining power. Soft drinks have numerous substitutes including beer, milk, coffee, juice etc. Customers can have a lot of choices other than soft drinks; however, these substitutes are highly differentiated products from soft drinks thus cannot replace them. Also, the substitutes and the soft drinks have similar prices and sometimes the soft drinks even have a lower price than their
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