Cola Wars Case Analysis

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Q1- Why, historically, has the soft drink industry been so profitable? First of all, we need to define the players in the soft drink industry which are: the suppliers of raw material such as (sugar, artificial sweeteners and packaging), the concentrate producers, the bottlers, and the retail channels. Looking at the five forces frame work, we can see why this industry has been so profitable. The threat of new entry is low for many reasons; the need of economies of scale and the existence of brand loyalty to either Coke or Pepsi. Also the absolute cost advantage for early entrants as new entrants will have to incur high cost in a plant, advertising, or R&D. Another important reason is the vertical integration as CPs acquire or own a percentage of bottling companies which gives them the advantage of controlling the bottling network and makes it very hard for new entrants to find bottlers for themselves. Rivalry, competition is concentrated with the top two players holding a total of 71.8% of market share (in 2009, Exhibit2), thus, leaving very small room for other competitors. Bargaining power of buyers is somewhat low and depends on the type of the buyer. For example, supermarket channel is fragmented and thus didn’t have much of a bargaining power. On the other hand, mass merchandisers like Target and Wal-Mart had some bargaining power due to the huge quantities they buy. Moreover, there was no threat of backward integration as retail channels can’t go into the bottling business or concentrate producing business. Bargaining power of suppliers is low as the raw material can be purchased from many suppliers. Packaging manufacturers had little power as CPs negotiated contracts for bottlers and exerted some power due to their size and brand name. Finally, suppliers of raw material and packaging can’t threaten to enter the industry of concentrate producing or

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