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Cola Wars Continue Essay

2642 words - 11 pages

The main environmental trends currently affecting the beverage industry include the decrease in the consumption of CSDs. According to Exhibit 1, U.S. CSD consumption started decreasing from 2000 with 53 gallons per capita to 46 gallons per capita in 2009. With that, the CSD consumption as a share of total beverage consumption decreased from 29% to 25.2%. Market share of the cola segment dropped drastically. In addition, the U.S. liquid consumption trends changed, with milk, juices, tea, powdered drinks, wine, and tap water/hybrids/all others gaining or maintaining a certain level of popularity among the population. Furthermore, growing non-CSD category demanded different bottling, pricing, ...view middle of the document...

There was also environmental criticism about the use of plastic bottles having a recycling rate below 25%, which resulted in negative operating profit margins generated by bottled water. International expansion focused on non-carbs opportunities in global markets while tailoring to local tastes and establishing new approaches to packaging. Lastly, rapid growth of the mass-merchandisers posed a new threat to profitability for Coke, Pepsi, and their bottlers.
The threat analysis, based on the five forces model of environmental threats, includes the threat of rivalry, the threat of entry, the threat of substitutes, the threat of powerful suppliers, and the threat of powerful buyers.
The threat of rivalry is high. The industry is characterized by 2 major competing firms. As shown in Exhibit 2, the Coca-Cola Company covered 41.9% of the U.S. soft drink market share and PepsiCo, Inc. covered 29.9%. There was also Dr. Pepper Snapple Group, which covered 16.4% of market share in 2009. The Cott Corporation along with other companies covered 11.8%. The industry was in the declining life cycle, as CSD as share of the total beverage consumption dropped from 29% in 2000 to 25.2% in 2009, as shown in Exhibit 1. In this situation, firms seeking to increase their sales must acquire market share from established competitors. In addition, the firms are unable to differentiate their products in the industry. The 3 most dominant firms offer similar CSDs with diet and flavored varieties. When product differentiation is not a viable strategic option, firms are often forced to compete only on the basis of price. As seen in Exhibit 5, although CPI kept increasing by an average of 2.9% from 2002 to 2008, after which it dropped by 0.3% in 2009, the CSD retail price per case, adjusted for inflation, was decreasing until 2008, when the retail price per case increased by 0.4%, followed by an increase by 0.7% in 2009. Finally, rivalry tends to be high when production capacity is added in large increments, which is the case in the CSD industry, with large concentrate manufacturing plants and bottling facilities.
The threat of entry is low. The cost of entry into the CSD industry is greater than the potential profits a new entrant could obtain by entering, due to moderate-high barriers to entry and a decreasing trend in sales. First, there are economies of scale. This was achieved through large manufacturing and bottling facilities, operational improvements, and having concentrate producers directly negotiating with their bottlers’ major suppliers, which enabled them to achieve “reliable supply, fast delivery, and low prices” (Yoffie & Kim, 2011, p. 2). Although the concentrate manufacturing involved relatively little capital investment in machinery, overhead, or labor, the bottling process is capital-intensive. Furthermore, there is an intense competition for shelf space and control over pouring-rights. With backward integration of bottling companies by both Coke and...

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