Analysis of forces affecting Cola Industry
Bargaining power of suppliers was very low for concentrate producers while the threat of substitute products is very high.
The main inputs for Coke and Pepsi products were sugar (sweetener) and packaging. Both had very low bargaining power due to the large number of suppliers in the industry.
Concentrate producers (CPs) negotiated directly with sweetener and packaging suppliers. This was done to ensure that prices were low, delivery was faster and the supply was reliable.
There were many different suppliers of sugar in the open market. This meant that Coke and Pepsi could purchase sugar from suppliers who ...view middle of the document...
This was also effective because it pressured suppliers to agree to terms that were favorable to Coke and Pepsi. Since metal cans make up 60% of bottlers’ packaged product, CPs benefited greatly.
Over the years, the threat of substitute products has increased. In the early 1960s, consumers equated soft drinks to “colas” because other beverages were not very popular then. In the 1980s and 1990s however, consumers began consuming more bottled water and teas. This was also probably affected by the rivalry among established firms such as coffee cafes, tap water and fruit juice. Because switching costs for buyers were low, demand for colas decreased and profits of concentrated producers were affected.
Coke and Pepsi responded three ways: 1) expanding product offerings (Coke’s alliances with Nestea), 2) internal product innovation (Pepsi creating Orange Slice) and 3) alliances. (Coke acquiring Minute Maid)
This way, Coke and Pepsi could capture value on the increasingly popular substitutes internally.
The intensity of competitive rivalry was...