Concentrate Producers and Bottlers were two of the four major participants that were involved in the production and distribution of Carbonated Soft Drinks (CSDs) in the United States. The Concentrate Producers (CPs) were responsible for blending raw material ingredients, packaging the blend in plastic canisters, and shipping it to the Bottler. Using Porter’s Five Forces analysis for the CPs industry, we determined that the Bargaining Power of Buyers was low.

In 1987, Coke’s Master Bottler Contract granted Coke the right to determine the concentrate price based on a pricing formula that adjusted quarterly and stated a maximum price for the sweetener used in the production. Pepsi’s Master Bottling Agreement required that top bottler purchased its raw materials from Pepsi on terms and conditions determined by Pepsi. These agreements limited the opportunity for price negotiations between the buyers and the CPs.

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The Bargaining Power of Suppliers was low because CPs often maintained close relationship with more than one supplier. Additionally, due to the basic nature of the raw materials used in the CPs process, there were many suppliers who were willing to lower their prices just for the opportunity to get a contract with the leaders in the industry. We believe that the Threat of Substitutes was medium due to the observed increase in sales of many alternatives to CSDs such as, beer, milk, coffee, bottled water, powdered drinks, teas, juices in the 1990s.

This ultimately had a negative effect on the sales of CSDs and respectively the CPs industry; however, the cola segment of the CSD industry was able to maintain its dominance at 60%-70% market share. We believe that the threat of New Entrants was low. The CPs’ capital investment requirements were small in machinery, overhead, or labor; however, in order to achieve the scale of the major CPs they required a lot of time and additional investments. These additional investments, such as, marketing and R&D, were crucial for the competitive process against the leaders in the industry.

Economies of scale, product differentiation, and access to distribution channels are just some of the high entry barriers that lead to low threat of new entrants. The Competition was low because Coca-Cola and Pepsi-Cola claimed a combined 76% of the U. S. CSD market in sales. However, the Rivalry between the CPs contracted by Coke and Pepsi as separate units was high. They focused mainly on product planning, market research, and advertising. They competed against each other on investing in innovative and sophisticated marketing campaigns that they claimed as their trademarks over time.

Meanwhile, the Bottlers were responsible for purchasing the concentrate, adding carbonated water and high fructose corn syrup, bottling or canning the CSD, and delivering it to retailers. The Bargaining Power of Buyers was low due mainly to the cooperative merchandising and franchise agreements established between the leading Bottlers and the retailers. The retailer-bottler relationships ensured the continual brand availability and maintenance of the products by the specified promotional activity and discount levels.

Additionally, the Coca-Cola and Pepsi franchise agreements allowed Bottlers to make the decisions regarding retail pricing, new packaging, selling, advertising, and promotions in its territory (Coke and Pepsi’s Master Bottling Agreements). The Bargaining Power of Suppliers was low. Firstly, 60% of the U. S. CSDs were packaged in metal cans and they were viewed as commodities that had a chronic excess supply in the industry. This often led to multiple can manufacturers competing for a single contract.

Even though Bottlers could not carry directly competitive brands, they were allowed to handle non-cola brands of other CPs and also choose whether or not to market new beverages introduced by those CPs. We believe that the Threat of Substitutes was low since the emerging industries of non-soft-drinks that threatened the CPs would rely on the current Bottlers. The existing networks and relationships between Bottlers and retailers would appeal to the substitutes of the CPs entering the supermarket channel.

The Threat of New Entrants is low mainly due to the costly capital investment requirements of the bottling process, such as, plant, high-speed lines, and distributions networks. Another entry barrier was the Soft Drink Interbrand Competition Act, which preserved the right of CPs to grant exclusive territories to bottlers. These close ties enabled the CPs to help Bottlers improve their performance by employing extensive sales and marketing support staff that worked with them to set standards and to suggest operating procedures.

CPs ensured reliable supply, faster delivery, and lower prices by negotiating directly with the Bottlers’ major suppliers, which in relation benefited the Bottlers. Lastly, the Competition between Bottlers was high due to the Cola Wars. They competed in building strong relationships with retailers who offered them promotions and discounts. The breakdown between both CPs and Bottling companies described above illustrates the reasoning for differences in their profitability. The cola wars have particularly weakened the Bottlers, as they were usually the price takers, which limited their ability to stay competitive.

In order to be competitive, the Bottlers needed to focus on advertising, product and packaging proliferation, and widespread retail price discounting. These capital expenditures were significantly higher than those of the CPs and resulted in lower operating margins. Many reasons can be attributed to the idea that the competition between Coke and Pepsi led to industry profits. The first is that they increased the market size by turning to non-carbonated soft drinks (CSDs). Sales of non-CSDs had been increasing at a percentage that was much higher than CSDs in the 1990s.

To take advantage of this, Pepsi and Coke started to release their own bottled water, juices, sports drinks, tea-based drinks and dairy-based drinks. As times changed, the consumers’ wants evolved, and non-carbonated beverages became widely popular and accounted for most of Coke and Pepsi’s growth also heightening the competition via new product lines. Another act that increased competition and profits was the regionalization of drinks in order to expand internationally. This allowed both companies to break into markets that would not normally consume their standard products.

An example of this cultural specification is the guarana that Coke offers in Brazil. Going international led to a ‘race’ of sorts between the two companies since they were fighting for profitable new markets. With the expansion into these global market segments, the already stiff competition increased, as well as their profits. The last reason that competition has helped industry profits has to do with how both firms bolstered domestic market support. This could be seen with the Pepsi challenge and the war over fountain drink market.

When Pepsi saw that they placed third behind Coke and Dr. Pepper in Dallas, they decided to take an active route in changing this. With the “Pepsi Challenge,” Pepsi was able to take a large chunk of Coke’s market share in Dallas, so they decided to take the campaign national. Another way the competition increased domestically was due to the battle over gaining national accounts in the fountain drink sector. The popularity of this sector rose resulting in fierce bidding wars between Coke and Pepsi.