Coca Wars Case

8/8/2019 Coca Wars Case

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Coca Wars Case

EXECUTIVE SUMMARY

Despite almost being a duopoly, the CSD industry is very competitive and has been facing challenges tocompete with substitute products. The entrance on the non-carbonate beverages required high capitalexpenditures; therefore, both companies had to become owners of large part of the bottlers industry tosustain required investments. My recommendation is, as the majority of investments in production lineswere already made to the bottlers companies, both Coke and Pepsi should consider selling theirsbottler s assets in order to focus in their main business marketing their products. Also, in lessdeveloped markets with high potential (e.g. China and India), they should concentrate in developingtheir distribution chain and should evaluate the possibility of local acquisition for non-carbonateproducts. On the other hand, my recommendation for new entrants in CSD market is the judoeconomics , staying small and retains part of the market in a size that Coke and Pepsi wouldn t retaliate.For new entrants in the non-carbonate beverage, my recommendation is focus in rapid grow products indevelopment market (e.g. flavored waters in China) to became a potential acquisition business fromCoke or Pepsi.

ANALYSIS

As seen in the Five Forces Analysis (Exhibit 1), the power of Coke and Pepsi is large, although they arefacing substitutes competition and slowdown in the grow rate of CSD products in the US. The mainmovement to compete in the non-carbonate market was made by both companies in the early 90 sacquiringsignificant part of the bottlers companies and, therefore, financing the high investments

required to adapt production lines. So far, the strategic focus of both companies has never been in theproduction but in the marketing and sales, what seems to be their real business. Wouldn t be time tochallenge their previous strategy and, again, focus on the marketing?

Looking the per capta consumption statistics around the world, makes sense sharing the market in two:steady markets for CSD / rapid grow for non-carbonate beverages (US, Mexico) and rapid rapid growthfor CSD and potential for non-carbonate beverages (China, India, Russia). For the first one, where raisingthe consumption of CSD seems low probable, keeping the brand strong can help boost the sales of theother line of beverages (water energy drinks, etc.), besides protecting the brand from the othercompetitor. For the second share of the global market, it is highly probable that as better theirscountries economies get the more beverages the population will consume. The levers in this case are toraise the Coke and Pepsi brand awareness (and fight local brands awareness) and have a distribution netready and capable to serve the market when the demand comes. Also, being more capitalized fromselling bottlers assets, make the acquisition of local competitors a great possibility to enter moreaggressively in the market.

Due to the concentration of the CSD industry at first sight might seems that there are no opportunitiesfor smaller companies or new entrants. Nevertheless, if looked from another prism great opportunities


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Coca Wars Case

can be found. For the steady markets for CSD / rapid grow for non-carbonate beverages, somecompanies can choose to stay small and focus in determined niches, for instance a regional premiumCSD. This strategy is good not only for the new entrant, which can guarantee a share of the market, butalso for the big two , that can benefit from public that previously were not consuming carbonatebeverages. For rapid growth for CSD and potential for non-carbonate beverages, local companies can

benefit of the awareness of their brands, local market knowledge and even from theirs establisheddistribution networks to become a potential acquisition target from Coke or Pepsi.

RECOMENDATION

I recommend that both Coke and Pepsi sell the majority of theirs bottler s assets in order to focus inincrease the awareness of their brands in develop markets and to develop their distribution chain andevaluate the possibility of local acquisition for non-carbonate products in high potential markets.


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Coca Wars Case

EXIBIT 1 FIVE FORCES ANALYSIS

1A Supply Bargain for PowerConcentrate LOW

y Main inputs are commodities: sugar and sweetenersy Sugar: Open market, many sources availabley Low switching costs among suppliersy Sweeteners: NutraSweet used to be the only suppliers for year. Although the entrance of

Holland Sweeteners increased competition in this markety Large importance of volume purchases to suppliers

1A Supply Bargain for Bottlers LOW

y Main inputs are commodities: aluminum, plastic and glassy Coke and Pepsi Negotiation direct negotiate with suppliers - Scale economy and large contractsy Relevant purchase from total industry - Large importance of volume purchases to suppliersy Switching costs low

2 Threat of Entry LOW

y Brands reputation and global presencey Massive investments in marketingy Concentrate require few investments, although bottling chain is capital intensivey Distribution net is keyy Exception for some markets (e.g., Brazil) where local regulation benefits local companies with

lower taxation

3- Buyers Bargain Power LOW / MODERATE

y Main channel are food stores CSD have margins similar to other food products and representsa relevant amount to total sales

y The duopoly of Cola soda producers lives low bargain power to supermarkets in general. Bigsupermarket chains have more power negotiating due to their scale

y Fountain (fast food chains) leaves small margins for Coke and Pepsi, although is considered

strategic to build brandy Other channels as convenience, vending and other restaurants are less relevant. Bargain power

is low but can increase with the entrance of substitute drinks

4- Threat of Substitutes - MODERATE

y Non carbonate products are growing in a higher rate than CSD


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Coca Wars Case

y Nevertheless, both companies are increasing their participation in this segment. Both buyingother brands or launching new products

y Bottlers were prejudiced with the introduction of new product lines due to high investmentlevels required. As alternative, Coke and Pepsi increased their participation in this industry

y Buyer use substitute products as an strategy to negotiate prices

5- Intensity of Rivalry - HIGH

y Declining in CSD overall consumption has led to increase in competitiony Competition translated in high marketing expenses, new products and some aggressive takeover

of bottlersy Intensification on competition abroad the USy Improvements on the supply chain to reduce costs (e.g. refundable glass packaging) and

alteration in the packaging to make the product more attractive


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Coca Wars Case

EXIBIT 2 GENERIC BUSINESS STRATEGY

y Coast Perceived Uniqueness

Broad

Narrow

EXIBIT 3 VALUE NET

Cost Leadership Differentiation

Focused Low CostFocused

Differentiation

CustomersFoodstores,convenience,fountain, vending, andother outlets

SuppliersSugar and sweeteners,aluminum, plastic andglass

SubstitutorsNon-carbonatedbeverages

ComplementorsFood in general,beauty industry (diet),events

Coke and Pepsi

Documents

Coca Wars Case