Debriefing- Cola Wars Continue- implementing and controlling organizational strategy

Consumer Goods product companies example;

pepsico, nestle, coca-cola, mars, kellogs

Additional facts:

majority of coke's sales and profits outside the us, great brand awareness, CSD consumption is highest after water

Questions

How can companies that sell colored sugar water so profitable? Why few firms? Barriers to entry? Why not marketing companies compete?

Barriers to entry

brand equity (advertising built over years), limited shelf space, vending slots, and fountains, the bottling system is very capital intensive and exclusive

Scale economic in advertising

the band for the buch: $15 million per share point

How do soft drinks companies get away with charging $1-2 when healthy substitute is free?

substitutes not always available, CSD often an impulse buy, lifestyle choices, addiction, status symbol

Porter's Five Forces of Competition

customers- multiple, suppliers- concentrate and bottlers, potential entrants, substitutes- not just CSD, competition (coke vs pepsi)

Do suppliers have any real power via the concentrate manufacturer?

the cost to make concentrate is nothing

Why goes into the concentrate?

not sugar/water, secret

What about the concentrate buyers? How much power do they have?

who is buying the concentrate- bottlers, McDonalds

Bottlers have had very little power in the last 25 years even when independent

high switching costs, franchise agreements lock down bottlers, concentrate producers offer significant benefits, competitors are concentrated

Maybe the biggest puzzle is about rivalry?

How can companies make so much money in the middle of a war? Who has won the cola wars? who lost and why? what has been the weapons of the war?

Rivalry

-Coke and Pepsi avoid
-downward spiral
high degree of
-perceived differentiation
competition is focused on everything except concentrate price (shelf space, diet drinks)

If compete with concentrate price, you will see

downward spiral

Why doesn't the war escalate?

gaining advantage is very short term (they copy each other/imitation), quickly imitate each other

Who has been winning the war?

Thru the 1960s, coke was the winner due to their extensive bottling franchises; Then Pepsi gained (selective discounts, target younger generations), Coke is still the most popular in the world

Who has been losing?

smaller brands (can't use Coke resources), industry is consolidating (different products), smaller brands sell to cadbury (third party)

How do the economies of bottlers differ from the economics of CP's?

Central Texas want for bottler; NYC is hard to get products to store and limited shelf space; TX large distribution center

The key is barriers to entry CP's have

exclusive franchise (locks bottler into a certain territory, only one bottler in that territory), high capital investment in bottling, high investment in distribution, shelf space is limited

Who are the buyers?

Fountain (brand awarenesss), Vending (highly profitable, Supermarkets

Rivalry

geographic exclusively limits the competition
- for CP, every sale is profitable sale but wants exclusive franchises
- a bottler can only grow if it increases market share

Coke and pepsi have created a very profitable industry but what are some challenges to the stability of the industry?

coke and pepsi are evolving into beverage companies, bottling requirements for non-CSD's add complexity, non CSD's carry higher prices and margins, retailers consolidating have more pricing power

What is the driving change?

non-CSD's, demographics and flattening demand, health concerns, greater control over value chain

To understand the strategy of these two companies:

we need to look at underlying economics for both CP and bottler, coke and pepsi didn't inherit business, they created it, they are smart competitors

For concentrate producers, the real big cost of goods sold for them is

marketing and brand development

For the bottler, the cost of

producing the final product or distributing the final products makes their margins small

Economic model for concentrate producers

is highly profitable

For the bottler,

it is based upon volume

When they go to war,

they kill everyone else not each other