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7704IBA – Case Assessment 1 (50%) (Please submit your report via SafeAssign) Tesla: Entry into the U.S. Auto Industry Case Study Questions 1. Please analyse the environment of automotive industry in the US. Based on the analysis, please evaluate Tesla’s competitive position in that industry and/or segment. (30%) 2. Please perform an internal analysis on Tesla’s resources and capabilities and evaluate how well it is performing. (30%) 3. Please critically evaluate Tesla’s current strategy. What challenges/opportunities does the company face? What strategic advice would you give Elon Musk in order to achieve sustainable success? (40%) ………………………………………………………………………………………………… Notes: Useful resources (reference 1 in the case): https://www.youtube.com/watch?v=Q4VGQPk2Dl8In your analyses, please work first and foremost with the information available in the case. Please write an essay to answer all questions referring to the information and time periods featured in the case.
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Assessment 1: Case Study Questions
Cola Wars Continue: Coke and Pepsi in 2006
1. Compare the attractiveness of the soft drink concentrate business to that of the
bottling business featured in the case: Why is the profitability of the main
players so different? (14%)
The soft drink concentrate business and bottling business operate in an evolving codependent relationship in order to supply carbonated soft drinks (CSDs) to the
American and global markets. Between 1975 and 2004, the combined CSD industry
developed from a highly fragmented series of operations to one in which main players
Coke and Pepsi exert hegemony over both concentrate and bottling business
operations. Despite apparent consolidation, the concentration and bottling businesses
operate in completely different industry environments and as a result, their respective
levels of profitability differs starkly 1(see Appendix I). This trend is also reflected in
cost of sales, gross profit and pretax profit all indicate concentrate production
business is more profitable than the bottling business.2 The difference in profitability
can be attributed to the disparate industry environments and by completing an
industry analysis using Porter’s Five Forces framework, it is possible to identify key
factors in both industry that give rise to this trend both before and after the
consolidation of bottling business using the anchor bottler model (see Appendix II for
the full analysis). Firstly, with respect to the concentrate business; although start up
capital is not prohibitive, the hegemony of Coke, Pepsi and Cadbury Schweppes
results in a challenging environment with high potential for aggressive market
retaliation. Furthermore, given production uses basic raw materials, bargaining power
of suppliers is minimal and suppliers must compete to achieve lower prices to meet
the demands of large industry players. Most importantly, the evolving (pre/post
consolidation) relationship with buyers (bottlers) is one dominated by favourable
conditions; legal agreements, strict terms of operation, pricing control, and delegation
of marketing, channel/transport organisation and competition for concentrate
business, ensures high profits for the concentrate business. Comparatively, the
1 For instance, financial data for the period of 1975-2003 shows the net profit/sales differentials between
concentrate producers (2000 – Coke, 10.6%, Pepsi, 10.7%) as opposed to their bottling companies (Coca Cola
Enterprises (CCE), 1.6%, Pepsi Bottling Group (PBG), 2.9%)
2
Cost of Sales (as % of sales): Concentrate Business (17%) Bottler (60%), Gross Profit (as % of sales):
Concentrate (83%), Bottler (40%), Pretax Profit (as % of sales): Concentrate (30%), Bottler (9%) (Yoffie, 2009)
bottling industry environment, both before and after vertical integration, displays
characteristics of a highly unattractive environment and this is largely attributable to
the dynamics of the relationship with the concentrate business. Although the threat of
entrants is minimal due to capital intensity and major players having gained
advantages of efficiencies, channel dominance, consumer loyalty and slow market
growth, the growing bargaining power of suppliers is problematic. Given market
dominance of a few large firms, concentrate companies exert their power to pressure
bottlers into strict processing and distribution arrangements that see significant capital
expenditure on the part of bottlers. Following consolidation and vertical integration of
bottling under anchor companies (Coca Cola Enterprises and Pepsi Bottling Group)
the concentrate companies are given greater pricing control, terms of sales and control
over bottlers business with other external companies. The profitability potential for
bottlers is further damaged by the high level of bargaining power of buyers, given low
switching costs and wealth of alternatives and the growing threat of substitute
products. 3 For further information, refer to Appendix II. Ultimately, the profitability
differentials can be located in the starkly different industry environments. Given the
most forces are dictated by the bottler/concentrate business relationship, the influence
of firms to shape the environment must be utilised to shift the challenging conditions
to enhance profitability.
2. How has the ongoing competition between Coke and Pepsi (in the concentrate
industry) affected the attractiveness of the bottling industry? (13%)
3 Between 2000-2004, Water and Energy Drinks made considerable gains in market share and during the 21 st
century the consumers increasingly turn to CSD alternatives including tea, coffee, juice and sports drinks for
health reasons.
The ongoing competition between Coke and Pepsi has seen the industry structure shift
from one characterized by ideal competitive conditions towards a structure more
emblematic of a duopoly. The attractiveness of the bottling industry has declined
substantially in response. Key players have made the structure of the two tiered
manufacturing process a playing field for competition and have shifted towards
vertical integration to increase profit margins, control over bottlers and to enhance
their geographical retailing distribution (Harrigan, 1985). In so doing, competition has
played out in various manifestations for bottlers, namely pricing, product
differentiation and distribution operations.
Firstly, the structure of the relationship allows concentrate manufacturers to control
concentrate prices offered to bottlers, meanwhile exerting considerable pressure on
bottlers to participate in additional spending to maintain brand profitability. In the
context of duopoly, this pricing control brings considerable challenges. To gain
profits, Pepsi and Coke entered into legal agreements to provide them with the
flexibility to increase or lower concentrate prices, while simultaneously pressuring
bottlers to invest in facilities and product launches. This establishes a situation of
dependency, as without investment bottlers will no longer be profitable and the
structure of the concentrate industry limits their alternative choices. For instance, the
“incidence pricing” introduced by Coke severely damaged bottler profitability and the
failure of this model was illustrated in the juxtaposition with Pepsi’s strategy, which
was more aligned with the needs of its bottlers.
Furthermore, the competition between Coke and Pepsi gave rise to considerable
shifts in product differentiation, and the structure of the arrangement between Pepsi
and Coke and their subsidiary bottlers ensured most costs were passed down to
bottlers. For instance, the development of new packaging saw bottlers take on greater
costs in transport, packaging and labour and this is reflected in cost of sales figures,
for bottlers COS is 60% of sales while for concentrate producers this was only 17%.
Furthermore, in offering alternative beverages to meet shifting market preferences,
Pepsi and Coke sold pre-manufactured products to their bottlers who were
subsequently responsible for distribution and despite high margins in may retail
outlets and growing market share, small volumes (Gatorade’s market share was 2.4%
relative to Coke 23.4%) meant profits did not trickle down for bottlers. These
arrangements were increasingly problematic as the direct store door delivery system
meant bottlers held responsible for implementation of delivery, shelving, positioning,
marketing and promotional activities, as directed by concentrate companies.
However, given growing customer price sensitivity and relinquishing of control over
the above relations with supermarkets and mass retailers to concentrate companies,
bottlers were under increasing price competition pressure while experiencing reduced
autonomy. 4 Ultimately, the dynamics of the relationship between concentrate
producers and bottlers ensures the bottling industry remains relatively unattractive.
The Coke and Pepsi duopoly ensures bottlers are subjected to limited choice of
suppliers and are pressured into relationships with concentrate producers in which
costs of competition in pricing and product differentiation are pushed onto bottlers.
This is made more challenging as retailing and distribution arrangements further
relinquish bottlers power and autonomy to Coke and Pepsi. For further analysis, see
the industry analysis in Appendix I.
3. How can Coke and Pepsi sustain their profits in the wake of potentially
lesser demand and the growing popularity of non-CSDs? (13%)
4 A prime example of this is the challenge presented as mass merchandisers become the largest CSD retailer,
however they wish to negotiate directly with Pepsi/Coke while bottlers are responsible for distribution, marketing
and shelving.
At the beginning of the 21st century, Coke and Pepsi experienced lackluster sales
growth and overall declines in profitability.5 This decline is largely attributable to
the changing macro-economic and industry environments. Ancillary to the
challenge presented by market saturation, Coke and Pepsi grapple with the
following issues that must be alleviated to enhance profitability:
Changing customer preferences founded in growing non-alcoholic
substitutes such as juice and sports drink and increasing understanding of
health risks associated with CSD consumption (Appendix I);
Increased prices of raw materials for concentrate and commodities such as
aluminum for packaging leading to higher cost of goods sold;
Two tiered manufacturing process dependent on bottler agreements means
that Pepsi and Coke are dependent on their bottler subsidiaries, however
bottlers may not hold the same business priorities if they can serve
alternative brands simultaneously. 6
Inefficiencies in the supply chain stemming from the growing demand for
alternative product production without adequate resources and capabilities
and growing pressure on bottlers to grapple with these challenges;
Growth of the mass merchandiser channel is challenging, retailers
command pressure on bottlers in areas of pricing, business arrangements
and competition with in-house private labels.
In light of these challenges, and an assessment of the US CSD industry and the
internal capabilities of both Coke and Pepsi, the following suggestions can be made to
both firms to sustain their profits in this challenging environment (see Appendix II for
an assessment of both firms resources which has informed this response). They are as
follows:
Re-invigorate the Coke/Pepsi brand as a valuable resource through
differentiated marketing appealing to:
5 In US markets, between 1999-2003 annual growth of the overall CSD market stagnated at -1.1% and Pepsi and
Coke both experienced declines (Coke: -2.5% and Pepsi-3.8%) in market share of the non-alcoholic refreshment
beverage market. Globally, CSD sales are at $350 billion per annum and the market grows at about 2% on average
6 The problems associated with this are intensified in light of the fact that and concentrate companies exert
significant control over bottlers and impose the duties of distribution, retailing and marketing in their geographical
region. Bottler autonomy over these processes is increasingly relinquished with extensions of concentrate firm
control. However, there are risks associated with this, stemming from minority shareholding position in the
bottling anchor subsidiaries.
o Young People: Cola is a classic and timeless drink consumed by fit,
healthy, relaxed and cool young people in interesting locations.
(Consider Corona marketing)
o Middle Age/Families: Cola is a classic hearty American drink
entrenched in national history
o Oppose health concern through intensive marketing and association
with health, fitness and sports activities.
Re-assess sweeteners, re-frame sugar as a natural and wholesome substance as
opposed to dangerous high-fructose corn syrup. Experiment in natural
sweeteners such as Stevia, rice malt to re-align with health conscious
consumers.
Enhance supply chain efficiency and effectiveness by investment into
subsidiary bottler capabilities and flexibility (machinery costs etc.)
Provide bottlers greater autonomy and support in retailing in their particular
region, as demand is determined by demographic characteristics in the region
bottlers need to have more control in their business activities to tailor them to
the local environment to ensure greater customer responsiveness. Price rises
from concentrate producers should correspond to profitability of bottlers to
ensure they are best financed to meet the needs of the local area.
Manufacture product for competing private labels sold in mass merchandise
and supermarkets. Despite cheap prices, private label CSD hold large profit
margins, as there are cheap to produce, have no marketing costs and are
increasingly important in the market, for instance, Canadian brand Cotts
accounts for 30% US household servings (“Soft Drink Manufacturing,” 2016).
Increase engagement in international markets, particularly Asia, Africa,
Middle East and Latin America where health awareness and regulations are
still in the early stages.7
References:
7 In particular, annual market growth is promising in Pakistan (14.4%), Indonesia (11.1%), Russia (7.7%), Czech
Republic (17.5%), Peru (11.1%) while markets such as South Korea, Saudi Arabia, South Africa, Vietnam hold
potential and relatively untapped growth.
Harrigan, K. (1985). Vertical Integration and Corporate Strategy. Academy of
Management Journal, 28(2), 396.
Soft Drink Manufacturing. (2016) Industry Profile Online First Research.
Yoffie, D. (2009). Cola Wars Continue: Coke and Pepsi in 2006. Harvard Business
School, 9, 706-447.
Appendix I: Porters Five Forces Industry Analysis for the US Concentrate and Bottler Industry (reference Q1 and 2)
The Soft Drink
Concentrate
Business
Threat of new
entrants
Bargaining power
of suppliers
Era 1 – Pre Consolidation
Era 2 – Post Consolidation – Changes to Pre Consolidation Industry Environment
Medium Level
Entry requires small investment in machinery, overheads and labor.
Pre-Consolidation industry is growing. However, a few key players who retain
hefty market share dominate the market and this holds potential for retaliation
The bottling network is largely dominated by franchise agreements that allocate
geographical territory to particular bottlers. Bottlers are under some restrictions
as to what products CSD they can process.
The brand and image generated by major players increases the challenges to
entry from new players.
Appeal shifts over time; the number of players is reduced significantly between
the beginnings of the 20th century to the 21st century.
Low
Low
Low
–
Bargaining power
of buyers
Suppliers to concentrate business are vendors of basic raw materials, thus they
are numerous and therefore have minimal bargaining power.
Concentrate firms can switch between suppliers with ease
Suppliers competing for market over cost and efficiency.
Low
–
–
All factors remain largely the same, but the hegemony of Coke, Pepsi and Cadbury
Schweppes are intensified (market share 1999-2003 largely unchanging Coke 44%,
Pepsi 31%, CS 14/15%)
New entry difficult as any new entrants are dependent on Pepsi and Coke
distribution channels
Consolidation and vertical integration of bottling franchises by Coke, Pepsi and later
Cadbury Schweppes means new entrants are challenged to find bottling companies
that will process and distribute stock.
– Same as pre-consolidation era
Low
–
The bottling franchisees have limited sellers to choose from.
Concentrate companies are able to determine prices and other terms of sale,
legal agreements are common practice.
Concentrate companies heavily value national Fountain accounts and they utilise
agreements to control theses channels.
High number of bottlers relative to concentrate companies ensures they compete
for business.
Pressure exerted onto the bottling companies to spend on advertising, marketing,
and packaging and ensure discounted pricing.
–
–
Vertical integration ensured bottlers are brought under the control of a small number
of firms and this subsequently makes it difficult for smaller concentrate producers
who must now use the Pepsi and coke distribution systems.
Consolidation – by 2004 Coke has 10 bottlers producing 97.4% of the domestic
volume.
Threat of
substitutes
Medium – Low
Always potential for substitutes to compete for the end consumer market, these
include juice, coffee, tea, milk drinks, water and alternative carbonated
beverages.
The bottling manufacturers are highly restricted in their capacity to work with
substitutes, as the high-speed production lines are only interchangeable for very
similar products of very similar sizes and dimensions.
Medium – Low
END MARKET (consumer): Drink substitutes include juice, coffee, tea, milk drinks,
water and alternative carbonated beverages.
21st century, growth in health conscious consumers who are aware of the health risks
of CSDs and seek alternatives such as sports drinks, tea based drinks, milk drinks,
coffee, juice and energy drinks.
DIRECT MARKET (bottlers) Post consolidation means that there is less scope for
bottlers to process and distribute substitute brands.
Bottlers are limited in their capacity to process substitutes given the limited range of
processing facilities.
Intensity of
competition
Rivalry between the duopoly between Pepsi and Coke and increasingly Cadbury
Schweppes.
Intense rivalry remains between Pepsi and Coke and Cadbury Schweppes.
The Bottling
Business
Era 1 – Pre Consolidation
Era 2 – Post Consolidation
Threat of new
entrants
Medium
Capital intensive, facilities costs very high and allow for limited diversification due to
limited flexibility in production processes.
High levels of competition between bottlers and Coke/Pepsi franchisees have rights to
geographic area.
DSD delivery system gives advantage to lager players who are able to bypass
warehousing systems.
Bottlers franchised under Coke and Pepsi have networked channel agreements over shelf
space, promotional activities and marketing & significant secondary influence through
concentrate producers who can use their brand to exert influence with distribution
channels.
Bottlers must invest in transport and distribution, additional capital.
High – Variable (Packaging/Concentrate)
Concentrate companies are able to determine prices and other terms of sale, legal
agreements are common practice.
Bottlers are legally restricted in what concentrate brands they are able to process if they
are under a franchise agreement.
Can and packaging manufacture power is relatively low considering the concentrate
companies purchase on massive scale and the potential (future) and they pressured into
loyalty by the large companies Coke and Pepsi. High level of competition for these large
contracts.
High– Variable according to the frequency, order size, advertising and marketing associated.
Supermarkets exert considerable bargaining power as they account for the highest sales
and bottlers fight for shelf space.
Mass merchandisers exerted bargaining power as the retailer is responsible for storage,
transport, merchandising etc. and this creates additional costs, however as the second
most important outlet, these are not avoidable.
Fountains are highly profitable and have great bargaining power; bottlers are pressured
to offer incentives to gain markets. The level of investment CSDs allocate towards
harnessing this buyer illustrates the level of power fountains have. Similar challenge in
the fast food industry
Vending machines – little bargaining power as Coke and Pepsi dominate the supplies to
this channel and the associated technology. Bottlers and CSDs work together in this
category
High
Always potential for substitutes to compete for the end consumer market, these include
juice, coffee, tea, milk drinks, water and alternative carbonated beverages.
In regards to the business they receive from the concentrate companies, the threat of
vertical integration by these firms is high.
Low
Bargaining
power of
suppliers
Bargaining
power of buyers
Threat of
substitutes
–
–
–
Distribution channels are controlled by the large firms and this makes
entrance by new companies very challenging as establishing placements in
supermarkets and other distribution channels
Major players have moved down the learning curve quickly and market is
close to saturation, making new entry challenging
The market growth slow, any market gained must be taken from present
competition – challenging considering the cost/brand loyalty and taste
preferences factors.
High potential for retaliation by major players.
High
–
–
Concentrate companies are able to determine prices and other terms of sale,
legal agreements are common practice, bottlers are tied to concentrate
companies through anchor arrangement.
Incidence pricing initiatives sees the concentrate prices vary according to the
distribution channels that are used; this ensures Concentrate Company has
pure control over the bottlers.
High
–
–
The early years of the 21st century sees the enforcement of price wars in
supermarket channels, bottlers must pursue low price strategy to remain
competitive – coupled with the large restructure and infrastructure
investments, this is damaging. Consumers become used to this competitive
pricing.
Low switching costs for consumers, limited need for product information
cannot be easily duplicated making imitations an unlikely option.
Wealth of alternative options available including water, energy drinks, tea,
coffee, soft drink.
High
–
Alternative beverage risk increases in the 21st century, growing demand for
alternatives including energy drinks, sports drinks, juices and bottled water.
Bottlers have mixed capacity to deal with these substitutes due to the change
in facilities and processes required to produce these.
Growing threat as consumer taste preferences expand with the growing
substitutes on offer
Growing understanding of health problems like Type 2 Diabetes and Obesity
that are associated with CSD consumption.
Intensity of
competition
High
– High number of bottlers is quite high in the early stages.
Appendix II: VRIN Analysis for Coke and Pepsi (Ref Q3)
High
Valuable
Rare
Market Reach and Distribution
Coke:
Has achieved expansive reach
over US markets
Considerable distribution through
fountain accounts
Dominates global markets in
Europe, Asia, Latin America and
competing well in Middle East.
Pepsi:
Similar distribution in US
markets
Key acquisitions have enabled
Pepsi to expand market reach in
US (Frito-Lays, Tropicana)
Coke:
Pepsi:
–
Inimitable
Coke:
–
–
The sheer size of Coke’s
distribution channels indicate a
level of rarity
Not as competitive in the
distribution, however Pepsi’s
better relations with networks are
rare on this scale.
Imitated, and was imitated by
Pepsi through the use of the
Anchor bottler strategy.
Imitation is challenging and
requires significant capital.
Pepsi:
– Pepsi spent a great deal on distribution
network and acquiring other firms, making
Product & Differentiation
Coke:
Coke has been able to
achieve considerable gains
because of the unique
product and taste.
The development of
multiple products and
alternatives such as the
diet/flavoured Cokes has
proven successful
Packaging alternatives and
acquisition of other brands
has enhanced portfolio and
market share of
food/beverage industry.
Great international
differentiation, eg.
Japanese markets success.
Pepsi:
Dependent on it’s ability
to differentiate itself as an
alternative to Coke, that it
is better. Proven in the
‘Beat Coke’ strategy.
Coke:
Initial development saw
Coke product as
mysterious, aura of
locking the recipe in the
safe, etc.
Coke is dependent on it’s
reputation as the real Cola
and this is rare.
Pepsi:
Not rare, as Coke gained
FMA in this regard.
Leadership
Coke:
Early pioneers were innovators
(Woodruff, Pemberton, Candler)
The novel acts of these men were
valuable and fundamental to building the
business.
Value lost in 1980s, Goizueta, Keough,
Ivester, saw poor decision-making and
leadership was largely a burden. Poor
HRM and brand management.
Pepsi
Steele, former marketing executive for
Coke was CEO of Pepsi and his instilling
of the Beat Coke campaign was highly
valuable for initially driving the
company.
Kendell and the Pepsi Generation and
Pepsi Challenge was valuable for gaining
ground against Coke.
Reinemund and Enrico utilised excellent
strategy “Grow the core and add some
more” and this provide valuable
Brand
Coke:
–
Coke:
–
Coke & Pepsi:
A brand so prominent and well
known is very rare, there are only a
few brands that reach such global
prominence in the food and beverage
sector.
Coke:
–
Coke:
–
Pepsi:
–
Standard Cola beverage,
similarly other products
are easily replicated and
have been through private
brands.
Pepsi
–
Initial pioneers and innovation is
reasonably rare
Leadership in the 21st century was rare
for the industry, wise strategy and
execution.
Pepsi:
–
While the Pepsi brand does not hold
the same weight, it has positioned
itself successfully as the alternative to
Coke and this holds significant value
for the firm.
–
Initial pioneers and innovation was
imitated by Pepsi
Coke:
–
Similar situation to Coke,
however even more
The Coke brand is highly valuable,
communicated through colour, taste,
bottles, product placement and other
clever marketing, it is one of the
worlds most recognised and reputable
brands.
Pepsi:
Numerous examples of companies
that attempt to imitate Coke
throughout the country’s history
through using similar colourings,
flavours, packaging etc.
However, the specific Coke taste is
difficult to Imitate.
this challenging to copy.
NonSubstitutable/
Organisation
Coke:
Pepsi:
–
imitable due to it’s second
mover nature.
Coke & Pepsi
Has been able to exploit the
network to enter foreign markets
quickly and gain market share.
Have exploited relations with
other firms in different industries
to ensure efficient distribution,
eg. KFC and Taco Bell.
–
Products are easily
substituted with coffee,
water, juice, energy drinks,
tea, milk drinks or through
home development (but
not easy to perform.
–
Coke & Pepsi
Coke:
–
– Leadership is easily substituted in other firms.
Pepsi:
–
–
More likely to be imitable as a
standard cola drink and a reputation
as second mover in the market.
Coke is able to use the wholesome
family name and trusted reputation to
gain market share.
Some organizational challenges have
damaged – contamination scares.
Use of taste tests has allowed Pepsi to
erode the Coke brand as Americans
deem Pepsi more appealing in taste.
Increased distribution of Pepsi
ensures it is a viable alternative for
Coke
Assessment 1
Timed Case Study 1
Due: 27 March 2017
Word count: 1618
1.
If your great-grandparents purchased a single Coca-Cola in 1919 at $40, holding and
reinvesting their dividends, the value of that single share in 2015 would be $11.7 million
(Montgomery, 2015). This vignette illustrates the value of concentrate producers in the
carbonated soft drink (CSD) industry; however, the experience of the concentrate producers
stands in stark contrast to that of the bottlers. Whereas concentrate producers earnt an
impressive return on equity (ROE) of between 18 to 55 percent from 1975 to 2004, bottlers
managed a comparatively paltry -11.5 to 23.5 percent over the same period (Exhibit 3).
Analysis of the macro environment (see PESTLE) does not depict any large forces that would
account for the variance in profitability between the two participants in the CSD industry. A
narrower view of industry analysis, however, shows a large disparity in the attractiveness of
the participants’ industries.
The structure of the concentrate industry is highly attractive and explains the relatively high
ROE enjoyed by the dominant participants (see 5 forces analysis of the concentrate industry).
In the concentrate industry, the threat of new entrants is reduced by the significant and
inimitable brand identity and entrenched market position. Although capital requirements are
low and economies of scale less relevant for growth, proprietary product differences and
entrenched distribution create significant barriers to entry. Supplier power is eroded through
the low concentration of commodity inputs and buyer power mitigated through the dispersed
nature and type of buyers, the risk to buyers of not stocking valuable, concentrated brands and
their low-price sensitivity. Buyer propensity to substitute is also low, driven mainly by
intangibles, such as strong brand identity. Although rivalry between the dominant concentrate
providers is high, the effects of this are largely transferred to buyers. Industry growth in
traditional markets is low, although emerging markets offer opportunities, fixed costs—such
as storage—can be offset downstream, switching costs are high driven by intangibles and
long-term contracts and barriers to exit are high.
In the bottling industry, however, the story is completely different, with the industry structure
highly unfavourable (see 5 forces analysis of the bottling industry). The threat of new entrants
is only mitigated through incumbents’ economies of scale and expected retaliation, meaning
anyone with deep pockets could successfully enter the market. Material supplier power is low
due to low switching costs and low likelihood of substitutes, although new technologies—
such as PET bottles—can dramatically alter the status-quo. Concentrate suppliers, however,
who do not supply a commodity-style product, have significant leverage over bottlers and the
threat of forward integration is high and with historical precedent. Buyer concentration is
dispersed; however, some low-cost buyers exert significant influence over bottlers. Similarly,
buyer information is high and readily available and buyers are relatively price-sensitive due
the commodity nature of the product and low brand identity. The product is substitutable with
low switching costs for buyers and suppliers. Rivalry amongst competitors is high, with low
growth in traditional markets tempered by distribution protections; product differences are
negligible and cost-driven and brand identity is very low. The industry is trending towards
concentration and less diversity of participants and informational complexity is low. High
capital costs create high exit barriers and corporate stakes are high with strategic alliances
favouring buyers.
2.
The ongoing competition between Coke and Pepsi in the concentrate industry benefited
Coke and Pepsi, to the detriment of the bottling industry. Coke and Pepsi pursued differing
strategies over time, predominantly broad differentiation and occasional broad low-cost
leadership.
Regardless of the strategy employed, bottlers were burdened by their higher capital
requirements. As concentrate producers adopted a broad differentiation strategy, bottlers paid
for capital and labour expenditure to service new product lines. Concentrate producers
encouraged bottlers to modernise plants and improve store delivery services. Coke and Pepsi
experimented with new flavours with new packaging options, offering more than 10 major
brands and 17 container types by the 1980s. New products and packages brought benefits but
also increased costs for bottlers, who had to produce and manage an increasing number of
stock keeping units which, due to their low volume, increased labour costs. Alternate
beverages also required costly new equipment and process changes.
As concentrate producers adopted low-cost leader strategies, bottlers saw their expected
margins from previous capital expenditure erode in a price war. With low brand identity and
commoditised value-adding, bottlers were essentially price-takers, while concentrate
producers price-setters. As the struggle for market share intensified, retail price discounting
became the norm to which consumers grew accustomed. Later, as the cola wars began, Pepsi
adopted a ‘beat Coke’ mission, encouraging bottlers to focus on supermarket channels—
typically their most marginal segment. In the 1990s, a price war in the supermarket channel
highlighted the divergent interests of concentrate producers and bottlers. To compete against
private-label brands, bottlers pursued a low-price strategy. Through the decade, retail CSD
prices decreased or remained flat, even as the CPI inched up and concentrate prices rose.
Bottlers, burdened by huge debts from consolidation and infrastructure investments saw profit
margins dwindle and volumes only grew modestly. When volumes declined because of
pressure from supermarkets and increasing competition, bottlers were forced to lower prices
in response (MacNevin, 2014). Bottlers subsequently increased
