Cola Wars Continue: Coke and Pepsi in 2010
The competition within the $74 billion carbonated soft drink (CSD) industry has been remarkable ever since Coca-Cola was formulated in 1886, and further intensified when Pepsi was introduced in 1893. Ever since then, the CSD industry has been dominated by these two companies, with Coke taking the lead in the early stage, followed by Pepsi doubled its market share between 1950 and 1970 by offering its concentrate at a lower price than its competitor. The CSD industry has been profitable historically due to numerous reasons. Firstly, in the world’s largest market for CSD products, consumption had been growing at a steady rate of 3% annually from 1970 to 2000 in the U.S., marking a high growth stage in the industry life cycle (Appendix B). This allowed both Coke and Pepsi (C&P) to achieve annual sales growth of around 10%, while competing head-to-head against each other and other smaller CSD producers. Competition between C&P reinforced their brand image, as the increase in marketing efforts could be transferred into profit and sales growth when the overall demand was increasing in a growing industry. However, the increasing industry volume was largely obtained by C&P, leaving other smaller firms vulnerable with stagnated growth opportunity. Secondly, according to Porter’s Five Forces analysis in Appendix A, high barrier for new entrants, low bargaining power of suppliers of both concentrate producers and bottlers, moderate buyer’s bargaining power and low degree of threats of substitutes prior to 2000, have been favorable to the high profitability and growth of the CSD industry. In terms of concentrate producers, the manufacture process involves little fixed costs and capital investments. This ensures high level of gross margin for them and frees up funds for marketing related expenditures. As the industry became more consolidated, large firms such as C&P gained pricing power over bottlers through master price contracts. For bottlers, even though heavy capital