Case Study: Cola Wars

Dr. S.Balasubrahmanyam, Indian Institute of Management Kozhikode PGP-I; Sections A & B ; 1st February, 2013

Beverage Business: Value Chain and Economics

Suppliers Cans Sugar Sweetner Concentrate producers Coca Cola Pepsi Royal Crown 7-Up Dr. Pepper Bottlers CCE Other Independent Bottlers Distributors Food Stores Fountains Vending Convenience stores End User

You

Upstream
Cost structure of CPs Sales 100% Concentrate RM And Labor Gross Profit Selling and delivery Adv. & Marketing Administration Profit before taxes 17% Concentrate, Labor & Packaging Gross Profit 83% 2% 39% 8% 35% Selling and delivery Adv. & Marketing Administration Profit before taxes 21% 2% 4% 9% 65% 35% Cost structure of bottlers Sales 100%

Downstream

Key Elements of Industry Structure: Impact on Industry Performance/Attractiveness

Entry Barriers
Threat of new entrants

Industry competitors Suppliers

Bargaining power of suppliers

Rivalry among existing firms

Threat of substitute products or services

Bargaining power of buyers

Buyers

Substitutes
Slide 2-4

Industry Structure: Barriers to Entry What factors keep potential competitors out?
Entry deterring regulations
Telecom? Banking?

Industry A B C D

Capital requirements
e.g., aerospace industry

Proprietary technologies
e.g., p g , pharmaceuticals

Brand (product) differentiation

e.g., Consumer goods (Coke/Pepsi)

Access to distribution
e.g., Beverages, soft-drinks

Scale/Scope economies
e.g., aerospace, retail industry

Entry deterring prices

e.g., personal computers

Industry Structure: Buyer Bargaining Power

Buyer concentration
Few vs many customers

Price

Alternative suppliers/options for buyers

Competitive products

Threat of forward integration

Ability to become a competitor

Switching costs of Buyers

Threat of switching providers

Costs

Industry Structure: Supplier Bargaining Power

Supplier concentration
Few vs many suppliers

Price

Alternative suppliers/options for suppliers

Competitive products

Threat of backward integration

Ability to become a competitor

Switching costs of Buyers

Threat of switching providers

Costs

Industry Structure: Threat of Substitutes What alternatives are available to customers

Industry A

Direct substitution due to better functionality

Soft drinks v/s. other drinks

I Increase product usage d t

Customers

Nature and Focus of Rivalry

Factors
Industry A
Number of rivals Dimensions of competition
Price, P d t features, etc Product f t t

Industry growth rates

Rate of industry growth

Fixed costs

Competitive rivalry can focus on many factors, including price, quality, technology, features, service, etc.

Concentrate Production: Very Attractive Industry (Gross Margin 83%; Pre-Tax Margin 35%)
Entry Barriers
High Entry Barriers
* Brand/Reputation * Access to Dist. Channels/Bottlers * Threat of Retaliation

Threat of new entrants (LOW)

Suppliers
* Many Suppliers * Smaller in Size * Supplying Commodities

Bargaining power of suppliers (LOW)

Rivalry among existing firms (MODERATE)

Bargaining power of buyers (LOW)

Buyers
Bottlers * High Switching Costs
* Inability to Integrate Backwards * Contractual lock-in

Threat of substitute products or services (LOW/MODERATE)

* Many substitutes * Inferior Availability * More expensive * Attractive due to changes in health consciousness

Users

Substitutes

* Fragmented * Low Switching costs; non availability of substitutes

Bottling: Not a Very Attractive Industry/Business (Pre-Tax margin 9%)

High Entry Barriers

Potential Entrants

* Capital Investments in bottline and distribution infrastruture * Access to Dist Channels * Exclusive contracts with CPs

Threat of new entrants (LOW)

Suppliers
Concentrate
* Two Suppliers * Large Size * High Switching costs for bottlers

Bargaining power of suppliers (VERY HIGH)

Rivalry among existing firms (MODERATE TO HIGH)

Bargaining power of buyers (HIGH)

Buyers
* Large Size/Concentrated * Volume Purchases * Price Sensitivity

Threat of substitute products or services (LOW) Very little substitute for Bottling

Others
* Supply commodities * Weak power due to bottlers alliances with CPs

Substitutes

CPs taking greater control over Bottling. Why?

To replace their weak bottlers and respond faster to competitive moves on pricing, new product introduction, promotion, etc. Consolidate to enjoy greater scale economies. Starve other smaller brands who out-source bottling activities Increase size/clout vis--vis large retailers/distributors To control (raise) the price of the final product, so as to retain or increase margins in their main concentrate business.

The Impact of Vertical Integration on Industry Structure/Attractiveness

Increase Scale Economies Increase Entry Barriers

Increase size/clout vis--vis Retailers/Distributors

Reduce Buyer Power

Starve smaller players

Reduce Rivalry from smaller players

Respond faster to new product and innovations

Minimize/reduce threat Of substitutes

The Cola Wars: Lessons Learnt

Striking example of how an industrys structure makes the industry attractive (profitable)!

Coke/Pepsi took strategic actions to increase industry p g y attractiveness by

Erecting entry barriers Reducing the power of certain actors (buyers/suppliers) Reducing the threat of substitutes Creating a rivalry that looks more like an alliance

Industry Structure & Firm Performance

Industry Structure * Entry Barriers * Buyer Power * Supplier Power * Substitute Threat * Rivalry

INDUSTRY ATTRACTIVENESS AND PROFITABILITY

SUPERIOR FIRM PERFORMANCE & PROFITABILITY

Industry Structure: Implications for Managerial Action

Defensive Posture
Analyze and understand present Industry Structure. But take the industry structure as given. Take actions to defend your position in that industry.

Offensive Posture
Analyze and understand present industry structure But recognize the industry structure can be changed Take proactive actions to change the industry structure and attractiveness

Industry Structure & Firm Performance

Industry Structure * Entry Barriers * Buyer Power * Supplier Power * Substitute Threat * Rivalry Companies Actions

INDUSTRY ATTRACTIVENESS AND PROFITABILITY

SUPERIOR FIRM PERFORMANCE & PROFITABILITY

The Cola Industry in Future: Threat of Substitution from Non-Cola Beverages

OPTIONS FOR COKE AND PEPSI?

Dont Worry!

Counter their threat by improving price & availability of colas.

Expand presence In the Non-cola Segment themselves

DO NOTHING!

DEFEND

ATTACK

Challenges for Coke/Pepsi in Non-Cola Beverages

Presence of large entrenched competitors (Nestle, Unilever) Coke/Pepsis current strengths in bottling and distribution of little use in the non-cola segments? Coke/Pepsi have no inherent hold over suppliers or customers

The Cola Industry: Benefits and Risks of International Expansion

Opportunities
Potentially large market size Low per capita consumption of colas

Challenges
Entrenched local rivals Fragmented and poorly developed distribution channels Colas may not become a life-style drink as in the US. Government regulations, taxes, etc.(higher cola prices)