Q1. The concentrate producer’s industry actually seems to be an oligopoly due to a few number of competitors who have high market share and have domination in the market. Coke, Pepsi, and Dr. Pepper are the top three companies (Case, Exhibit 2) across the different segments that are sold in Retail and Fountain Outlets (Case, Page 4). Now, let’s evaluate the concentrate producer’s industry using Porter’s 5 forces:
1.
Power of buyers
: While Coke and Pepsi face pressure from large retailers, their brand loyalty and the unique nature of their concentrates give them some leverage. However, bottlers have negotiating power, especially because they have alternative concentrate suppliers (Case, Page 3).
2.
Power of Suppliers
: The 2 main inputs for concentrate production i.e. citric acid, natural flavors etc. (Case, Page 5) are widely available and do not face any supply constraints. Both Coke and Pepsi have multiple options for sourcing their inputs, thereby implying low supplier power.
3.
Substitutes
: (Case, Page 2)
“Among national concentrate producers, Coke and Pepsi claimed
a combined 72% of the U.S. CSD market’s sales volume in 2009, followed by Dr Pepper Snapple Group (DPS) and Cott Corporation”. Despite the substitutes being there, the strong brand image and unique flavors of Coke and Pepsi, along with consumer preferences, mitigate the threat. Hence, low threat of substitutes.
4.
Entrants
: The concentrate producer industry has high barriers to entry. Coke and Pepsi have established strong brand identities, distribution networks, and economies of scale. New entrants would need substantial capital, expertise, and time to compete effectively.
5.
Competition
: Coke and Pepsi are direct competitors with similar product offerings. They
engage in aggressive marketing, product innovation, and pricing strategies to gain market
share. The industry is mature, and growth is primarily achieved by taking market share from competitors. This leads to intense rivalry and thus, high competition. Since this is a concentrated industry, they are profitable because larger firms are more productive and efficient (Book, Page 77). Q2. The main cost components for Bottler’s industry are concentration and syrup, in addition to significant capital for packaging, labor, overhead, transportation, and delivery.
Let’s evaluate the
bottler’s industry using Porter’s 5 forces:
1.
Power of buyers
: Bottlers are dependent on Coke and Pepsi for the concentrate supply. While the concentrate producers hold significant power due to their established brands, bottlers also play a crucial role in distribution. Large bottlers may have some negotiating power, but overall, they are reliant on the concentrate producers.
2.
Power of suppliers
: Bottlers require packaging materials such as bottles, caps, labels, etc. The packaging industry is diverse, and bottlers can usually negotiate favorable deals. However, the concentration of packaging suppliers and potential fluctuations in raw material prices may impact bargaining power.
3.
Substitutes
: The bottling industry for Coke and Pepsi is specialized, and there are limited
substitutes for the production and distribution of carbonated beverages. Bottlers are dedicated to serving specific beverage brands, reducing the threat of substitutes within their core business.
4.
Entrants
: The bottling industry for Coke and Pepsi involves significant capital investment in production facilities, distribution networks, and relationships with retailers.
