Cola Wars: Profitability of the soft-drink industry

835 WordsOct 12, 20134 Pages
Cola Wars Case Study Question: Why is the soft drink industry so profitable? Historically, the soft drink industry has been extremely profitable. Long time industry leaders Coca-Cola and Pepsi-Cola largely drive the profits in the industry, relying on Porter’s five forces model to explain the attractiveness of the soft drink market. These forces allowed Coke and Pepsi to maintain large growth until 1999, and also explain the challenges that each company is currently facing. The relative duopoly that Coke and Pepsi share in the industry allows for higher profits, while also maintaining enough competition to promote firm improvement. The first of Porter’s forces is the threat of new entrants. Coke and Pepsi have been largely…show more content…
Since then, bottled water has become increasingly powerful, cutting into U.S. consumption. A growing health awareness has led to higher demand for non-carbonated soft drinks. Coke and Pepsi have largely met this threat by diversifying into other product lines such as water, juice, tea, and sports drinks. A significant factor that has also allowed the soft drink industry to prosper is the success of the fast-food industry. By partnering with restaurants such as Taco Bell, McDonalds, Burger King, and Pizza Hut, soft drinks have become a complement to this other profitable sector. Pepsi has taken advantage of this trend in its merger with Frito-Lay. While these five factors all contributed to making the soft drink industry very profitable, the industry is more recently facing challenges that could lead to declining profitability. Industry demand is steadily decreasing, as the United States – the largest consumer of soft drinks in the world – becomes more health conscious. Furthermore, buyers are now threatening to produce soft drinks themselves, such as in-store brands at Walmart. This has increased the bargaining power of the buyer. Though the future profitability of the soft drink industry may be declining in America, Coke and Pepsi have taken substantial actions to spread their brands worldwide. Each has a long-term growth strategy to saturate new markets, whether

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