Cola Wars

1. Why historically, has the soft drink industry been so profitable?

An industry analysis through Five Forces Model reveals that the market forces are favorable for the profitability:

a. Bargaining Power of Suppliers: Since the primary inputs for CSD industry are sugar, sweeteners, color and packaging (bottles and cans), the suppliers of these raw materials have less bargaining power against the concentrate producers (CPs) and bottlers.

i. Sugar: Sugar can be obtained from various sources on an open market and if price of sugar increases, the cola companies can easily switch to low price artificial sweeteners or high-fructose corn syrup. Though aspartame, used in diet beverages, gained the bargaining power for time-being while it was under patent protection

ii. Cans: With abundant supply of inexpensive aluminum in early 1990s, several can companies competed for the contracts. These can suppliers had the little bargaining power in controlling the prices. Concentrate Producers (CPs) further negotiated on behalf of bottlers, reducing the number of suppliers. By 2009, only Ball, Rexam, Crown Cork & Steal were major can suppliers.

iii. Plastic Bottles: Again there were more plastic bottle suppliers than the contracts, so direct negotiation by CPs reduced their bargaining power.

b. Bargaining Power of Buyers: The distribution of CSDs took place through five principal channels: Supermarkets (29.1%), fountain outlets (23.1%), vending machines (12.5%), mass merchandisers (16.7%) and convenience stores (10.8%). Overall the industry enjoyed profitability due to lower buyer bargaining power.

i. Supermarkets: End consumers have developed their loyalty to particular cola brands. Thus, to generate the store traffic, supermarkets needed Pepsi and Coke products. However, these supermarkets were highly fragmented and so didn’t have high bargaining power except to charge premiums for providing the shelf space.

ii. Fountain Outlets: This was the least profitable channel for...