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Economic Analysis of Coke and Pepsi
In the twenty-first century, business enterprises continue to experience remarkable changes in their operations. The advent of technological advancement dictates that companies must not cease to explore new ways to keep their market share. The worst affected business entities are multinational companies. They not only need to keep their brands afloat, but also fight off the new entrants in the world market. Two key companies in the food and beverage industry continue to keep and expand their market share for an appreciable duration. These companies are Coke and Pepsi. They are good examples of the companies that show great success in leveraging their core competencies towards expanding into new markets (Carbaugh, 2011). Their managements seem to know the right moments to exploit in order to minimize the risks that may accompany such ventures. For instance, both Coke and Pepsi continuously exhibit their ability to leverage their economies of scale. Furthermore, they progressively capture new markets while ensuring the protection of their brands and avoiding chances of cannibalization (Caves, 2007).
In the second half of the twentieth century, there was significant increase and consolidation of these two companies due to their expansive products manufacturing. However, Pepsi was the latter entrant into the food and beverage industry. In order to stay ahead of its key competitor, the company unveiled several new product areas. As a result, it suddenly gained considerable share of the market in numerous global markets (Dicken, 2003). Nevertheless, the Coke Company had to defend its market share. It effectively countered the negative branding attacks from Pepsi to retain its lead in the Cola market.
Coke and Pepsi experience massive rivalry within the soft drink industry. In fact, they provide the basis for determining the measure of competition within the industry. Their attitude towards each other has a vital effect on the intensity of this rivalry. For example, low rivalry would imply more money for the two behemoths since there would be a reduction in the need to lower prices. This would equally influence the necessity to cut their profit margins. For the most part, Coke and Pepsi sell their products to individual consumers. It is critical to note that the product is a low-priority, low-cost expenditure for many consumers. Consequently, the product is not a high-cost priority in making a purchase (Carbaugh, 2011). Therefore, the bargaining position of Coke and Pepsi in relation to their customers immensely favors these two companies.
In defining the market of any product, substitutes and competition play invaluable role. The food and beverage industry market depends largely on the customers’ preferences and prices of the goods. The market is a venue for buyers and sellers to compare offers and make a choice for their respective transactions. They discover price in the course of acquiring information and conducting numerous transactions (Dicken, 2003). In the soft drink products, an individual may choose to take tap water, diet cola, cola with sugar, milk, or even champagne to quench his or her thirst. However, few people consider these products as perfect substitutes for one another. Therefore, a substitute for any product relies on an individual’s preferences and the prices of the beverages. For instance, some people will pay a lot for Coke or Pepsi if the alternative is a fruit drink. On the contrary, others would buy Coke or Pepsi only if there is a discount (Dicken, 2003). Substitutes aid in determining competition. Therefore, a set of producers will be competitive if each supplies a suitable substitute for what the others produce.
The effect of the substitute on the market share of these two companies is enormous. Coke is a common substitute for Pepsi. This is because it satisfies the same need or desire. Many consumers drink both. This is the reason why competition is so fierce for shelf space at several grocery stores. Thus, a summertime pricing promotion featuring 12-p1acks of Diet Coke can cause its sales to skyrocket. The result would be to make sales of Diet Pepsi to plummet. Nevertheless, many devoted Pepsi drinkers will reject even promotionally priced Coke in favor of Pepsi. This implies that despite being close substitutes, Pepsi and Coke are not perfectly interchangeable (Caves, 2007).
One of the key strategies that Pepsi used to increase its market share was the application of less sugar in its formula. This significantly improved its taste. It managed to establish a uniform control over local bottlers, most of who previously added varying amounts of carbonated water to the syrup so that the taste of Pepsi varied throughout different regions. In addition, the company offered its consumers a 12-ounce bottle that was sold for the same price as Coke’s famous 6 ½-ounce bottles (Dicken, 2003). To enhance its image, Pepsi further adopted advertising campaigns, featuring young women and men drinking Pepsi in affluent surroundings (Carbaugh, 2011). As a result, Pepsi became the light refreshment while people perceived Coke as heavy beverage. Moreover, Pepsi adopted promotional efforts to increase its sales in various groceries. More attack on the Coke drink was in the vending machine and cold-bottle segments of the market. It achieved this by offering financial support to local bottlers who were willing to buy and install Pepsi vending machines.
In the wake of this threat of a new entrant, Coke launched retaliatory advertising campaigns. It used slogans such as “The really refreshed” and “No wonder Coke refreshes best”. As a result, the sales of Coke improved due to these campaigns. However, Pepsi also came up with more advertising campaigns such as “Be sociable” and “Think young” (Caves, 2007). These campaigns had tremendous influence on the young people, who accounted for the highest per-capita consumption of soft drinks. The youth theme suggested that Coke was an old-fashioned drink. Coke, on the other hand, countered this Pepsi slogan with a new advertising theme of “Things go better with Coke”. In the late twentieth century, Coke opted to compete more directly with Pepsi. This is because the latter had a sweeter flavor than Coke. Therefore, Coke modified its formula and branded the subsequent product as “New Coke”. In spite of massive advertising, the company incurred colossal losses and re-introduced its previous product (Dicken, 2003).
In the twenty-first century, the industry rivalry between Pepsi and Coke is still dominant. Using Porter’s five forces of industry analysis, it is evident that the competition for resources determines the profitability of any firm. Porter envisions competition as a zero-sum game between these five forces and the focal firm (Carbaugh, 2011). In the case of Coke and Pepsi companies, there is a weak influence of the force of the power of suppliers. This is because the raw materials needed to make the concentrate, which Coke and Pepsi sell to their bottlers as cheap. However, despite profound secrecy of their recipes, a person can imagine the ingredients they use quite easily. They cannot be anything more than water, corn syrup, and flavorings (Caves, 2007).
The second force is the power of buyers. The effect of this force is rather weak between these two companies. This is because the buyers in this industry are not the final consumers of the drinks. Instead, the buyers are merely the bottlers that Coke and Pepsi have signed up to long-term contracts. In the recent years, the bottlers consolidated with a view to increase their power relative to their founding companies (Dicken, 2003). In spite of this development, their influence on Coke and Pepsi is still weak.
Concerning the threat of new entrants, these companies experience massive freedom. This force has nearly zero influence. There are several barriers to entry in terms of distribution networks. In addition, brand recognition suggests that Coke and Pepsi are unlikely to face fierce competitors in this industry. Another force in industrial analysis is the threat of substitutes. Earlier observations suggested that this force has significant effect on the industry. In fact, this is the principle weakness in the industry. There are increasing cases of obesity and emergence of non-carbonated products industry. These close substitutes poise a threat to the products that drive a significant percentage of Coke’s and Pepsi’s profits (Caves, 2007).
The final force in this analysis is industry rivalry. This force has minimal influence on the performance of these companies. Although the end consumer sees Coke and Pepsi competing on advertising and pricing, the bottlers bear the burden of this rivalry. The bottlers are responsible for the distribution of these products to supermarkets and other retail outlets, not the concentrate makers. Therefore, Pepsi and Coke retain enormous control over the price they charge bottlers for the concentrate. Furthermore, each bottler has an obligation to remain committed to either Coke or Pepsi (Caves, 2007). Consequently, this structure ensures favorable competition for Coke and Pepsi in the carbonated soft drinks concentrate industry. This is the reason behind their well-established competition in a stable industry. Their websites currently show numerous appealing advertisements. The two market leaders maximize the latest technology to highlight their products (Pepsi and Coca-Cola).
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