Money is better than poverty, if only for financial reasons–Woody Allen
Besides understanding economies of scale, the next area you need to master is understanding the prisoner’s dilemma and how companies coexist or compete within barriers to entry.
The case readings were presented here:http://wp.me/p1PgpH-yl
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CASE STUDY ANALYSIS
The case study discussion in a PDF because of financial tables. Go here:http://www.yousendit.com/download/M3BsM25ITmFsMHhESjlVag
PEPSI AND COKE’S UNCIVIL WARS
Chapter 9 in Competition Demystified: Uncivil Cola Wars: Coke and Pepsi Confront the Prisoner’s Dilemma
What are the sources of competitive advantages in the soda industry?
First we should look at industry structure. The cola companies buy raw materials of sugar, sweeteners and flavorings from many suppliers then they turn the commodities into a branded product which consists of syrup/concentrated combined with water and bottles. The companies are joined at the hip with their bottlers/distributors who then sell to many retail outlets. Selling bulky and heavy beverages lends itself to regional economies of scale advantages.
The soda companies cannot operate successfully unless their bottlers and distributors are profitable and content whether company-owned or franchised.
The existence of barriers to entry indicates that the incumbents enjoy competitive advantages that potential entrants cannot match. In the soft drink world, the sources of these advantages are easy to identify. First, on the demand side, there is the kind of customer loyalty that network executives, beer brewers and car manufacturers only dream about. People who drink sodas drink them frequently (habit formation), and they relish a constancy of experience that keeps them ordering the same brand, no matter the circumstances.
Both Coke and Pepsi exhibit the presence of barriers to entry and competitive advantage—stable *ROE can be influenced by whether bottlers’ assets are off or on the balance sheet
Second, there are large economies of scale in the soda business both at the concentrate maker and bottler levels. Developing new products and advertising existing ones are fixed costs, unrelated to the number of cases sold. Equally important, the distribution of soda to the consumer benefits from regional scale economies. The more customers there are in a given region, the more economical the distribution. A bottler of Coke, selling the product to 40% to 50% of the soda drinkers in the market area, is going to have lower costs than someone peddling Dr. Pepper to 5% to 56% of the drinkers.
During the “statesmen” era of Pepsi and Coke, what actions did each of the companies take? Why did they help raise profitability?
Note the stability of market share and ROE. ROE dipped in 1980 and 1982 as Pepsi and Coke waged a price war. Yet, market shares did not change as a result of the price war—both companies were worse off. Pepsi gained market share in the late 1970s versus Coke. Coke was slow and clumsy to respond.
Price wars between two elephants in an industry with barriers to entry tend to flatten a lot of grass and make customers happy. They hardly ever result in a dead elephant. Still, there are better and worse ways of initiating a price contest. Coke chose the worst. Coke chose to lower concentrate prices on those regions where its share of the cola market was high (80%) and Pepsi’s low (20 percent). This tactic ensured that for every dollar of revenue Pepsi gave up, Coke would surrender four dollars.
Coke luckily developed New Coke which allowed it to attack Pepsi in its dominant markets in a precise way—minimizing damage to Coke’s profits–and force a truce in the price wars.
They made visible moves to signal the other side that they intended to cooperate. Coca-Cola initiated the new era with a major corporate reorganization. After buying up many of the bottlers and reorganizing the bottler network, it spun off 51% of the company owned bottlers to shareholders in a new entity, Coca-Cola Enterprises, and it loaded up on debt for this corporation. With so much debt to service, Coca-Cola Enterprises had to concentrate on the tangible requirements of cash flow rather than the chimera of gaining great hunks of market share from Pepsi. PepsiCo responded by dropping the Pepsi Challenge, toning down its aggressive advertising and thus signaling that it accepted the truce. Profit margins improved. Operating profit margins went from 10% to 20% for Coca-Cola. Pepsi gain was less dramatic but also substantial.
Both companies focused on ROE rather than market share and sales growth.
The urge to grow, to hammer competitors and drive them out of business, or at least reduce their market share by a meaningful amount, had been a continual source of poor performance for companies that do have competitive advantages and a franchise, but are not content with it.
Essay about Case Study on Coke versus Pepsi
1065 Words5 Pages
The case study "Cola Wars Continue: Coke and Pepsi in the Twenty-First Century" focuses on describing Coke and Pepsi within the CSD industry by providing detailed statements about the companies’ accounts and strategies to increase their market share. Furthermore, the case also focuses on the Coke vs. Pepsi goods which target similar groups of costumers, and how these companies have had and still have great reputation and continue to take risks due to their high capital. This analysis of the Cola Wars Continue case study will focus mainly on the profitability of the industry by carefully considering and analyzing the below questions:
Why is the soft drink industry so profitable?
Compare the economics of the concentrate business to the…show more content…
Barriers to entry is another factor that accounts for the high profitability of the soft drink industry. As stated in the case, it is nearly impossible for new concentrate producers or bottlers to enter the industry. The new producers would not require high capital to enter (low cost of capital to produce concentrate), however the entry would be impossible due to patents and the presence of Coke and Pepsi which have nearly century old established names. Meanwhile entering bottling is very capital intensive, and the existing bottlers have exclusive territories in which they distribute their products. Provided the above stated facts it is clear that the soft drink industry is a highly profitable industry. Moreover, in Exhibit 5 it is easily observed that in 2000 the Concentrate Producers (CP) earned 35% profit on sales whereas the bottlers earned 9% profit, which account for a total positive industry profit of 14%. The data listed in the case shows how the soft drink industry in itself is very profitable, however the profitability of the concentrate producers is much higher that that of the bottlers, even though these two businesses should be inseparably linked. Exhibit 5 clearly reflects the profitability of concentrate producers vs. bottlers; even though the dollars per case profit is much higher for the bottlers, the ultimate profit as a percent of sales is higher for the concentrate producers. The cost of goods sold for a CP is equivalent