Porter’s Five Forces, Coke Industry Analysis
-Based on Case Study Information-
The Coca Cola company is the most successful CSD beverage company to ever hit the market. Throughout the year the company has endured setbacks that have weakened the company but has also made them stronger by improving and innovating the company. The company has evolved in many ways during many years of business. The company has faced challenges of suppliers, buyers, substitutes, new entrants, barriers to entry, global struggles, and industry rivalry. The Cola Wars case can be analyzed by Porter’s Five Forces framework, which attempts to analyze the industry in regards to the intensity of competition and attractiveness.
Bargaining power of suppliers are low because when bottlers were being difficult in cooperating in Coke’s marketing and promotion programs Coca Cola Company decided to buy “poorly managed bottlers, infusing them with capital, and quickly reselling them to better-performing bottlers”. This refranchising gave Coke leverage because the company was able to “expand outside their geographic territories”. Coke also took the opportunity to buy two of it’s largest bottling companies and create Coca Cola Enterprises (CCE). The CCE became the most “consolidated system” and produced 94% of domestic volume. Coke became the largest bottler in 2009 and did not have to depend on other independent bottling companies. CCE “handled about 75% of Coke’s North American bottle and can volume. Which then eliminated the pressures to spend more on “advertising products, packaging proliferation, widespread retail price discounting” and ultimately saving Coke money on “high capital requirements and lower profit margins”.
Also, suppliers providing ingredients to Coca Cola Company do not have much bargaining power because their ingredients are not unique or rare, in fact their supplier’s ingredients are substitutional and/or imitable. “The concentrate for most regular colas consisted of caramel coloring, phosphoric acid, citric acid, natural flavors, and caffeine”. Coca Cola and Pepsi are the industry’s largest buyers for these supplies and Coke is are able to “negotiate [prices] on behalf of their bottling networks.”
Bargaining power of buyers are medium because as of 2009 mass merchandisers held 16.7% of CSD market distribution. Large mass-merchandise buyers like Wal-Mart, Sam’s Club, Target, etc, threaten Coke’s profitability by put pricing pressure on the company. “All CSD companies faced the challenge of achieving pricing power in the take-home channels.” Since Coke doesn’t directly sell to its customers, they deal with distribution networks that try to negotiate their prices and those channels then sell it to their customers at prices that will create long-term sales from consumers. Mass merchandisers had leverage on Coke’s marketing and shelving arrangements because they buy Coke’s products in large quantities and they are able to negotiate.
Price-sensitive buyers (in reference to consumers), have bargaining power because of low switching costs to substitutes. The exception to this statement is Coke’s loyal returning customers. For example, when Coke introduced their brand’s purified water to the market, consumers searched for cheaper alternatives like private-labeled water or even tap water. Another factor of bargaining power is influenced by the customer’s knowledge on health issues. The correlation of regular soda drinkers and obesity” and lack of nutrition, not only put a strain on the CSD industry but a shift in consumer purchasing behaviors. Consumers are now seeking healthier beverage alternatives and drinking less CSD products.
Threat of substitutes are low to medium/high in pressure depending on how you look at the situation. Although, Coke is threatened by the millions of substitute CSD and non-CSD products, Cola Company is well established and have created brand recognition and product extension lines that can withstand substitute competition. Many of the CSD and non-CSD substitutes are already owned by the Coke. So, really Coca Cola Company and PepsiCo are only competing with each other’s brand alternative beverages since the other beverage company shares are so low. So I would analyze this point of view as a medium pressure.
Mass merchandisers and discount retailers like Wal-Mart and Target, “[sell] Coke and Pepsi products, but they could also have their own private-label CSD, or sell generic labels such as Wal-Mart’s “President’s choice” sodas. Private Labels and generic brands threaten Coke because consumers switching cost to substitute products are low in price and customers are becoming more price sensitive. Fortunately, Coke is able to withstand most threats because of their strong customer loyalty and successfully differentiated diverse advertising campaigns and promotions.
Threat of new entrants and barriers are low. “Both at home and abroad, the growing popularity of alternative beverages brewed complication for CDS makers in their production and distribution practices.” That being said, to protect the Coke Company from new entrants in the beverage market, Coke extended its product line to non-CSD products. Coke also accounted for the complication in their distribution practices by creating Coca Cola Enterprise to handle their own bottling system and cut costs. Coca Cola has also set the industry standards high by having contracts with all the distribution outlets the company could get their hands on. New entrants would need to spend a large sum of money to be able to compete with Coke’s already established capital and independent bottling system.
Since Coke’s economy of scale is so large it leaves small growth opportunities for other unknown entrants, especially in global markets. Coke serves more than 200 countries and even PepsiCo could not compete with Coke’s international sales. If established Pepsi can’t even beat Coke then an unknown new entrant will mostly fail internationally many times before they are successful. New entrants going into the international beverage market are challenged by “antitrust regulation, foreign exchange controls, advertising restrictions, and local competition.” Even Coke was denied by the Chinese government to purchase the leading company in China, Huiyan Juice. New entrants need to be able to compete with big names like Coke who have already recognized by their customers, vendors, suppliers, buyers, marketing, and bottling systems.
Although, the industry is saturated with substitute products, Coke’s only major competitor since 1980 is Pepsi, hence the article “Cola Wars”. Making the industry rivalry low/medium. Coke owns so much of the market share that rivalry of new entrants is incomparable to the successful company. Coke is continuously finding new ways to be innovated to stay on top of their competitors. Whether it be new product line extensions, flavors, or effective marketing. In 2005, Coke catered to its consumers with concerns to their calorie intake by creating the very successful Diet Coke. When men responded negatively to the “Diet” label, marketers innovated its advertising by renaming Diet Coke “Coca-Cola Zero” and changed its can-packaging. In 2009, Coke created a unique Freestyle soda machine which can “create dozens of different kinds of custom beverages”. Unknown entrants struggle to have a competitive advantage to beat Coke’s brand loyalty and years of successful marketing for all their products. As of 2010, marketing surveys on brand loyalty favored Coke over Pepsi.
Coca Cola has set the standards for the rest of the drink industry and given the strength and weaknesses of the Coca Cola company I would expect the profitability level to be high. Granted, “cost and profitability in each channel is varied by delivery method and frequency, drop size, advertising, and marketing.” Coca Cola is mainly competing against Pepsi, making new entrants a minor threat. The company is successful in America as well as internationally in over 200 countries. The company continues to expand its product line and flavors to cater to their consumers needs. They now own the largest bottling company and do not have to rely on outsource bottling companies. “
After analyzing the Cola Wars article, I found many of the forces affecting the industry to be mainly medium, with some exceptions. The level of bargaining power of suppliers are low because Coca Cola is not dependent on other bottling franchise because it has created its own bottling enterprise. The Coke Company is also not threatened by concentrate suppliers because the ingredients are not rare enough to hold above the Coke Company’s head as pricing leverage. The bargaining power of buyers are medium because even though there are various alternative beverages, many of those substitutes lack differentiation. The lack of differentiation makes customers price sensitive resulting in higher bargaining power. Another reason bargaining power of buyers is high because distribution channels know Coke needs their outlet and are able to negotiate prices and shelf space; but the bargaining power can be weakened because of consumer brand loyalty. New entrants pose a low threat and are not a strong pressure to Coke. New entrants will struggle to differentiate their products and advertising to Coke’s successful diverse marketing and establish relationships with distribution networks that Coke and other large companies already use. New entrants will also have a high startup cost for capital requirements.
I categorized the substitution of products as medium/high because consumers are more aware of the obesity relationship to soda. I also believe this force is the force that is changing and affecting Coke and the industry itself the most. Since consumers are becoming more conscious of health issues caused by CSD sugars they are consuming less CSD beverages, which means they are purchasing less. This results in higher pressure to compete in non-CSD to stabilize Coke’s market share overall. But since Coke owns many other big name CSD and non-CSD alternative beverages to meet customer’s needs, they are able to keep up in the industry and make up for some losses. I also categorized substitute products as high because many alternative beverages are priced close in price to soda.
The company does not suffer a setback from suppliers because the ingredients they need are not rare enough to negotiate price and since Coca Cola buys their supplies in large quantities the supplying company’s largest and most profitable customer is probably Coca Cola. Coca Cola is also the leader in bottling and fountain accounts.
The industry rivalry can be classified as low/medium. Yes, there are many substitutes, but as mentioned before those substitutes lack differentiation and distribution channels that Coke and Pepsi have already built strong relationships in. I would say for new entrants the industry may initially look attractive because of substitutional opportunities, but until after analyze the competition it does not. Coke is constantly improving and innovating its marketing programs and products to remain market leader and fan favorite. It would be hard for new entrants to create a startup that differentiates its product from the millions of beverage competitors and and unique advertising, that Coke does so well.