Alex Ortolani

GMGT6290A
Cola Wars Case
2/5/2020

1. As an investor, would you prefer to invest in the Bottler Industry or in the Concentrate
Producer Industry?

As of right now (the 2011 publishing of this case), I would prefer to invest in the

Concentrate Producer Industry. The main reasoning being a lower necessary investment of

capital. The labor, machinery and overhead are lower than for the bottlers. Also, the cost of a

plant that could cover the continental US would cost $50-100 million. Whereas, the cost for the

same for a bottler would be hundreds of millions. Coke and Pepsi both offer Customer

Development Agreements that work with concentrate producers to provide marketing and

advertising funds; as well as works with bottlers to coordinate reliable supply, fast delivery and

low prices. These CDAs help to manage all a CPs major costs: advertising, promotion,

marketing, and bottler support. As it stands Coke and Pepsi take care of their Concentrate

Producers. Coke and Pepsi have also purchased and have control over many of their bottlers

which would make for easier and more mutually beneficial negotiations.

2. Compare the economics of the concentrate industry to that of the bottling industry?
Analyze each force of the Porter's five forces model to explain why the profitability is so
different.

Concentrate:

a) Supplier Power: suppliers provide CPs with caramel coloring, citric acid, natural flavors,

and caffeine. As Coke and Pepsi control concentrate production, supplier would have a

difficult time raising prices because they claimed 72% of US concentrate sales
 b) Buyer Power: Like supplier power, the bottlers who purchase the concentrate, for the

most part, are controlled by one of the big 3 bottler groups (Coke, Pepsi or Dr. Pepper

Snapple). This would lead me to believe buyers affecting price would be difficult unless

it is a focused effort by one of these big 3, which would assumingly have a strategic plan

affecting all levels.

c) Competitive Rivalry: The CPs do not have a competitive rival, outside of the fact that

the Big 3 control pricing in one way or another. Their hopes to seek more profits lies in

an ability to negotiate with one of the big 3. One of these three may come to you with a

plan to use buy your products to draw you away from its competitors.

d) Threat of Substitution: The threat of substitution is minimal in this case. The big 3 have

large in-depth distribution networks. Other companies exist that do what you do, but

these networks help to keep consistency.

e) Threat of New Entry: I cannot see how a new entry would be a threat, unless a new

company finds an alternative to zero calorie sweetener that no one else can produce yet.

This would attract the big 3 given the change in consumer purchasing patterns.

Bottlers:

a) Supplier Power: Coke and Pepsi have a strong control over the pricing of Concentrate.

Coke via the 1987 Master Bottler Contract, and Pepsi negotiates using the consumer price

index (CPI).

b) Buyer Power: As the big 3 control so much of the CSD market in the US, their bottler

groups have control over the negotiations with buyers. For the most part, buyers can only
 choose between one of the 3. Also, as Coke and Pepsi own some of the buyers (KFC,

Pizza Hut etc.) the threat is present but minimal.

c) Competitive Rivalry: The rivalry for the bottlers is the existence of the three major

bottling groups: the CCE, PBG and DPS’s.

d) Threat of Substitution: The threat of substitution is mostly in how the products are

packaged. The majority of product is packaged in either metal cans or bottles. Newer or

cheaper alternative can always pose as a threat. Also, the focus of environmentally safe

products will have an impact.

e) Threat of New Entry: I think the biggest threat as a new entry would be from the

environmentally safe angle. If a competitor, or new company, can create an alternative to

metal cans and plastic bottles that is environmentally safe or bio-degradable, that will

pose a huge threat to the bottlers. Although my expected outcome would be for one of the

big 3 to purchase this threat.

3. How can Coke and Pepsi sustain their profits in the wake of flattening demand and the
growing popularity of non-CSDs?

The case speaks about large advertising investments to reshape both brands, as well as a

commitment to providing healthier options to consumers. These are two major steps to keep

consumer focus on the CSDs these companies rely on. The introduction on Stevia sweetened

drinks will help both Coke and Pepsi to maintain their demand, as it gives consumers exactly

what they want: a healthier alternative of their favorite drinks. The expansion into non-CSDs

from the case seems to benefit Pepsi more than Coke, as they reach major markets with their

partnerships with some of the US’s professional sports leagues and Gatorade. Both companies

embraced the bottled water markets, however the environmental impact of plastic seems to be
the next big concern on their lists. A possible approach not listed in the case would be to pursue

purchasing any of the major seltzer water brands. Carbonated water, which is an input of the

staple products of both companies, has seen an increase in popularity and could pose as a new

product line with high profit margins.