Robert Mathews

Pepsi Bottling Group, Inc.

Module 1 Assignment

The world’s largest manufacturer, seller, and distributor of Pepsi-Cola products, the Pepsi
Bottling Group, Inc., operates in the soft drink manufacturing/bottling industry. The following
will go into detail of the external environment that surrounds Pepsi Bottling Group (hereinafter
referred to as PBG). The competitive structure of the industry and competitive position of the
company will be illustrated while explaining the competitiveness and positioning of major rivals.
The Porter’s Five Forces Model will be used to analyze the external environment of PBG.

Apply the five forces model to the industry in which your company is based. What does
this model tell you about the nature of competition in the industry?

Porter’s Five Forces Model

This model will allow us to identify the strategic opportunities and threats in the operating
environment of the organization. This process will entail examining PBG’s risk of entry by
potential competitors, industry rivalry, bargaining power of buyers, bargaining power of
suppliers, and the threat of substitutes for their product. An overall assessment of the
combination of these forces can tell how us how exactly competitive the industry is that PBG
operates in.

The Risk of Entry by Potential Competitors

The first of Porter’s Five Forces considers the risk of entry of competitors into the company’s
market. Since PBG competes most heavily with Coca-Cola Bottling Consolidated, Coca-Cola
Enterprises, and Coca-Cola FEMSA, it pretty much exists in an oligopoly/duopoly type industry,
with Pepsi-Cola and Coca-Cola being the two largest, most dominant competitors, amongst other
much smaller competitors. These much smaller companies would include various ones such as
Hansen Natural, Nestle, Red Bull, AMCON Distributing, Cott, and Energy Brands. Thus, being
one of the two dominant players with a strong niche in the market, PBG does not have a very
large risk of a competitor coming in and taking their place.
When considering the threat of entry by potential competitors, a company must understand their
certain barriers to entry, which could include economies of scale, brand loyalty, cost advantages,
and switching costs. Operating in the U.S., Canada, Greece, Mexico, Russia, Spain and Turkey
and having over 100 plants and 545 distribution centers worldwide, PBG has been able to
develop tremendous economies of scale. Picture 1.1 shows PBG’s business units across the
United States.

Picture 1.1

Source: Pepsi Bottling Group website

Moreover, PBG is able to retain it’s market share because of it’s powerful brand loyalty. Their
products include Pepsi-Cola, Diet Pepsi, Pepsi MAX, Pepsi Lime, Wild Cherry Pepsi, Mountain
Dew, Diet Mountain Dew, Sierra Mist, Sierra Mist Free, Sierra Mist Squeeze, Aquafina, Propel,
Life Water, Tropicana Pink Lemonade, Dole Juices, Lipton Teas, SoBe, Starbucks products,
Gatorade G2, Amp, and several others. Chances are, you’ve tasted, seen, or at least heard of all
of those brands. Many soft drink beverage drinkers are either Coca-Cola people or Pepsi-Cola
people, and it is evident in the strong branding and marketing. This is one element that PBG has
on it’s side and it makes it difficult for competing bottling companies to come in and steal
market share when they already have such a dominant position in the eyes of the consumer.

These two factors of brand loyalty and economies of scale allow PBG to have large costs
advantages. Since they already have so many plants and distribution centers, PBG is more
readily available to quickly manufacture and distribute their soda than other potential
competitors. They have accumulated much experience in altering key processes and production
that would be new relative to the entrants. Being such a large company with a popular name and
convenient cost reductions due to mass production, they are already locked into many contracts
and positions that allow them to have a stronghold over certain market areas. This makes it
extremely difficult to penetrate the market as a new entrant and expect to immediately gain and
retain market share.

Industry Rivalry
While the industry may be highly consolidated, with Pepsi, Coca Cola, and Dr. Pepper Snapple
Group accounting for more than 70% of the market volume, it stays fairly competitive. The
large players and the smaller competing bottlers all undertake aggressive marketing and
advertising in attempts to sway consumers and chip away at the lead their competitors might
have. Graph 1.1 is the market share for the carbonated soft drink industry:

Graph 1.1

50

40

30

20 Com pany
10

0
Coca Cola Pepsi Dr. Pepper Others
Snapple

Source: Datamonitor Industry Profile on Carbonated Soft Drinks in the United States
The demand is high for the popular brands and there are fairly high fixed costs and fairly high
exit barriers in this industry. Nevertheless, since the larger players can secure certain segments
of the market, there is considered to be a moderate level of rivalry in this market.

Bargaining Power of Buyers and Suppliers

If you view this industry from the carbonated soft drinks side, you would consider the bottling
companies and retailers as the buyers and the producers of packaging, soft drink ingredients and
other raw materials as the suppliers. Buyer power is reduced to a medium level due to the heavy
marketing and advertising and brand loyalty. Supplier power for the market has increased over
years due to the heavy consolidation and highly concentrated advertising. However, overall
supplier power remains at a moderate level since most of the inputs are still readily available.

Substitutes
In the bottling and soft drinks industry, there are many substitutes from other companies that can
also satisfy customer needs. A clear example would be someone switching from Coca Cola to
Pepsi, with virtually no switching cost involved. Thus, to remain a dominant player in the
market, bottling companies must offer a very diversified array of products that can fill each niche
successfully. This is what PBG has been able to do with offering not only carbonated drinks
such as Pepsi and Mountain Dew, but also supplying Gatorade G2, Cole juices, Lipton teas, etc.
Furthermore, being able to aggressively market and advertise their products and leaning on their
exclusive brand loyalty, PBG is able to combat the threat of substitutes.

Overall Nature of Competition

PBG operates in an extremely consolidated industry that has a moderate level of competition.
There are high barriers to entry and they do not feel the risk of potential entrants stealing market
share from them. This is mostly due to the fact of their large scale of production and brand
loyalty. Marketing and advertising play large roles as they are tools used to sway market share
away from the other top players in the industry.
Are any changes taking place in the environment that might have an impact, positive and
negative, on the industry in which your company is based? If so, what are these
changes, and how might they affect the industry?

Changes in the Environment

A key issue that has been identified with the soft drink industry over the past few years is the
health concerns related with carbonated drinks. Sales volume of carbonated soft drinks began to
decline a couple years back when health problems, such as obesity, increased in the United
States and other countries. This is due to the fact that soft drinks have been criticized for their
high level of sugar and caloric content. This caused all of the bottling companies to remove all
sweetened soft drinks from high schools to reduce the intake of unhealthy substances during
school. They did however replace their own products with alternatives so that they would not
lose school sales while still saving their brand value. This negative issue also caused PBG and
the other bottling companies to diversify their product range to offer more healthy products.

Another recent concern for the industry, as it was for many industries, was the volatile fuel
prices. Being a large distribution company that operates with over 38,300 delivery vehicles, the
fuel price increases had a direct impact on PBG and other competitors. Since the market
competes on price, PBG and other companies may not be able to pass these operating cost
increases onto the customers and will have to take a hit to revenue margins. This concern is
something that will have to be closely watched in the years to come in the industry.

1. Identify any strategic groups that might exist in the industry. How does the
intensity of competition differ across these strategic groups?

Strategic Groups
Strategic groups would not necessarily play a role in PBG’s industry. While PBG and Coca Cola
and other companies are very similar in the business model and their strategies, they are not
completely separate from other bottling companies because the processes to be successful in the
industry are all pretty similar. The competition exists either way, and the notion of strategic
groups isn’t really considered here.
How dynamic is the industry in which your company is based? Is there any evidence that
innovation is reshaping competition or has done so in the recent past?

Innovation in the Industry

This industry is fairly dynamic and has seen some innovation in the past years that have
increased competition and created many different products and product niches. Two such areas
are the energy segment the enhanced water segment.

The past few years have seen dramatic expansion in the area of bottled water with the creation of
enhanced water products on the market. Due to health concerns discussed above, bottled water
is one of the fastest growing segments in the consumer goods market today. Such enhanced
water products include Vitaman Water, Life Water, Smart Water, etc. Coke’s recent acquisition
of Vitaman Water in the past 2 years has proven to be tough competition for PBG’s product, Life
Water. The introduction of this type of bottled water has made the players have to either
innovate or acquire other bottlers so that they can fill the certain niches and remain competitive.
The fact that the bottled water industry has grown from a value of 15.6 billion in 2006 to a
staggering 23.2 billion forecasted for 2011, this innovative segment of the market has proven that
it has reshaped the competition from what it was in the past.

Energy drinks have also made a large impact on the bottling industry. In 2006 alone, the U.S.
beverages market saw an additional 200 new energy drink products. Despite health concerns due
to a large amount of sugar and caffeine, the drinks remain popular among younger demographics
that use them as a stimulant.

In what stage of its life cycle is the industry in which your company is based? What are the
implications of this for the intensity of competition both now and in the future?

Stage in the Industry Life Cycle

The industry life cycle takes into account the changes in competitive forces and how an industry
evolves over time, and is classified into five distinct stages: embryonic, growth, shakeout,
mature, and decline. Since this industry has existed for many years, is highly consolidated, and
competition is based on market share, the carbonated soft drink and bottling industry would be
considered to be in the mature stage of the life cycle.

The implications for this are fairly straightforward: maintain your market share, fight to control
more, and keep your industry alive and steady to continually generate revenue in the future.
Hopefully, if PBG and other top competitors can maintain these goals, their industry will not
take a downturn in the decline stage. Competition for the future should remain fairly similar to
how it is now, with firms competing for market share and aggressively marketing and advertising
their products.

Is your company based in an industry that is becoming more global? If so, what are the
implications of this change for competitive intensity?

Going Global
Competition in this industry is global. If Coca Cola and other competitors operate
internationally, then so must PBG. As stated above, you can find Pepsi and other PBG products
all over the world. PBG operates all over the United States as well as in Canada, Greece,
Mexico, Russia, Spain and Turkey. With over 100 plants and 545 distribution centers
worldwide, they have been able to stretch their revenues around the globe. Chart 1.1 shows the
total revenue spread according to geographical location in the world.

Chart 1.1

Revenue Analysis
Geographical Market % Total Revenues
US and Canada 76.1%
Europe 13.7%
Mexico 10.2%
Total 100.0%

Source: Datamonitor Company Profile on the Pepsi Bottling Group, Inc.

Also, PBG has recently merged with PepsiCo, Inc., which is one of the world’s largest consumer
goods companies. This will allow the companies to consolidate the North American segment
and expedite the decision making process and eliminate friction points. They will be able to
offer more compelling bundles and offer better cost benefits that will spur investments. They
will be able to better distribute across nations and be more flexible while also reducing redundant
costs involved with large scale production.

Sources:
Datamonitor, (2009). Carbonated Soft Drinks in the United States [industry profile]. Retrieved
from OneSource Global Database.
Datamonitor., (2009). Pepsi Bottling Group, Inc., The [company profile]. Retrieved from
OneSource Global Database.
Hoovers, (2009). Various in-depth databases. Retrieved August 26, 2009 from the UF Business
Library.
OneSource, (2009). Various in-depth databases. Retrieved August 26, 2009 from the UF
Business Library
Various Information. Retrieved August 26, 2009 from the Pepsi Bottling Group, Inc. corporate
website. http://www.pbg.com/about/facilities.html