1. Why is the soft drink industry so profitable ?
Michael Porters 5 force analysis:
The threat of substitute products:
The entire US Liquid Consumption Trend has grown 34% between 1970 and 2000. CSD consumption trend has increased from 22.7gallons/capita in 1970 to 53gallons/capita in 2000, a rise of 133%.
Compare this to figures for substitutes: Beer ? 2% decline and Coffee ? 53% decline
The threat of the entry of new competitors:
Combined market share of Pepsi and Coke= 76%.
Initial capital investment high:
1) Concentrate production ? approx $25m-$50m
2) Bottling - $25m - $35m for one plant. And roughly 80-85 plants required for full distribution across US.
Aggressive spending by the two big players on their trademarks over time, with innovative and sophisticated marketing campaigns, market research and product planning leaves very little scope for the other players.
Quantifying the same, Pepsi Cola and Coca-Cola spent a combined total of $240m in 1999 and $337m in 2000(Exhibit 2). This means that a new entrant would have to spend a very large amount to create its own brand presence.
The intensity of competitive rivalry
The two biggest players in the soft-drink industry have been Coca-Cola and Pepsi Cola
1) Total advertising spending for Coca-Cola = $207.3 m and Pepsi = $130. Amount paid by bottler = atleast 50% in each case.
2) DSD ? managing shelf space by stacking the product, positioning the trademark label, cleaning packages and shelves and setting up point-of-purchase displays and end-of-aisle displays.
3) Main distribution channels : food stores(35%), fountain outlets(23%), vending machines(14%), convenience stores(9%) and other outlets(20%).
4) Spending in development of fount ...