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Five-Force Analysis for Cola

By:   •  Case Study  •  677 Words  •  April 27, 2011  •  870 Views

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Five-Force Analysis for Cola

Five-force analysis for Cola

Bargaining Power of Suppliers

Like many other Carbonated Soft Drinks (CSD), Cola consisted of a flavor base, a sweetener, and carbonated water. Consequently, major inputs for Coke and Pepsi's products were sweetener and packaging. As they are not unique products, suppliers didn't have bargaining power. Coke and Pepsi can simply switch to other suppliers if the price is high. Often, two or three can manufacturers competed for a single contract. As Coke and Pepsi were among the metal can industry's largest customers they could take advantage of it. Moreover, Coke and Pepsi cleverly negotiated on behalf of their bottling networks to reduce the price.

Bargaining Power of buyers

The distribution of CSDs in the United States took place through supermarkets, fountain outlets, vending machines, mass merchandisers, convenience stores and gas stations. The main distribution channel was the supermarket. Bottlers fought for shelf space to ensure visibility for their products. The mass merchandiser like such as Wal-Mart had more bargaining power because of their scale. Competition for the fountain accounts was intense so CSD companies frequently sacrificed profitability. To support the fountain channel, both Coke and Pepsi invested in the development of service dispensers and other equipment and provided fountain customers with cups, and point-of-sale advertising as well. Vending was the most profitable channel according to Exhibit 6. Coke and Pepsi bottlers could simply sell products to consumers through machines.

Threat of New Entrants

It would be very hard for a new concentrate producer or a new bottler to enter the industry. First of all new entrants have to invest a substantial amount of money. For concentrate producer, the investment is not that burdensome as a typical concentrate manufacturing plant cost about $25 million to $50 million to build, and one plant could serve the entire United States. However, in case of bottlers, the cost of a large plant was about $75 million in 2005 and 100 plants are needed to provide effective nationwide distribution. The investment problem must be a huge barrier for entrants. Moreover, new entrants would not have much bargaining power when it comes to making a deal with retailers. In other words, they cannot expect much profitability from the business in the beginning. Not only that, Coke or other powerful existing player might exert pressure on retailers so that retailers don't give a favorable position to new entrants. Moreover, it would be so hard for new entrants to persuade consumers to buy their products. A considerable

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