1. Despite the inextricable coordination between concentrate producers and bottlers, having been analysed through Porter’s competitive forces, they have shared not only similarities but also differences, which subsequently lead the concentrate business to be highly profitable compared to bottlers.
New entrants: In spite of the low capital requirement for entry to the concentrate industry, new entrants would need an immense amount of capital investment to overcome the marketing and pricing wars of existing established brands. Moreover, due to the franchisee agreement with bottlers, it would make new concentrate manufacturers more difficult to find effective distribution channels. On the other hand, the bottling industry requires intensive investment in its high-cost specialised machinery to lower the variable costs through economies of scale. Besides, the strong relationship between existing bottlers and regional retailers is one of the biggest barriers deterring new bottlers to enter the industry.
Suppliers: As concentrate producers require basic commodities for which there are a large number of suppliers with low switching costs, concentrate suppliers have less bargaining power over pricing. In contrast, suppliers of bottlers are established concentrate producers. With fewer active concentrate producers compared to bottlers and more value-added brand of concentrate producers, bottlers who have no branded value would have no negotiation power to their contracts with concentrate manufacturers
Buyers: Since concentrate and bottling businesses share their promotional and advertising costs, they try to increase the sales in retail channels which have different bargaining power over them. While selling through vending does not experience any bargaining power because of its direct serve to customer, food store buyers, due to the limited visible premium space, have a significant bargaining power over concentrate and bottling companies by offering the lower price to them.
Rivalry: The concentrate industry structure can be categorized as duopoly competition between Coca-Cola and Pepsi-Cola since only two firms command more than 65.7% of the U.S. soft drink case market shares from 1985 onwards (Exhibit 2). The big two competed intensively to each other through advertising, differentiation and pricing over the years. On the other side, the structure of bottling industry is classified as the perfect competition due to the large number of competitive firms and the homogeneity of products, which cause firms in the industry employ pricing strategies to survive.
Substitutes: Owing to the growing health concern debates and low customer switching costs, it is undeniable that alternative beverages, sports drinks, juices, coffee, tea and mineral water, have been playing a substitute role for soft drinks at the time. Bottlers however face the less threat of substitutes. The only threat for bottlers is the sale through soda fountains, in which the concentrate producers can bypass the bottlers and supply directly to those outlets.
According to the competitive forces analysis and financial structure (Table A), it is not surprising that the whole industry is very profitable, and, especially high in concentrate business. Playing the supplier role for bottlers, who compete in a more competitive industry, concentrate producers have much more bargaining power in line with their valuable brands. Moreover, because of intensive investment in specialised equipment with high switching costs and specific materials like plastics and aluminium, bottlers’ operational costs are much higher in both fixed and variable costs while concentrate producers, who require lower costs, can emphasize on marketing and advertising competition and maintain their high margin of profits regardless of the fluctuation of commodity prices.
2. Initial competition between the two Cola giants was in the form of a pricing war. With Coke’s first mover advantage, which already