The soft drink industry has show to be very profitable and that is basically due for the two major competitors, Coke and Pepsi. The best way to analyse why this industry has been profitable, is by using Porter’s 5 forces framework consisting of the threats of new entrants, bargaining power of supplier, buyers, threat of substitutes and the rivalry among exiting competitors (Hitt, Ireland, & Hoskisson, 2015). To understand this, we will start with the first aspect of the framework:
Threat of new entrants:
The threat of new entrants is basically non-existent for a simple reason, Coke and Pepsi constantly invest large amount of money in advertising and marketing, keeping them with high market share. For any possible entrant, it will be almost impossible to overcome this costs on marketing and advertising to even gain some part of the market share in the industry. Additionally, Coke and Pepsi are basically in power of Bottlers “given them rights to certain geographic are in perpetuity” (Yoffie & Kim, 2011). With most of the companies acquired by this two, it is very unlikely a bottler will consider distributing from a new entrant.
Threat of new of substitutes:
The soft drink industry is one with many substitutes, with products such as energy drinks,
Sports drinks, bottled water, juice-drinks and tea-based drinks. Having all this substitution have caused that the Carbonated Soda drink (CSD) consumption decreased, as per results in 2009 showing CSD accounted for 63% down from 81% in 2000 (Yoffie & Kim, 2011). Nevertheless, for substitutes to keep up with CSD consumption, a lot need to happen and even if there is some sort of catch up, Coke and Pepsi already have diversified their portfolio by acquiring many companies that are part of this substitutes.
Bargaining Power of Buyers:
Exhibit 6 shows that the Soft Drink Industry has for major channels of retailing: Supermarkets, vending machines and mass retailers (Yoffie & Kim, 2011). Considering supermarkets, the only true power they have is the option of shelf space for the drinks, other than that basically the have lack of bargaining power, plus it is complete overcome with the strong position that Pepsi and Coke have. Mass merchandisers represent a less favourable buyer for this industry as they represent high margins of consumption in comparison to supermarkets. In the case of vending machines, these represent no buying power (no actual buyer)
Bargaining Power of Suppliers
The main concept in this section is the fact that the bargain power of suppliers is weak. Ingredients to produce CSD is mainly sugar. Since this is available constantly, there is no dependency in particularity one supplier, additionally both companies have used corn syrup or stevia sweetener on their products before, leaving them with many more choices of suppliers (Yoffie & Kim, 2011) , plus Coke and Pepsi can easily negotiate agreements of price since they have very strong market share.
The reason why the soft drink industry has been profitable is basically due to how this two companies have arranged to have a strong power over the years leaving a minimal possibility for competitors to change the market scenario that this industry has.