Why, historically, has the soft drink industry been so profitable?
The soft drink industry has been a profitable one in spite of the “cola wars” between the two largest players.
Asanalysis using Porter’s five forces shows why the soft drink industry has been so profitable.
Suppliers and buyers have not had more power over the industry than it has had over them.
Internalrivalry, while seeming intense, has not eroded the profitability of the industry because of its concentration and the fact that the two major players have primarily competed on the basis of advertising andpromotion and not price. Entry is difficult both for reasons of scale and the strong brand identity of the current major players. Substitutes have not been close enough to take away significantmarket share, although the emergence of new substitutes may pose the largest threat to the industry’s profitability.
How has the competition between Coke and Pepsi affected the industry's profits?During the 1960’s and 1970’s Coke and Pepsi concentrated on a differentiation and advertising strategy. The Pepsi Challenge was a prime example of this strategy where blind taste tests were hosted byPepsi in order to differentiate itself as a better tasting product from Coke.
However during the early 1990’s bottler’s of Coke and Pepsi employed low priced strategies in the supermarket channel inorder to compete with store brands, This had a negative effect on the profitability of the bottlers. Net profit as a percentage of sales for bottlers during this period was in the low single digits. Pepsi and Coke were however able to maintain the profitability through sustained growth in Frito Lay and International sales respectively. The bottling companies however in the late 90’s decided toabandon the price war, which was not doing industry any good by raising the prices.
Coke was more successful internationally compared to Pepsi due to its early lead as Pepsi had failed to concentrate...