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Why Is the Soft Drink Industry So Profitable?

Essay by   •  November 4, 2012  •  Essay  •  787 Words (4 Pages)  •  2,609 Views

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The soft drink industry, dominated mainly by Coke and Pepsi, have been very profitable in the carbonated soft drink (CSD) and non carbonated soft drink industry in the United States initially and are now internationally recognized brands. Profits for the soft drink industry result from the introduction of non-cola CSDs, flavored and diet varieties and brand extension. An industry analysis and business strategy development framework can be prepared through Porter's five forces to prove the profitability as well as the attractiveness of the soft drink industry. This analysis can be carried out on the concentrate producers of the soft drink industry. The concentrate producers are responsible for blending raw material ingredients, packaging the mixture and shipping the containers to the bottlers. They also took the lead in product development, market research and advertising the products to the audience. The porter's five forces include; rivalry among existing competitors, threat of new entrants, bargaining power of suppliers, bargaining power of buyers, and threat of substitute product or services.

Rivalry among existing competitors:

The profits for a concentrate producer depend highly on the competition amongst the firms in the soft drink industry. The dominating companies, such as Coke and Pepsi, compete mainly based on the price and the brand image through advertising and promotion. The soft drink industry mainly focused on Coke and Pepsi can be characterized as a duopoly since both Coke and Pepsi combined have a large marker share leaving the rest with a low combined market share. Price wars, for example, in the 1990's between Coke and Pepsi resulted in the retail CSD prices to decline or remain flat. Resultantly, sales volume declined weakening brand loyalty and affecting profit margins for the soft drink industry with regards to Coke and Pepsi. A different approach that inclined Pepsi's profitability was through "The Pepsi Challenge" in Texas whereby Pepsi competed through attributes other than price. Moreover, firms in the soft drink industry compete with each other in the areas of advertising. For example, Coke started using messages such as "American's preferred taste" to the audience to recognize the existence of their competitors. Furthermore, between 1981 and 1984, both Coke and Pepsi more than doubled their advertising spending to attract more consumers. Finally, amongst the firms in the soft drink industry, product differentiation plays a role to a certain extent. For example, both Coke and Pepsi have very similar products such as Coke carries Fanta, Sprite and cola Tab, whilst Pepsi carries Mountain Dew, 7up, and diet Pepsi. Sprite and 7up, for example, taste very similar. If in the market the price of one is lower than the other, than despite the brand loyalty, consumers will switch between the brands as a result of price differentiation.

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