Bottling industry five forces analysis

1. If vertical integration and consolidation happened between the concentrate producers and bottlers:

benefits of Vertical Integration:

· negotiate directly with retailers

· distribution method

· new brands to the market

· cut costs

Vertical integration is where the supply chain of a company is owned by that company. its also described , management styles that bring large portions of the supply chain not only under common ownership , but also into one cooperation

Possible Reasons for Vertical Integration:

· With the decrease in the number of bottler’s from 2000 in 1970 to less than 300 in 2000, the concentrate producers were concerned about the bottler’s clout and started acquiring stakes in the bottling business.

· They could offer attractive packaging to the end consumer.

· To preempt new competition from entering business if they control the bottling.

A. how would that change the industry attractiveness (5 forces)

in this question A) its all about positioning:

- To identify an attractive industry (with a favorable configuration of the five forces)

- To identify an attractive position within a given industry (a position with a favorable configuration of the five forces compared to other position within that industry)

CSD industry :

Barry to entry Brand Equity: High

$234 million spent on advertising This makes it extremely difficult for an entrant to compete with the incumbents and gain any visibility,

Retailer Shelf Space (Retail Distribution): Retailers enjoy significant margins of 15-20% on these soft drinks for the shelf space they offer. These margins are quite significant for their bottom-line. This makes it tough for the new entrants to convince retailers to carry/substitute their new products for Coke and Pepsi.

bottling and canning lines cost from $4m to $10m each , the cost of large plant with multiple lines and automated warehousing , could reach hundred of millions of Dollar , To enter into a market with entrenched rival behemoths like Pepsi and Coke is not easy as it could lead to price wars which affect the newcomer, Government regulation

Substitutes: High

Threat from substitute products are probably second in importance to the cola industry only to the rivalry among established firms: coffee cafes, tap water, milkshakes, fruit juice, hot tea, hot chocolate, chocolate milk and so on

Rivalry: high (VERY IMPORTANT: IF THERE IS NO PRICE WAR, THEN RIVALRY SHOULD BE LOW OR MODERATE NOT HIGH)

Industry is largely consolidated with two major players dominate 72% of market share and a few smaller competitors like Cadbury Schweppes, making the companies interdependent , Pepsi and Coke mainly over the years competed on differentiation and advertising rather than on pricing except for a period in the 1990’s.

Bargaining Power of Buyers:Low

Bottlers own a manufacturing and sales operation in an exclusive geographic territory, with rights granted in perpetuity by the franchiser, subject to termination only in the event of default by the bottler, Bottlers are locked into contracts that grant CPs the right to set prices and other terms of sale ,

Bargaining Power of Suppliers:low

Concentrate producers (CPs) negotiate directly with bottlers’ major suppliers – particularly sweetener and packaging suppliers – to encourage reliable supply, faster delivery, and lower prices ƒ Coca-Cola and Pepsi are among the metal can industry’s largest customers and maintain relationships with more than one supplier, giving these suppliers less bargaining power due to the availability of alternative suppliers ƒ Metal cans make up the majority of the bottlers’ packaged product (60%), followed by plastic bottles (38%) and glass bottles (2%) Commodity Ingredients: Most of the raw materials needed to produce concentrate are basic commodities like Color, flavor, caffeine or additives, sugar, packaging. Essentially these are basic commodities. The producers of these products have no power over the pricing hence the suppliers in this industry are weak.

Bottling Industry:

This has changed in the 1990s and after as we see now about 400 bottling companies in the market, too many companies exited the market due to the high fixed cost required to start this business, this led to a high entry barrier in the current time.

Due to the high fixed cost related to the machinery used for bottling the exit barriers also was high which led to high rivalry between bottlers.

Unlike CPs, bottlers face a high bargaining power of buyers as the retailers require incentives and promotions to display the soft drinks in the appropriate premium shelves. The bottlers have a good relationship with the CPs as their suppliers, sometimes the CPs pay part of the advertising and promotion costs, and CPs work closely to improve and develop the bottlers.

The substitute products wasn’t a threat to bottling companies as basically there was no substitute to the bottlers to bring the soft drinks to the market. To compare the economics of CPs and bottlers, we could say that bottlers incur higher fixed cost than the CPs as the machinery required is much expensive, the major cost for the CPs is for advertising and promotion activities.

B. what are the weaknesses in the 5 forces *** Its in week 2 slides in BB 33-38

in b) we need to talk about Weaknesses: Complementors, Industry Life Cycle Analysis, Macro Analysis, Firm Distinctive competitiveness.