MAN 320F Lecture 7 Outline of Last Lecture I Exam 1 Review Outline of Current Lecture I Interesting facts II Pepsi Challenge Questions III Barriers to Entry IV Scale Economies in Advertising V Bottlers have little power VI Puzzle about Rivalry VII Rivalry VIII Key Barriers to Entry IX Summary Current Lecture I Interesting facts U S Consumers consume more CSD carbonated soft drinks than any other liquid Roughly 33 of all U S liquid consumption is CSD That s about the same amount as beer milk and bottled water combined Americans consume over 50 gallons per person per year Worldwide annual per capita consumption of CSD are 7 5 gallons that is for every man woman and child on the planet About 70 of Coke s sales and 80 of its profits come from outside the U S Coke has over 3 300 products sold in over 200 countries Perhaps the best known world brand II Pepsi Challenge Questions These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute How can companies that sell colored sugar water be so profitable for so long Brand recognition embedded in culture advertising campaigns the firms spend a lot of money on advertising If this is such a profitable industry why have so few firms entered this business over the last century Brand name recognition What are the barriers to entry Brand Areas of stores are committed to these brands already new brands wont have a place for them on the shelf coke is interchangeable name for sodas softdrinks Why cant great marketing companies such as P G see Exhibit 9 launch competitive products Brand recognition III Barriers to Entry Brand Equity Cumulative spending on advertising Part of the American Culture Limited Shelf Space vending slots and fountains Grocery stores dominated by Coca Cola Machines outside class are limited The franchise system bottling is very capital intensive with exclusive arrangements Cost up to 10 B to build national distribution Very expensive to get into distribution game Very costly to get into the game IV Scale Economies in Advertising Exhibit 8 bang for the buck Coke spent 15 million per share point Dr Pepper spent 19 per share point Gatorade spent 38 million per share point Mountain Dew seems to V Bottlers have little power High switching costs Franchise agreements locked bottlers into exclusive arrangements You cant buy coke product if you sign something with Pepsi and vice versa Hill country brand of soda is being made by maker in central texas not HEB Locked into long term contracts difficult to get out of Producer giving value helping with buying CPs offer significant benefits Buying power for cans sugar etc Marketing brand development You get much better purchasing power looking at it like an entire entity not single distributor Competitors are very concentrated and large In fact if you think of all diff manufacturers of soft drinks theres really only just a few VI Puzzle about Rivalry How can companies make so much money in the middle of a war Without a war no means to innovate make new flavors and create new things Constantly pushing to compete against each other They are always trying to out do each other They play off each other to some degree that s important to keeping them both viable countries How do they still make so much money theres so many people who drink sodas they continue to look for ways to reduce the coststhey compete on everything but one thing one thing they don t compete on price of concentrate focus on everything else lifestyle image branding but don t change price VII Rivalry two players with long history of interaction dominate the market yet avoid downward spiral seen in other industries VIII High degree of perceived differentiation Competition is focus on Shelf space Advertising lifestyle based and brand Selective discounting Diet drinks NOT on concentrate prices Who has won the cola wars Thru the 1960s Coke was the winner Who has lost Why Smaller brands o Historically they could piggyback on Coke bottler systems o Coke and Pepsi proliferate product offerings o Coke and Pepsi fill shelf space push small brands off the shelf o Industry is consolidating o Smaller brands sell to Cadbury now Dr Pepper and Snapple What have been the weapons of the war How do the economics of bottlers differ from the economics of Cps What was the logic of the franchise system Why for example did Coke and Pepsi use exclusive franchise agreements in the past Key Barriers to Entry excusive franchise agreements most important factor high capital investment in bottling and canning lines high investment in trucks distribution centers shelf space is limited Central Texas would be better The critical factor for bottlers is large drop sizes More traffic in NYC so higher delivery costs to thousands of small stores Versus large drops to HEB Walmart Target etc IX Summary To understand the strategy we have to look at the underlying economics for both Cp and bottler Coke and Pepsi did not inherit this business the created it they created their own rules Coke and Pepsi have determined the structure for all others Coke and Pepsi are smart competitors When they go to war they kill the bystanders not themselves Anyone new coming into market will have to play by those rules When you look at Coke and Pepsi they are smart not about killing eachother but killing everyone else in industry