Sandrine Heller GB410-011 Question: Using your knowledge of industry structure (Porter’s five forces) please compare the industry structure of the concentrate producers to the industry structure of the bottlers – which one is more attractive – why? Bottlers Industry Threat of new entrants (barriers): - High startup cost (CAPEX) - Sunk cost in machinery purchased (it cannot be used for anything else than bottling) - Existing relationships and contracts - Monopolistic competition (Pepsi and coke have their own bottling franchises) - Loyalty to concentrate industry The Power of suppliers: - Raw Material is a commodity (cans and glass) The Power of buyers: - Low profitability so lower power (Exhibit 4 shows gross profit per case is only 42% of net sales compared to 78% in concentrate industry) - More power if they buy large volumes from bottlers Substitutes: - No Substitutes Rivalry among existing firms: - Franchise agreements where bottlers are not allowed to produce products of competitors Concentrate Industry - - Low Capex Oligopoly industry (threat of retaliation) Relationships that already exist in industry (agreements and contracts) Retail Shelf Space (Pepsi and Coke can offer a significant margin that newcomers won’t be able to match) Brand loyalty - Raw Material is a commodity (Sugar, caffeine, additives, etc.) - Pepsi and Coke have vertically integrated into the bottler market (who are the ones buying from them) So they have less power Individual consumers have no power Large customers who buy in volume such as supermarkets have more power - - Non CSD (water, juices, etc.) Consumption of water has been rising at 5% over the years whereas CSD has had negative growth rates (Exhibit 7) - Long lasting rivalry between Pepsi and Coke. They have been fighting for largest market share and try and win over contracts from competitor The bottler industry, although there is a large entrance cost, is more attractive for new entrants since there is not an oligopoly, however it does not provide a high profit margin (8%). The threat to entry for the concentrate industry is low since the barriers to new entrants are very high. For the bottler industry it seems that the threat is slightly higher bur still low, since it is not completely dominated by two firms. However, since the cost to entry is relatively high, it will keep the threat low. Coke and Pepsi are so well known in their industry that it is almost impossible to start new since they will likely retaliate and lower their prices to make your product not worth buying for customers. Even a new company enters the industry it seems from past experience that they will buy the new company and add it to their huge collection of brands. In the bottler industry at least there is some chance of entering but there is a very high risk of sunk cost with the initial startup cost.
