According two firms have been on the market

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According two firms have been on the market

According
to the article, the concentrate producers blend raw ingredients, package the
mixture and then ship it to the bottling firms; and the bottling firms, they
purchase the concentrate and then add sugar, carbonated water and so on; what’s
more, the bottling firms’ cost to produce is much higher than concentrate
producers. From this information, it is safe to say that the fundamental
difference between the concentrate producer and bottler is the added value, and
concentrate producer has a better competitive advantage comparing to bottling
firms. Concentrate producers spend massive money on advertising, promotion and
marketing, indicating that their added value mainly comes from branded products
themselves. For bottling companies, their added value is comparably less because
it mostly comes from consumers, retailers with the concentrate products. To
better strengthen my belief, I will apply the five forces model to better
illustrate.

In
terms of barriers to entry, we know that soft drink industry is oligopoly,
meaning that there are only few large firms in the industry and they are
interdependent. In this case, the barriers to entry is very high. Firstly, the
importance of brand name (reputation) is very high to both Coke and Pepsi, and
they usually offer funds for marketing and other purpose to the retailers in
order to gain more shelf space. Secondly, the two firms have been on the market
for a long time and it is for sure that they each built their customer base and
gained customers’ loyalty. Thirdly, the direct marketing expense for concentrate
producers and bottlers takes 21% and 10% of net sales. What’s more, the shelf
space, vending slots and so on are all limited in the market and are largely
taken by the two firms. These factors all contribute to the difficulty for new
firms to enter the market.

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In
terms of bargaining power of suppliers, it is very weak for mainly two reasons:
first, the cost of the raw ingredients is very cheap (suppliers cannot be price
setters); and second, Coke and Pepsi both have their secret recipes which particularly
adds much more value to the products.

In
terms of bargaining power of buyers, from the article, we know that the
channels for soft drink are primarily supermarkets, convenience stores, food
stores, mass retailers and so on. And the profits are variable for each different
channel. For example, for food chain has a strong bargain power because of the
precious shelf space which both firm are competing for.

In
terms of threat of substitutes, even though there are already numerous
available substitutes on the market such as tea and water, but comparing to
concentrate producers, they are less widely known because of less spending on
marketing and advertising. What’s more, concentrate producers have relatively
more differentiated products and people are more likely to become addicted to
them.

Last
but not least, in terms of rivalry among existing competitors, it is very
limited because there is no or little price competition on concentrates between
Coke and Pepsi. Instead they are mainly competing on shelf space, improving
brand names and differentiating their products.

 

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