Cola wars: competition and market dynamics

Business

Cola Wars

The product that has given the world the most well-known taste was born in Atlanta, Georgia, on May 8, 1886. Dr. John Stith Pemberton, a local pharmacist, produced the syrup for Coca-Cola by accident. He then carried a jug of the new product down the street to Jacobs' Pharmacy, where it was sampled and pronounced excellent. It was placed on sale for five cents a glass as a soda fountain drink. Carbonated water was teamed with the new syrup to produce a drink that was at once known as delicious and refreshing. This theme continues to be heard today wherever Coca-Cola is enjoyed (the Chronicle of Coca-Cola, 2009).

Thinking that the two Cs would look good in advertisements, Dr. Pemberton's partner and bookkeeper suggested the name Coca-Cola and penned the now famous trademark in his unique script. The first newspaper ad for Coca-Cola appeared in the Atlanta Journal. It invited thirsty citizens to try the new and popular soda fountain drink. Hand painted signs reading Coca-Cola appeared on store awnings informing passersby's that the new beverage was for soda fountain refreshment. During the first year, sales of Coca-Cola averaged a modest nine drinks per day. Dr. Pemberton never realized the potential of the beverage he had created. He gradually sold portions of his business to various partners and, just prior to his death in 1888, he sold his remaining interest in Coca-Cola to Asa G. Candler (the Chronicle of Coca-Cola, 2009).

In 1889, Asa Candler published a full-page advertisement in the Atlanta Journal, announcing his wholesale and retail drug business as the sole proprietors of Coca-Cola. He claimed that it was delicious, refreshing. Exhilarating, and invigorating. Sole ownership cost a total of $2,300. By 1892, Mr. Candler's talent for merchandising had boosted sales of Coca-Cola syrup nearly tenfold. He soon closed his pharmaceutical business and focused his full attention on the promotion of the soft drink. Together with his brother, John Pemberton's former partner Frank Robinson and two other people, Mr. Candler formed a Georgia corporation known as the Coca-Cola Company. Initial capitalization was $100,000 (the Chronicle of Coca-Cola, 2009).

The trademark of Coca-Cola has been used in the marketplace since 1886. It was registered in the United States Patent Office on January 31, 1893. This was the same year the first dividend was paid. It was $20 per share which amounted to 20% of the book value of a share of stock. As demand for Coca-Cola grew, the Company quickly outgrew its facilities. A new building was built in 1898. It was the first headquarters building devoted exclusively to the production of syrup and the management of the business. Mr. Candler considered the new, three-story structure as sufficient for all our needs for all time to come (the Chronicle of Coca-Cola, 2009).

The expression soft drink is derived from the phrase soda water. It dates back to 1798. During that time, soft drink creation and soda fountain manufacturing were handled by local pharmacists because of their experience with chemistry and medicine. It was in 1835 that the first bottled soda water was produced in the United States. As the local drugstore evolved into the central attraction in most American towns and neighborhoods, the pharmacist was integral in providing beverages that were part pharmacology and part refreshment (Soft Drinks & Diet Soft Drinks, 2009).

In 1876, root beer entered the marketplace, but it wasn't until five years later that the first cola-flavored beverage was unveiled. It wasn't until 70 years later that the first official diet soft drink was introduced. In 1958, RC Cola introduced Diet Rite into the market. This was the first nationally distributed diet soft drink. Tab, Fresca and Diet Pepsi came on the scene in the 1960s. Sugar-free 7UP was introduced in 1970 and Diet Coke made its debut in 1982. According to Beverage Digest, in the year 2006 the U.S. carbonated soft drink market totaled 10.16 billion cases (Soft Drinks & Diet Soft Drinks, 2009).

The North American Industry Classification System (NAICS) is the standard used by Federal statistical agencies in order to classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy. Coca-Cola is categorized as soft drink manufacturing, which is SIC code 2086 and NACIS code 31211. The soft drink manufacturing industry is made up of establishments that are primarily engaged in manufacturing soft drinks and artificially carbonated waters (North American Industry Classification System (NAICS), 2008).

The Porter's Five Forces Model is an outside-in business unit strategy tool that is used to make an analysis of the attractiveness or value of an industry structure. The Competitive Forces analysis is made by the identification of 5 fundamental competitive forces:

The entry of competitors - how easy or difficult is it for new entrants to start to compete and what barriers exist?

The threat of substitutes - how easy can the product or service be substituted for something cheaper?

The bargaining power of buyers - how strong is the position of buyers and can they work together to order large volumes?

The bargaining power of suppliers - how strong is the position of sellers and are there a lot of potential suppliers?

The rivalry that exists among the current players - is there a strong competition between the existing players? Is there any one player that dominates or all equal in strength or size (Five Competitive Forces model Porter, 2009)?

When looking at Porter's competitive forces in regards to the soft drink industry it is easy to see that it is very easy for a new company to begin competing in the industry. There aren't any real barriers to the industry that would make entering it difficult. The easier that it is to enter a market, the lower the profit potential tends to be. In regards to the threat of substitutes in the industry there are a few that would need to be contended with. These substitutes would include water, fruit juices and sports drinks. It has been found that the more substitutes that are available the lower the profitability will tend to be. In the soft drink industry there are quite a few large customers and because of this these customers often have influence on what a company can charge for a product. In regards to the bargaining power of the suppliers in the soft drink industry their influence tends to be low. In industries where the suppliers have low bargaining power the profits tend to be higher. Because of the number of competitors that are in the soft drink industry there are many rivalries going on. There is a very strong competition that goes on among the industry leaders. It has been found that the more competitors there are, the lower the profitability there tends to be in the industry.

In the soft drink industry four of Porter's five competitive factors tend to contribute to low profitability within the industry. If you look at all of the factors and their influences it would be easy to conclude that the soft drink industry is a low profitability industry overall and maybe not one that new competitors would want to join. Having large competitors within an industry makes it very hard for new companies to enter and make any money.

In doing the company analysis I looked at the Coca-Cola Company in regards to their Strengths, Weaknesses, Opportunities, and Threats (SWOT). This company's best strength is their brand name recognition. Coca-Cola's brand name is known globally around the world. The influence of a good brand name is very important asset to a business. Another strength that Coca-Cola has is that of its structured bottling system. All bottling partners work closely with customers such as grocery stores, restaurants, street vendors, convenience stores, movie theaters and amusement parks, in order to execute localized strategies developed in partnership with the Company. These customers then sell the products to consumers at a rate of 1.5 billion servings a day (the Chronicle of Coca-Cola, 2009).

The weaknesses of the Coca-Cola Company in the eyes of their management include having a lack of bench strength, and in the classic definition of the bench, it's the reserves. They feel that this is one area in which they need to improve. They also feel that they have lost their growth engine and that they need to work on turning that back on. They have been very affected by the layoffs that have taken place throughout the company. Management feels that the layoffs have broken the trust that used to exist within the organization around having a lifetime career. It is felt that this has had an immense impact on the people and the level of trust that they have in the company (Interview with Coke CEO Isdell, 2004).

The opportunities that exist for the Coca-Cola Company include manufacturing and promoting healthy drinks, purified water and new product lines. They have the potential to pick up new customers by releasing new products. Once the customers are satisfied and hooked on the new products they can use their superior operation management and logistics system to provide their products around the world. Increasing their product lines with good products will increase their sales around the world.

The biggest threat that Coca-Cola faces is the intense competition that exists within the industry. Coca-Cola has three main competitors, these being: PepsiCo, Cadbury Schweppes, and the Cott Corporation. All of these companies have products that compete with Coca-Cola products around the world. The competition between Coca-Cola and Pepsi has dominated the industry for more than a century. Both companies have participated in fierce marketing campaigns along with much sponsorship. Trying to stay a step ahead of Pepsi has been a long concern for the Coca-Cola Company and doesn't seem to be letting up anytime soon.

In the financial analysis, I compared Coca-Cola with their three main competitors in the areas of Return on Assets (ROA), Current Ratio, and Debt to Asset Ratio and Inventory Turnover from 2006 to 2008. In looking at the ROA ratio (Ex.1), it can be seen that Coca-Cola's return on assets has remained relatively steady over the three-year period. Pepsi's ROA dropped slightly over the three-year period, while both Cadbury Schweppes and Cott dropped dramatically.

In looking at the current ratios of the four companies (Ex. 2), Coca-Cola's ratio has increased slightly over the three-year period. Pepsi's current ratio was steady the first two years of the period but then dropped slightly in 2008. Cadbury Schweppes ratio remained constant over the three-year period while the Cott Corp decreased slightly in the last year.

Ex. 3 shows the debt to asset ratios for all four companies. Coca-Cola's debt to asset ratio increased from 2006 to 2007 and then remained steady in 2008. Pepsi's ratio was steady in 2006 and 2007 and then increased in 2008. The debt to asset ratio for Cadbury Schweppes decreased from 2006 to 2007 but then rebounded nicely in 2008. The Cott Corporation's level was steady in 2006 and 2007 and then increased slightly in 2008.

The Inventory Turnover ratios for all four companies can be seen in Ex. 4. Coca-Cola's ratio dropped from 2006 to 2007 and then remained steady. Pepsi's inventory turnover ratio dropped from 2006 to 2007 and then remained steady in 2008. Cadbury Schweppes ratio dropped drastically from 2006 to 2007 and then rebounded slightly in 2008. The Cott Corporation's ratio remained steady over the entire three-year period showing their stability.

After looking at all three analysis surrounding Coca-Cola and the soft drink industry there are several recommendations that can be made. An immediate concern that Coca-Cola is facing is the ever growing concern with nutrition and healthy eating. Because of this push there has been a concern raised that soft drinks are unhealthy and not good for you. This thinking has caused some downfall in the sales of carbonated soft drinks. A recommendation for Coca-Cola would be to focus their immediate attention on their non-carbonated product lines. These would include juices, teas and sports drinks. Taking advantage of the ever growing market for sport industry is a great way for Coca-Cola to promote their sport drink line. Acquiring sponsorships in the sports arena will allow them to increase the promotion of their products through various mass medias.