Porter’s five forces model is a framework for the industry analysis and development of business strategy. Three (3) of Porter’s five (5) forces refers to rivalry from external/outside sources such as micro environment, macro environment and rest are internal threats. It draws ahead Industrial Organization economics to develop five forces that conclude the competitive intensity and consequently attractiveness of a market place or industry. Attractiveness in this framework refers to the generally overall industry profitability. An "unattractiveness" in industry is one in which the mixture of these five forces proceed to constrain behind overall profitability. An extremely unattractive industry would be one moving toward "pure competition", in which existing profits for all companies are moving down to zero.
The threat of the entry of new competitors
Advertising and Marketing
Soft drink industry needs huge amount of money to spend on advertisement and marketing. In 2000, Pepsi, Coke and their bottler’s invested approximately $2.58 billion. In 2000, the average advertisement expenditure per point of market share was $8.3 million. This makes it exceptionally hard for a new competitor to struggle with the current market and expand visibility.
Customer Loyalty/ Brand Image
Pepsi and Coke have been investing huge amount on advertisement and marketing throughout their existence. This has resulted in higher brand equity and strong loyal customers’ base all over the globe. Therefore, it becomes nearly unfeasible for a new comer to counterpart this level in soft drink industry.
This industry provides significant margins to retailers. For example, some retailers get 15-20% while others enjoy 20-30% margins. These margins are reasonably enough for retailers to entertain the existing players. This makes it very difficult for new players to persuade retailers to carry their new products or substitute products for Coke and Pepsi.
Fear of Retaliation
It is very difficult to enter into a market place where already well-established players are present such as Coke and Pepsi in this industry. So these players will not allow any new entrants to easily enter the market. They will give tough time to new entrants which could result into price wars, new product line, etc in order to influences the new comers.
In this industry manufacturers have franchise contracts with their presented bottler’s that have privileges in a definite geographic area in eternity such as both Pepsi and Coke have contracts with their presented bottler’s. These contracts forbid bottler’s from taking on new competing brands for similar products. Latest consolidation between the bottler’s and the backward integration with Coke buying considerable numbers of bottling firms, it makes very difficult for new player to contract with bottler’s agreeable to distribute their brands. The alternative is that new entrances build their bottling plants, which will need intense capital and exertion. Because in 2000 new bottling plant needs capital of $80 million.
The intensity of competitive rivalry
The industry is almost dominated by the Coke and Pepsi. This industry is well known as a Duopoly with Coke and Pepsi as the companies competing. These both players have the majority of the market share and rest of the players have very low market share. Otherwise; competition is comparatively low to result any turmoil of industry structure. Coke and Pepsi primarily are competing on advertising and differentiation rather than on pricing. This resulted in higher profits and disallowed a decline in profits. Pricing war is nevertheless experienced in their global expansion strategies.
Composition of Competitors
Except the Coke and Pepsi other competitors are of unequal size especially in local markets. Coke and Pepsi both players have the majority of the market share and rest of the players have very low market share.
Scope of Competition
Scope of competition in this industry is generally global; Coke and Pepsi are approximately presents in 200 countries.
Market Growth Rate
The soft drinks business will not see growth in near future, with the smoothie and bottled water sectors mainly hit by a decline in 2008, and across all sectors volume declined by 1.1 percent.
Fixed Storage Cost
This industry needs huge manufacturing plants and contracts with bottling network companies. These contracts make sure that bottler’s must have standard manufacturing plant; these plants need huge capital and exertion.
Degree of differentiation
Marketing and Product differentiation have become more significant. Coke and Pepsi mainly are competing on advertising and differentiation rather than on pricing. Coke has diverse advertisement campaigns according to conditions. Coca-Cola is recognized as the best-known brand name in the globe. More prominently, its consumers would not do without it, and have established a loyalty.
Coke’s core operation is the manufacturing and distribution both for itself and beneath franchise, of non-alcoholic beverages and related products. Because of the strategic stake the main brand of the Coke has been around for a lot of years.
The threat of substitute products
This industry is enriched with enormous statistics of substitutes such as: water, tea, beer, juices, coffee, etc presented to the end-consumers. But all the suppliers of these substitutes need massive advertising, brand equity, brand loyalty and making sure that their brands are effortlessly accessible to the consumers. Most of the substitutes cannot counterpart the existing players’ offers or diversify business by offering new product lines of the substitute products to safeguard themselves from rivalry.
Aggressiveness of substitute products in promotion
Soft drink industry companies spend huge amount of money on advertisement and marketing to differentiate their products from others and also create brand equity, base of loyal customers and increase visibility.
Switching cost of the substitute products is very low so consumers can easily shift towards the substitute products.
Perceived price/ value
Perceived price/value in this industry is very low because all products are comparatively same and are only differentiated by promotional activities.
The bargaining power of Customers (Buyers)
The most important buyers for the Soft Drink industry are fast food fountain, vending, convenience stores, food stores, restaurants, college canteens and others in the categorize of market share. The profitability/revenue in each of these segments obviously demonstrates the bargaining power of the buyers to pay different prices.
Fast Food Fountain
Pepsi and Coke mainly regard this segment as “Paid Sampling” due to small margins. This division of buyer’s is the slightest profitable because of the high bargaining power of the buyers. The bargaining power of the buyers is high because they purchase in bulks.
Vending Machines provide products to the customers in a straight line with enormously no power with the buyer.
This segment is tremendously fragmented and has no bargaining power due to which it has to pay superior prices.
This segment of buyers’ is fairly merged with few local supermarkets and numerous chain stores. Since this segment presents best shelf space it demands lower prices.
The bargaining power of Suppliers
Most of the raw materials desirable to manufacture soft drink are basic merchandise such as flavor, color, caffeine, sugar, and packaging etc. The suppliers of these commodities have no bargaining power over the pricing due to which the suppliers in soft drink industry are relatively weak.
Number of important Suppliers
Raw materials for soft drink are basic commodities which are easily available to every producer and have low cost which makes no difference for any supplier.
All the raw material ingredients are basic merchandize and easily accessible to manufacturers. Switching cost to the suppliers is very low; manufactures can easily shift towards the other suppliers.
Availability of substitutes
Soft drink products have standard raw material ingredients which could not have any alternatives or used instead of the actual ingredients.
Threat of forward integration
Threat of forward integration is very low in this industry because manufacturers of the soft drinks need huge manufacturing plants, bottling network, strong distribution network and best shelf space. Suppliers could not afford such kind of well-established network.
Importance of buyer industry to suppliers
Soft drink industry is very important to the suppliers because buyers purchase larger amount of raw material. This encourages suppliers to remain in good contact with buyers.
Suppliers’ product an important input to the buyer’s
Product of the suppliers is very important input for the manufacturers in this industry because these products do not have any substitute.