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Michael Porter’s Five Forces include - the threat of new entrants, threat of substitute products or services, bargaining power of buyers, bargaining power of suppliers and competitive rivalry between firms. We will apply this framework to the soft drinks industry.
1. Porter’s 5 Forces
Threat of New Entrants: Medium Pressure
The threat of new entrants is quite real for the soft drinks industry today. The consumer is becoming more health conscious. Many governments are instituting legislation to curtail the use of sugary soft drinks like Pepsi and Coke.
This has led to the emergence of non-carbonated soft drinks such as Gatorade, Juices and Lipton Ice Tea. The “popularity of non-carbs is growing” (Yoffie & Kim p. 11). Bottlers are using excess capacity to produce non-carb, healthier products.
The Threat of Substitute Products - High pressure
New launches of juices, flavored beer, wines and other such products will carve out a niche among consumer segments held strongly by CSD brands like Coke and Pepsi. With lesser socialization and outdoor behavior, people are more likely to meet at cafes and restaurants which offer a differentiated drinks menu. Increased penetration from chain brands like Starbucks which offers a wide range of social experience and beverage options will challenge CSDs.
The Bargaining Power of Buyers - Low to Medium pressure
Pepsi and Coke enjoy a strong loyal customer base. Although the sales in U.S. have dwindled since 1990 the CSD brands have managed to innovate and create strong marketing campaigns to push sales (Yoffie & Kim p. 9). Large outlets and e-commerce companies such as Amazon will have a medium pressure on CSD’s due to high volume purchases.
The Bargaining Power of Suppliers - Low pressure
Though the ingredients to produce CSDs are simpler in nature and have undergone changes over the years, the overall bargaining power of suppliers will remain at low pressure. The substitutes market is still quite nascent and bottlers also will depend on high revenues and margins from CSDs rather than on Gatorade or Juices.
Rivalry between Existing Firms - High Pressure
Since the past many decades the competition and rivalry between Coke and Pepsi is strong. This will be a high pressure rivalry that will continue and expand in emerging markets too.
2. Level of Rivalry
With an increasing threat of substitutes and changed buyer behavior, the brands will witness increased rivalry in future. In addition, other forces such as vendors or bottlers will also apply competitive pressure on the CSDs in search of higher margins and uncomplicated production processes of non-carbonated drinks.
3. Which force is changing the most?
Buyer behavior is changing rapidly due to increased awareness of the ill-effects of CSDs and government legislation (Yossie & Kim p. 11). This force will increase in the future and expand to emerging markets like India and China, further challenging the sales of CSDs.
References
Yoffie, David B. and Kim, Renee. “Cola Wars Continue: Coke and Pepsi in 2010.”
Harvard Business School, 26 May 2011, pp. 1-22.
