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The Coca-Cola Industry

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The Coca-Cola Industry

Abstract

The CSD (carbonated soft drink) industry is one that is very competitive. A few firms dominate this industry, most notably Coca Cola and Pepsi Cola. This is due to substantial barriers to entry. Cadbury-Schweppes, producer of products such as 7up and Dr. Pepper is the third leading company in this industry. Due to the dominance of Coca Cola and Pepsi, Cadbury-Schweppes faces the daunting task of having to fight for market share and survive in this fiercely competitive industry. Using economic analysis for support, Cadbury-Schweppes will need to use its strengths in the non-cola categories to compete in this CSD industry.

Introduction

Dr Pepper Company is the oldest major manufacturer of soft drink concentrates and syrups in the United States. Dr Pepper is the company's principal brand. Cadbury Schweppes PLC acquired Dr Pepper/Seven-Up Cos. Inc. in March 1995. The new business will be called the Dr Pepper Company, which will focus on the Dr Pepper brand by handling all beverage system sales, which account for 75 percent of its business, in addition to related independent bottlers. The second operating group will be Cadbury Beverages/Seven Up Co., which will service independent bottlers not carrying Dr Pepper. Dr Pepper/Seven Up soft drink brands now hold about 16 percent of the U.S. market. Dr Pepper and Seven-Up are among the top 10 carbonated soft drinks, with Dr Pepper being the top non-cola soft drink. Other soft drink include: A&W Root Beer, Canada Dry, Schweppes, Welch's, Sunkist, Squirt, Crush and Hires (Levy 1999). According to the soft drink industry report, there is large sales growth recently in non-colas. Dr Pepper was number three in the industry. The reason is because non-colas have above-average caffeine level, and will be aimed at the 12-to 21-year-old market. Obviously, management sees this product as an opportunity to more fully participate in the growing popularity of non-colas.
The main external threats to Cadbury-Schweppes are competition from Coca-Cola and Pepsi and changing consumer tastes. External opportunities include increasing sales internationally and development of new products. Cadbury-Schweppes has many internal strengths and weaknesses in its organizational, marketing, operational, and financial activities. These characteristics along with economic analysis will be used to provide the answers needed in order to survive and thrive in the CSD industry.

Analysis

In order to understand the situation of Cadbury-Schweppes in the CSD industry, the product, which is soda, needs to be analyzed. This product follows the law of demand, which simply states that the higher the price the lesser the quantity demanded, and the lower the price the greater the quantity demanded.
[pic]
The Demand Curve
The D stands for demand. The demand curve is negatively sloped.
There are five different determinants of demand that shift the demand curve either to the right or to the left.
1. A change in population: If the number of people potentially buying the product (the population) increases, then a seller would expect to sell more of the product. Symbolically,
If Population ↑ ↧ D ↑.
2.A change in taste: If for some reason people find the product more appealing, they will tend to buy more of it without any change in the product's price. The opposite can also happen. Symbolically, 
                              
If taste changes against the product (↠) ↧ D ↠.
If taste changes for the product (↑) ↧ D↑ .
3. A change in expectations: If consumers or buyers expect a future increase in the price of the product, they will probably buy it now before the increase takes place. They would wait until a future decrease takes place, however. There are other factors that can affect expectations that would affect demand.
                                   If buyers expect a price ↑ ↧ D ↑ now.
 If buyers expect a future shortage ↧ D ↑ now.
4. A change in income: The impact of changes in consumers' income is different for different products. One would normally assume that an increase (or a decrease) in income would increase (decrease) demand. However, demand may decrease for some products when income increases and increase when income decreases. It is also possible for the demand to remain unchanged for another group of products regardless of what happens to income. For soda it would be under a normal good.

If the change in demand is in the same direction as the change in income, then the product is known as "normal" or "superior".                                            
If income ↑ ↧ D ↑ .
5. A change in the price of other goods or products: Here again the direction of the change in demand when the price of another product changes will differ.

If the change in demand is in the same direction as the change in the price of another product, then the products are known as "substitute goods". Pepsi and Coke are good examples of substitute products. Assume that Pepsi is product A while Coke is product B, then
                            If P of A ↑ ↧ D for B ↑ .

Below are the two graphs of the shift in demand. The first one is a shift to the left and the second one is a shift to the right.
      [pic]
Graph 1

  [pic]
Graph 2
The demand elasticity is a measure of consumers' demand response to changes in one or more of the determinants of demand. Because the CSD industry has such close substitutes, price is very sensitive to demand. Therefore demand for soda is elastic.
Cross-price elasticity measures the change in the quantity consumers' demand of a product when the price of another product changes. For soda, cross-price elasticity is positive (ec > 0) because the two products are substitutes. This is because if the price of Pepsi increases for example, the quantity demanded of product 7up should increase as a result. People will simply prefer the cheaper substitute.
Income elasticity measures the change in the quantity consumers' demand of a product when consumers' income changes. Soda is a normal good; therefore if the income increases for example, the quantity demanded of the product should increase as a result. People will simply buy more of it if their income increases.
A firm such as Cadbury-Schweppes in the CSD industry belongs to the market structure called an “Oligopoly”. The market is considered an oligopoly because:
1. There are a small number of firms that produce most of the output in the market: Coca Cola, Pepsi Cola and Cadbury-Schweppes account for 90% of the CSDs sold. (harry 1996)
2. The product sold by the member firms may be either identical or differentiated.
3. There are substantial barriers to entry. Typically economies of scale apply and make it difficult for others to enter.
4. For firms producing specific products (especially for the consumption by the final consumer) find advertising very important.
5. Behavior of managements in firms in an oligopoly is typically interdependent. Decisions made by one firm’s management typically affect decisions to be made by others.
If Coca Cola decided to lower the price of their product Pepsi and Cadbury †Schweppes would follow to protect their market share. If Coca Cola raises prices, the others would ignore to gain market share.
| |[pic] |

Coca-Cola and Pepsi have long been the leaders in the cola markets, while Dr Pepper/Seven-Up have been the non-cola leaders. Therefore, Dr Pepper/Seven-Up did not get involved much in the competition in the cola wars. However, with the recent increase in the non-cola and alternative beverage markets and the shrinking of the cola market, both Coca-Cola and Pepsi have begun to try to increase their lines of these cola-alternative products. This poses a direct competition threat to Cadbury-Schweppes.
Dr Pepper/Seven-Up, belonging to neither PepsiCo nor Coca-Cola, has had rocky times. At one time Seven-Up almost switched to PepsiCo from Philip Morris while Dr Pepper was almost acquired by Coca-Cola. During this time Seven-Up became known as "the Orphan." Seven-Up became labeled this due to the many owners that it had been passed through. The soft drink had become overlooked (Levy, 1999). Seven-Up had become neglected and so was surpassed by Coca-Cola's Sprite.
Cadbury-Schweppes faces marketing weaknesses as well, since they are not as big of players as PepsiCo and Coca-Cola, they lack the recognition that other noncolas in the industry have. Whether it is advertisements, slogans, or availability, Dr Pepper/ Seven-Up still falls short.
Slogans are also a key to Sprite's success over Seven-Up. Sprite uses catchy slogans with great sound effects and well-known individuals, such as NBA stars. People remember seeing their favorite athlete or star drinking this soft drink. In the case of Seven-Up, people hear the slogan, "It's an up thing," and do not understand what the meaning of the slogan is (Harris 1996). Seven-Up has problems connecting with consumers.
Another major problem of Seven-Up's is that it is not widely available in restaurants (Harris 1996). Seven-Up is rarely seen on the menu of many restaurants. If the restaurants sell Coca-Cola products, Sprite is once again the winner because it is a Coca-Cola product.
After evaluating the economic analysis of the CSD industry and exposing the weaknesses of the Cadbury Schweppes firm, their strategy to survive and compete is to use their greatest strength. The best strategy would be their current strategy of product differentiation. With this strategy, the company would seek to increase sales both domestically and abroad by continuing to create new products that are unique and unlike the leading colas. The company would attempt to gain a larger market share of the growing non-cola and alternative beverage market, a market in which it is already the leader. This strategy would be chosen because of the belief that Cadbury-Schweppes has been successful at creating beverages that are unique and which do not compete directly against Coca-Cola and Pepsi. With the growth of the non-cola and alternative beverage markets, Cadbury-Schweppes has the opportunity to continue this success by obtaining a larger share of these markets with its unique products. Under this strategy, the company would increase marketing of its products worldwide and continue to use slogans and advertisements that differentiate its products from the colas.
Conclusion
It is a daunting task to survive and thrive in an oligopoly market structure such as the CSD industry. Being the third leader behind Coca Cola and Pepsi, Cadbury- Schweppes needs to differentiate themselves from the other two in order to compete. Using careful analysis of the market structure, demand, different types of elasticities, and firms weaknesses; the solution is apparent. Cadbury †Schweppes’ best strategy is to continue to dominate the non-cola markets and continue gaining market share.

Bibliography
Levy, Roy (1999) “Measuring Market Power Effects in Differentiated Product Industries: An Application to the Soft Drink Industry. Journal of Economics and Marketing Strategy 1, 277-323
Harris, Nicole, "7Up Behind the Eight Ball," Business Week, (August 12, 1996), p. 71.

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