Counting Beans

Coca Cola operates in the non-alcoholic beverage industry. This industry is an oligopoly because there are a small number of competing firms and costly entry and exit. Coca Cola, PepsiCo, and Dr. Pepper Snapple Group make up the majority of the market. Both Coca Cola and PepsiCo spend a significant amount of money on advertising cost, making it hard for new brands to break into the market. The non-alcoholic beverage industry uses product differentiation as a barrier to entry. Consumers have strong loyalty to their brand of choice, creating a significant financial investment for a new entrant to attract consumers to their product.

Also, the non-carbonated beverage industry has cost advantages independent of scale as a barrier to entry. Coca Cola and its competitors have proprietary technology surrounding their beverage flavors and syrups. This is patented information that is costly to develop and introduce a competing product. Coca Cola has favorable access to raw materials due to their size in the market, allowing them to negotiate the lowest price possible from their vendors.

The threat of substitutes is significant in the non-alcoholic beverage industry. Carbonated soft drinks sales have declined as consumers look for heathier options. Coca Cola has tried to compete with their 2007 acquisition of Glaceau, which has brands such as Smartwater and Vitamin Water. They have also focused heavily on their water brand Dasani. PepsiCo is launching a new premium water brand called LIFEWTR in this year’s Super Bowl ads. There have also been new market entrants such as companies like Bai, who was recently acquired by Dr. Pepper Snapple Group and KeVita which was purchased by PepsiCo. These healthier options are where growth for the industry is headed.