Date: 10/08/2019

To: Warren Buffet

From: Aigerim Akhmetova

Subject: Soft-drinks Industry Analysis

The purpose of this report is the Coca-Cola industry trends, evaluating the impact of the five forces in
the industry and make a recommendation as per whether further investment in Coca-Cola is a
preferable strategy.

Industry Analysis and Trends in the Industry and Consumers’ Behavior

The soft drink industry is dominated by two large companies: Coca-Cola and PepsiCo. These two entities
control almost 2/3 of the world’s market. Modern data shows gradual decrease of soft drink
consumption by consumers. Reasons for such trend include change of consumers’ lifestyle that prefer
healthy brands, and the rise of substitutes, such as healthy drinks and juices.

Competitive rivalry

Internal rivalry has been an ongoing process between Coca-Cola and PepsiCo, however it does not have
a significant effect on the industry profitability as two major players have been competing on the basis
of advertising and promotion rather than price. Coca-Cola is underperforming in Wall-Street in
comparison with PepsiCo. In the last five years, PepsiCo has grown almost double more than Coca-Cola.
Yet, Coca-Cola still holds the sixth position in the rank of the most valuable brands. There are relatively
high entry barriers due to the economies of scale and strong brand identity of the industry dominants. It
is difficult for new entrants to build a loyalty circle among customers who have been loyal to major
brands for years. Substitutes have not captured a significant share of profits however the current trend
shows the decline in sales volumes in soft drink industry and an increase in volumes in energy drinks
industry which suggests that new substitutes may pose a threat to industry’s profitability.

Substitutes

Soft drinks are pretty unique in taste so it is hard for substitutes to compete. However, there are social
forces that affect consumer choice. Nowadays, more and more people become conscious about their
body image, health and lifestyle. Being healthy is becoming a new fashion which, as statistics show,
already has its effect on sales volume of soft drink industry. The new products with more natural
ingredients and health benefits start to capture some of soft drink industry’s audience.

Threat of new entrants

Entering the soft drink industry requires substantial capital investment which would deter entry by new
players. Current industry parties have built strong relationships with their retail channels which includes
exclusivity through beneficial deals so newcomers would face a lot of difficulty in forming trustful
agreement with retail channels.
New industry players would also need to overcome the tremendous marketing muscle and market
presence of Coke, Pepsi, and a few others, who had established brand names that were as much as a
century old.

Companies that have a door to door distribution channel in place like snack companies could choose to
diversify into soda industry

Switching costs are low for consumers who risk very little by trying new brands or beverages. Barriers to
entry are relatively high, though, with large advertising budgets and competitive brand loyalty to big
players like Coca-Cola and PepsiCo.

The drinks with high growth and high hype are non-carbonated beverages such as juice drinks, energy
drinks, tea-based drinks, dairy-based drinks, and especially bottled water.

Bargaining power of buyers

Buyers can be considered from the consumer standpoint and the retail standpoint. Consumers have
been historically loyal to their chosen brands as taste is the main force that drives consumer preference
so consumers would not typically switch to a new brand due to lower price if the taste does not satisfy
their expectations.

Retail outlets, on the other hand, have more bargaining power than consumers. Retail store may bargain
the price to in return to providing priority shelves and ensuring high level of purchase. Currently, retail
outlets choose major soft drink brand to ensure high sales at their stores. However, as retail chains
continue to grow, they will have more bargaining power over soft drink industry.

Bargaining power of suppliers

Suppliers for the soft drink industry include producers of sugar and sweeteners, bottles and cans.
Industry for these products is not very differentiated which means that there are low entry barriers.
With high supply and low differentiation, soft drinks industry companies can easily switch from one
supplier to another. This limits the bargaining power of suppliers.

Recommendation

The five- force strategy has shown that there is healthy internal rivalry as it does not use prices as means
to attract customers; current social trends gave rise to healthy substitutes, however Coca-Cola has
abilities to invest in that industry and react efficiently to market changes; there is insignificant threat for
new entrants as two strong industry players have been dominating the market for many decades and it
would be hard for newcomers to compete; there is low bargaining power in the hands of both
customers and supplies. Changes in the industry should not be viewed as threats but rather as new
prospects. Coca-Cola has a solid foundation and can turn market changes into new opportunities for
itself. My recommendation is to continue investing in Coca-Cola and perform year to year analysis of its
performance, sales growth levels and investments.