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Non-CSD beverage: Non-CSD beverage Coke and Pepsi are attacking these categories themselves, each trying to become a â€Å"total beverage company. † Will this approach lead to brand dilution? Do CPs risk becoming a less profitable business if they do not extend the brand? No good answers yet to these questions: Pepsi, so far, has had more success and has been more aggressive with non-CSDs. 7/20/2011 32 Session led by Prof. J. K. Mitra, FMS, Delhi Non-CSD beverage: Non-CSD beverage The business model for non-CSDs is somewhat different from the classic CSD model (pp. 1-14) The supply chain and bottling requirements add complexity to the value chain, compared with the relatively simple CSD model. 7/20/2011 33 Session led by Prof. J. K. Mitra, FMS, Delhi Non-CSD beverage: Non-CSD beverage The basic principles of the business remain the same: Coke and Pepsi own the brand and control product development; Dedicated bottlers leverage economies of scope in distribution (selling to same outlet, same trucks). There are exceptions—e. g. , Gatorade is delivery through food wholesalers. As niche products, non-CSDs carried prices and margins that are higher for everyone in the value chain. /20/2011 34 Session led by Prof. J. K. Mitra, FMS, Delhi The Implications of Bottled Water: The Implications of Bottled Water Will Coke and Pepsi be able to repeat their success with CSD in the water segment, or will a new competitive dynamic emerge? (page 14) 7/20/2011 35 Session led by Prof. J. K. Mitra, FMS, Delhi Bottled Water: Bottled Water Repeat of CSD New (less attractive) Industry Structure Economies of scale in advertising Hard to create brand loyalty Barriers to entry in distribution Highly fragmented, competitive structure Similar economics of concentrate firm High price sensitivity Little differentiation (e. . , taste) 7/20/2011 36 Session led by Prof. J. K. Mitra, FMS, Delhi Bottled Water: Bottled Water Unless Coke and Pepsi can generate brand loyalty and establi sh their brands, water is more likely to become a commodity-like product, where despite the scale and barriers in distribution, most of the profits will be extracted by the distribution channel (retailers) rather than by the concentrate companies or (especially) the bottlers. 7/20/2011 37 Session led by Prof. J. K. Mitra, FMS, Delhi Summary of the Case:Summary of the Case 1. One of the clearest examples on how firms can create and exercise market power. 2. To really understand the opportunities for strategy, we have to look at the underlying economics of the firm and the industry, and its related (upstream and downstream) parts. Without understanding the economics of the CP and bottler, we cannot understand the motivations and the likely success of moves like vertical integration. 7/20/2011 38 Session led by Prof. J. K. Mitra, FMS, Delhi