The Coca-Cola Company dominates the United States market and other regional markets. However, PepsiCo dominates other territories including the overall Northern American market ad it outsells Coca-Cola in the Indian and Chinese markets. Both companies have been engaged in the so-called cola wars for generations. This paper explores and analyzes the industry and competitive position of PepsiCo using the Five Forces model of Michael E. Porter.
Five Forces Analysis of PepsiCo: Analyzing Its Industry Position and Competitive Situation Using the Framework of Porter
1. Industry or Competitive Rivalry
Note that Pepsi operates in the food and beverage industry and the specific food processing and beverage markets. There is intense competition within the industry due to three reasons. These are the high number of firms, low switching costs, and aggressiveness of these firms. Competitive rivalry is a strong force for PepsiCo.
Remember that Coca-Cola is one of the dominant firms. However, there are also other firms with substantial presence and positions in the entire industry and the specific food processing and beverage markets across different geographical or regional markets.
For example, in China, Hangzhou Wahaha Group dominates the Chinese market and has become the third-largest beverage manufacturer. The Frito-Lay division of Pepsi competes with food manufacturers such as Mondelez International and General Mills in North America and Nestle and Unilever in Asia and the Pacific.
It is important to note that there are also smaller or localized companies in geographic and regional markets that take sizeable market shares. These firms offer either alternative food and beverage products or substitute products.
The high number of firms means that the market structure is monopolistic in nature. It further translates to low switching costs for consumers. In addition, to maintain or expand further their market shares, these firms have been aggressive when it comes to their marketing expenditures. Companies such as Coca-Cola and Nestle have been big ad spenders.
2. Threat of Substitutes
Included in the product portfolio of PepsiCo are soft drinks and other beverage products, chips and snacks, and oatmeal and cereal products. The threat of substitutes for the company is a strong force because its products have several substitutes.
Note that the substitute products for soft drink brands such as Pepsi and Mountain Dew are coffee and other related beverages, milk, fresh fruit juices, and bottled water while substitutes for chips and snacks are whole foods, fresh food items, and even other processed food products such as canned goods and instant noodles.
The company has managed this threat through product diversification and forming partnerships with other companies such as Starbucks and Dole that manufacture products and brands it can distribute and market using the PepsiCo branding.
Nevertheless, these substitutes continue to have a strong impact. They unfavorably affect the earning potential of the company by serving as better or alternative options. In addition, the presence of direct alternatives and substitute products also gives the company less freedom to determine the prices of its products to maximize its profitability.
3. Threat of New Entrants
Another force that affects the industry and competitive positions of PepsiCo is the threat of new entrants. This force has a moderate to high influence. Manufacturing food and beverage products remains resource intensive but it has become more accessible and cost-efficient.
Newer companies can enter untapped markets. This has been demonstrated by Hangzhou Wahaha Group and its Future Cola brand which has a presence in China and other Asian countries such as Taiwan and Indonesia. Refriso Bebidas is also a local soft drink brand in Brazil while Fraser & Neave has a presence in the Asia-Pacific market.
Switching cost is low and customer loyalty is moderate. The major obstacle to market entry is the high cost of brand development. Remember that companies such as PepsiCo and Coca-Cola spend big on advertisements and other sales promotions to maintain brand awareness.
4. Bargaining Power of Buyers
The fact that the competition remains intense and that the threats from product substitutes and new entrants are present grant consumers with higher bargaining power. It is also important to note that the market structure is monopolistic. There are alternative soft drink products that have little differentiation and substitutes that have unique selling points.
Consumers can be sensitive to price. The cost of switching to an alternative or substitute product is low. Access to market information is high. There has also been an emerging awareness of the negative health impacts of high sugar consumption.
Substitute products that are positioned as healthier choices give customers more reason to shift from carbonated soft drinks. Even healthier food options such as whole foods can encourage customers to switch from processed food products.
Nevertheless, because this bargaining power is a strong force for PepsiCo, it cannot set the prices of its products too high without losing customers. The company is also susceptible to risks and possible backlashes stemming from poor corporate behavior and bad publicities because the food and beverage market has moderate customer loyalty.
5. Bargaining Power of Suppliers
There is a high concentration of suppliers in the food and beverage industry. This means that the bargaining power of suppliers is a weak force for PepsiCo. Supplies are abundant. Suppliers have low forward integration. Individual suppliers have low to moderate size.
It can be considered that even the specific market structure of these suppliers is monopolistic because there are too many of them who provide similar products or alternatives with little to no differentiation. Examples include the suppliers of sugar or fructose-related inputs, packaging materials, and raw materials for food flavoring and additives.
Remember that there are numerous food and beverage manufacturers. The production inputs of these companies are similar. The landscape has brought forth an abundance of different suppliers from different parts of the world.
However, in certain situations, food and beverage manufacturers are still exposed to risks that come with the globalized supply chain. These include disruptions due to global crises and global economic downturns, problems in the agriculture sector, other issues affecting international trade, and logistical or distribution costs.
It is still important to note that PepsiCo is a large organization with a global market presence and sales volume that outclasses smaller companies. Suppliers would prefer doing business with this company because of the higher income potential.