Strategic Management

Threat of Substitutes for Coca-Cola Company

Recently, the media has turned their spotlight on sugary beverages as consumers’ tastes change, and people become health conscious. Among other things, the move by the media seems to have affected brands that previously focused on sugary beverages. For instance according to Rodionova (2017), in April 2017, Coca-Cola announced about its intention to cut at least 1,200 jobs in a move to cut down on their expenditure as sales for their fizzy drinks fell by one percent for the first three months of last year. The move comes as thousands of consumers across the United States and Europe are increasingly moving away from drinks with high sugar concentration. Certainly, a threat of substitutes for the Coca-Cola Company is significantly high if the company does not innovate and move with the current tide. Consistently, we make a comprehensive overview on how the threat of substitutes in the soda production industry has affected Coca-Cola.

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Over the last decades, the soda production industry has experienced a tremendous upwards growth and truly made a name all over the world. However, amidst their growth, the world has also been changing as millennials have developed a different drinking habit opposed to people in the early years. According to Watson (2015), the trend has seen many people shifting towards healthier beverages as the spotlight about the dangers associated with sugary beverages intensifies. The trend means that big bottlers such as Coca-Cola are under threat and pressure to step up their investment towards healthier beverages as consumers move towards a healthier consumption. According to Porter’s threat of entrants, the force refers to the threat posed by new competitors to existing competitors in any industry. In the case of the Coca-Cola Company, the substitute product offers better benefits that are more favorable from what the beverage company is offering. 

Virtually, the availability of a substitute product in a particular industry can make the industry competitive and lead to a decline in profits. Consequently, several factors determine the success of the substitute in the industry. For instance, if the switching costs are low, the consumer will be willing to purchase the substitute instead of the existing product (Wahlen, Bradshaw, & Baginski, 2017). Second, if the substitute product is cheaper than the industry’s product, it will be easy for the consumers to make the switch, which will be a risk for the company. Third, if the substitute product is of superior quality, with better benefits compared to the industry’s products, then the threat of substitutes is significantly high. In the case of Coca-Cola, although the substitute products may not be cheaper, the consumers will be willing to make a switch because the new products are of superior quality to them and offer them better benefits to their health.

Notably, though, the entry barriers for the substitute products are significantly high making it hard for the new companies to offer competition to the Coca-Cola company. More particularly, the soft drinks industry requires a huge amount of expenditure to spend on advertisement and marketing to reach a significant number of consumers necessary for a company to succeed (Hill, Jones, & Schilling, 2017). The huge amount of money required makes it hard for new companies to offer any stiff competition to the existing industry’s product. Another barrier is customer loyalty and brand image. Virtually, Coke has been in existence for more than a century, and over the years, they have managed to increase their brand awareness and win a huge and loyal customer base. This means, the risk of a substitute product completely overtaking the industry’s products is significantly minimal. Along with that, most companies might be afraid of retaliation from the industry’s giant players. Practically, it is very hard to enter into a market, because these players are not likely to make it easy for the new entrants. Most likely, the companies will attempt to make a switch and start making the substitute products. In this case and with their significant market share and network, it will be easy to penetrate the market, making it hard for the new substitute products. Importantly noted, Coke has already started the journey towards a healthier beverage with their Coke Zero beverage, which is already doing well and considerably increased the sales margin of the company. 

Essentially, the beverage industry is awash with substitute products such as tea, bear, coffee, natural fresh juices all presented to the same consumers taking carbonated sugary drinks. However, the companies and supplies of these products lack one thing that gives the Coca-Cola Company a competitive advantage. The substitutes need massive marketing and brand promotion to create brand awareness, brand loyalty, as well as brand equity to ensure their brands are effortlessly available to the consumers all over the world. In essence, most of these companies offering substitute products cannot counter the presence of the existing players such as Coke. They are also not positioned to diversify their business through new product lines to safeguard themselves against rivalry from the well-established beverage companies. Thus, the risk on the threat of substitutes for the Coca-Cola Company is low, giving the company a higher competitive advantage. 

References

Hill, C. W. L., Jones, G. R., & Schilling, M. A. (2017). Strategic management theory. Boston, MA. Australia, Brazil, Mexico Cengage Learning.

Rodianova, Z. (2017). Coca-Cola to cut 1,200 jobs as consumers turn away from sugary drinks. Independent. Retrieved from: http://www.independent.co.uk/news/business/news/coca-cola-cut-jobs-1200-consumers-sugary-drinks-fizzy-sales-slump-a7706241.html

Wahlen, J. M., Bradshaw, M., & Baginski, S. P. (2017). Financial reporting and statement analysis, and valuation: A strategic perspective. Mason, Ohio Thomson/South-Western.

Watson, E. D. (2015). Younger Consumers Are Trending Toward More Health-Conscious Eating. Huffington Post. Retrieved from: https://www.huffingtonpost.com/elwood-d-watson/younger-consumers-are-tre_b_6632166.html

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