POSSIBLE LONG TERM EFFECT OF THE PEPSI LONG THROAT IN THE BEVERAGE (SOFT DRINKS) INDUSTRY
Change in the Market leader for the Nigerian Soft drinks Industry
Undoubtedly, Coca Cola has the largest market share in the Beverage (Soft drinks) industry. If Coca Cola decides not to react to this new strategy by Pepsi, it is inevitable that Pepsi would steal some market share from Coca Cola, and they may even usurp Coca-Cola’s position as the market leader in the soft drink industry in Nigeria.
Consumers are rational consumers, and they would always prefer more to less except the consumer reaches a point of dis-utility according to the law of diminishing marginal utility. Since the release of the Pepsi Long throat bottle, I have been buying only Pepsi, and I have neglected Coca Cola. The reason being that I am a rational consumer who prefers more, I have no preference for one, and anyone is fine by me.
Although, the volume of the Pepsi soft drink was all that was increased in this revamped product, this strategy might lead to price war in the long term. Price war is commercial competition characterized by repeated cutting of prices below those of the competitors. The increase in volume is equivalent to a cut in price of the product, the analysis is a follows: The Pepsi bottle was previously 50cl at 100 naira per bottle, this meant that the cost for every 1cl was 2 Nigerian Naira. The new Pepsi long throat bottle is 60cl at the same 100 naira per bottle. This means that the new cost for every 1cl is approximately 1.67 Naira. This represents an effective decrease in price by 16.65 percent.
A price war might ensue if Coca Cola decides to safeguard its market share and respond aggressively to Pepsi’s new tactic. Coca cola might level the playing field by also increasing the volume of their bottle to 60cl at the same price or reducing the price of their current 50cl bottle, or both. A price war is a continuous reduction of prices. Assuming Coca-Cola also reduces their price per cl, and Pepsi further reduces theirs, a new round of reductions starts. In the short term, price wars are good for buyers, who can take advantage of lower prices. Often they are not good for the companies involved because the lower prices reduce profit margins and can threaten their survival. A price war although as its reward. For example, in the medium to long term, price wars can be good for the dominant firms in the industry; this is because the smaller, more marginal, firms cannot compete and must close, and the remaining firms absorb the market share of those that have closed. The real losers then, are the marginal firms and their investors.
In the long term, the consumer may lose too. With fewer firms in the industry, prices tend to increase, sometimes higher than before the price war started.
As predicted, Coca Cola has followed suite, they recently increased the volume of their 50 cl bottled drink to 60Cl in February of 2016; like Pepsi did the previous November of 2015. Coca cola is coming out more aggressively, as the previous 50cl has been reduced from 100 NGN to 80NGN, and the new 60Cl model is 100 NGN thereby competing with the pepsi long throat bottle.
As said in the analysis, this could lead to a very interesting price war in the Nigerian soft drink industry. The smaller players would suffer, and consumers would be able to get more for less; although it might not always be to the consumer’s benefit because they would be consuming more sugar, and excess sugar may lead to diseases such as diabetes.
Marc Cosentino., Case In Point: Complete Case Interview Preparation, 8th Edition
Micheal Shearn., The Investment Checklist: The Art of In-Depth Research