Cola Wars Continue: Coke and Pepsi in 2006
Why is the soft drink industry so profitable?
In an industry dominated by two heavyweight contenders, Coke and Pepsi, in fact, between 1996 and 2004 per capita consumption of carbonated soft drinks (CSD) remained between 52 to 54 gallons per year. Consumption grew by an average of 3% per year over the next three decades. Fueling this growth were the increasing availability of CSD, the introduction of diet and flavored varieties, and brand extensions. There is couple of reasons why the industry is so profitable such as market share, availability and diversity and brand name and world class marketing.
Coke and Pepsi have created an oligopoly that controls more than three-fourths of the entire industry. This insures little price competition, barriers to entry, and power to negotiate prices as well as distribution contracts that favourably affect their bottom lines.
Soft drinks and snack foods are widely available and conveniently packaged. This contributes to profitability by increasing consumption which leads to greater sales and profits. Pepsi is also a dominate player in two of the most profitable distribution channels, convenience stores and vending machines.
Coke and Pepsi enjoys a unique advantage over rivals in that it holds a more diversified portfolio of products including alternative beverages and non-CSD beverages and snack foods. This insulates them from sluggish CSD sales and increases profitability.
Pepsi and Coke has remained one of the most recognizable brands in the world and distribute some of the most popular names in the food and beverage industry. These brands include Quaker Oats, Tropicana, Lay’s chips, Aquafina, Gatorade, Doritos, Dole, Lipton and Mountain Dew, Minute Maid, PowerAde, Vitamin water, Dasani. Brand equity is a tremendous strength for Coke and Pepsi and allows them to gain more from their marketing expenditures by solidifying product loyalty.
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