Why Soft Drink Industry Is Profitable

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1. Why was the soft drink industry so profitable?

Soft drink industry observed growth rate from its inception 1886 to 1990, the consumption of soft drinks saw remarkable growth, below data shows the growth in United State’s consumption. Year| 1899| 1970| 1980| 1990|

Consumption| 0.6| 22.7| 34.5| 47.4|
#Consumption: Gallons per person per year
Financial figures also back the growth story of the Soft Drink market. ROE %| 1972| 1975| 1980| 1981| 1982| 1983| 1984| 1985| 1986| 1987| 1988| 1989| 1990| Coke| 22| 21| 20| 21| 18| 19| 23| 24| 27| 29| 31| 49| 36| Pepsi| 16| 18| 20| 20| 14| 17| 12| 30| 22| 24| 24| 23| 22|

ROE is even higher across years and it increased to 36% for Coke and 22% for Pepsi in 1990 from 22% and 16% in 1972 respectively. The main reason for being profitable is that the United States market took the soft drinks overwhelmingly and gradually it became a part of their life style also the manufacturing process for concentrate was simple and required small investment, significant cost were to advertise, promotion, market research etc, while bottling process was extremely capital-intensive and involved specialized, high speed lines, but there was no considerable investments required on Advertisements, promotions and market research etc. This way Concentrate Manufacturers and Bottlers complemented each other for higher profit margins by sharing cost on in procurement, production, marketing and distribution. Many of their functions overlap; for instance, Concentrate Manufacturers do some bottling, and bottlers conduct many promotional activities. Balance Sheet data for year 1986 shows that pretax profit as % of assets was $.40 per case for Concentrate Producers and $.37 for Bottlers.

The Cola war between Coke and Pepsi played significant role to increase the consumer base as both came up with new strategies and ideas to grab the market share from others that resulted to new markets and...
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