GS BUSI 681 Fall 2013
Cola Wars Continue: Coke and Pepsi in 2006
1. Why, historically, has the soft drink industry been so profitable?
Americans enjoy carbonated sugary beverages. The industry itself, because of its tasty product, focuses on marketing and advertising to make a profit. Coke and Pepsi employed the following technique to make the soft drink industry profitable: marketing (Yoffie 21).
Coke and Pepsi have dominated the market on soft drinks by offering a product that people enjoy, at a price that the average Joe can afford, and by utilizing marketing strategies and campaigns. Through effective leadership, an environment was created which enabled success and profitability as well as creative strategies and campaigns. Both Coke and Pepsi developed and deployed aggressive marketing campaigns which began generations ago by fighting trademark infringements and continued with cleaver and aggressive sales techniques. By branching into other flavors and types of drinks via mergers and acquisitions, both Coke and Pepsi generated additional revenue from more than just their core beverage.
The fierce competition the two Cola Giants created ensured profitability and world recognition of the American developed carbonated soda.
2. Compare the economics of the concentrate business to that of the bottling business: Why is the profitability so different?
The process of producing carbonated soft drinks, or CSDs, is a multi-staged procedure that involves varying levels of capital and labor. The two most significant processes involved in the production of a CSD encompass the concentrate business and the bottling business. Concentrate producers blend raw ingredients into a packaged mixture that is subsequently shipped to bottlers, who purchase the mixtures, add carbonated water, and bottle or can the resulting CSD. Both businesses differ in their nature and scope, and as such, the profitability, sustainability, and overall economics of the concentrate and bottling businesses vary.
The concentrate business has been historically dominated by large magnates such as Coca-Cola and Pepsi. Data from the case study detailing the industry breakdown indicate that Coke held 51% of market share in 2003 while Pepsi and Cadbury Schweppes held 22% and 6% of international market shares for that year respectively (Yoffie 22). Analysis of this data indicates that the market structure for CSD concentrate producers is oligopolistic. The production process of concentrate involves comparatively little investments in capital and labor, and a typical concentrate manufacturing plant costs between $25 million to $50 million to build. In addition, just one plant could [theoretically] serve the entire United States (Yoffie 2).
The bottling business, on the other hand, differs significantly. Bottlers must make large investments to build plants and production lines, which are interchangeable only for products of a similar size and package (Yoffie 3). The cost of building a large bottling plant could range as high as $75 million and both Coke and Pepsi each required up to 100 plants to provide effective nationwide distribution (Yoffie 3), indicating that the market structure of bottling plants is far more competitive than that of concentrate producers. Bottlers must also purchase concentrate, which accounts for up to 45% of the cost of bottling sales (Yoffie 3), making concentrate a major input to bottlers and indicating that CSD prices are subject to market forces influenced by concentrate producers (See Exhibit 2a).
Using several of Porters’ Five Forces Framework of Sustainable Industry Profits, the economic dynamics of both businesses may be compared even further. Entry into the concentrate and bottling businesses is very strict. Prospective entrants into the concentrate business, though relatively inexpensive to that of bottlers, must challenge well-established oligarchs, each over a century old, that spend...
Cited: Yoffie, David B. “Cola Wars Continue: Coke and Pepsi in 2006” Rev (2009): 1-28. Print.
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