Cola Wars

Reasons for profitability in the soft drink industry

• Only a few major players in the market (Coca-Cola, PepsiCo, DPS Group)
• Strategic partnerships with restaurants for exclusive pouring rights
• High market demand
• Low cost of product(concentrate)
• High profit margins
• Several areas for competition: grocery, discount retailers, vending machines, restaurants

Economics: Concentrate vs. Bottling

Concentrate:

• Low cost of overhead-inputs, labor, machinery
• Limited inputs-caramel coloring, phosphoric or citric acid, natural flavors, caffeine
• Packaged concentrate, ship to bottler
• Financed higher portions of marketing programs (in conjunction with bottlers)
• Large staff focused on sales, company standards, and process improvements
• Gross Profit-78%

Bottling

• Capital Intensive
• High overhead for labor
• Limited number of inputs-concentrate, syrup, sweeteners, packaging materials
• High cost and multiple options of packaging
• Typically pays 50% or more of promotional/advertising costs
• Gross Profit-42%
• Operating Margin-8%

Profitability of the concentrate vs. bottlers differs significantly because of the cost of overhead to produce the products, as well as the number of inputs required for each. Additionally, the cost and multiple options of the packaging, as well as the selling and delivery expense were significantly higher for the bottler $0.85 per case, vs. the concentrate producer $0.00.

Impact of Coke and Pepsi on the Soft Drink Industry

Essentially Coke and Pepsi have a duopoly on the soft drink industry (71.8% market share in combined unit case volume). The more successful each company becomes, the more the other one has to keep up. The relationship is a perfect push-pull, and has encouraged both companies to continually seek innovation both in their product assortment as well as their business models, and processes. Additionally, both companies are now focused on the growth of the international market share, which is a contributing factor the continuation of the Cola Wars.

Maintaining Profitability

In order to sustain profits in the wake of the flattening demand and the growth of non-CSD beverages both companies should continue to explore the international market and the opportunities that may provide. Both companies should continue to align their product offering to meet the consumer demand. They should revisit their processes and see if there is any way to cut cost, thus increasing profit margin. Overall they must continue to shift their model to ensure that the consumer is receiving the product they want from the brands they trust.