Soda Pop Industry: Profitability, Economics of Concentrate
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Answer the following questions using 1-2 pages:
1. Why historically, has the soft drink industry been so profitable?
2. Compare the economics of the concentrate business to that of the bottling business. Why is the
profitability so different?
3. How has the competition between Coke and Pepsi affected the industry's profits?
4. Can Coke and Pepsi sustain their profits in the wake of flattening demand and the growing popularity of non-
CSDs?
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Solution Summary
This detailed solution describes why soda pop industry has been so profitable, the economics of the concentrate business, and the affect on profits of the competition between Coke and Pepsi. It also discusses if Coke and Pepsi can sustain their profits as consumers turn to other beverages. APA references are included.
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Historically, the soft drink industry has been profitable for a variety of reasons. The traditionally large share of market for Coca-Cola and Pepsi establishes a large barrier of entry for others to enter the market. This results in an ability to charge higher retails, and thus preserve margin. In addition, both the Coca-Cola Company and Pepsi have franchisee agreements or own their bottlers. This controls access of the distribution network to other beverage companies. Due to the size of these two market leaders in the soda pop business, their established source and distribution channels are extremely fine-tuned. Historically, the companies were able to dictate prices to their bottlers based upon bottling agreements. They were also able to prevent their bottlers from carrying competing brands, which could have possibly driven down the profitability of the major brand.
In addition, the two main entrants benefit from economies of scale in negotiating best rates for the majority of their needs. Most of the raw materials needed to produce soda pop are basic commodities like color, flavor, caffeine, additives, sugar and packaging. This allows the companies more power to produce cheaply. From here, both companies control the concentrate, and "regularly raised concentrate prices, often by more than the increase in inflation" (Yoffie, Kim, 2011), further adding profitability to the category.
Soda pop companies have maximized profits in another manner: through the manipulation of various sizes in different channels of trade. Twelve packs of soda pop may be advertised on sale for a great price, driving consumers into buying their ...
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