Case Study on Soft Drink

Why, historically, has the soft drink industry been so profitable?

Soft drink plays an important role in the people’s daily life. There is no doubt that this industry is profitable. The soft drink can be found in everywhere in the world, and the reasons of its high profit have several aspects.

The first aspect is a little capital investment and material cost. They include that machinery, overhead, labor, and materials. The machinery, overhead, and labor are the basic requirements and for soft drink industry, the levels of these conditions are not very high. So the cost of those is low and reasonable. On the other hand, the manufacturers add the concentrate flavors to the drink and improve people’s desire for the soft drink. Of course, the concentrate flavors are not expensive, just like caramel coloring, phosphoric or citric acid, natural flavors and caffeine.

What’s more, the marketing channels are increased in a way. People can buy the soft drink in different channels, and they can enjoy the drink everywhere. For example, they can buy them through vending machines, in fast food chains, in supermarkets or other restaurants. It is convenient for people to solve the thirsty problem so that the soft drink manufacturer can get profits from it.

The last reason is that high consumption needs in the market. The manufacturers increased the advertising budgets for a soft drink. It is easy for people to know that what the soft drink is and the characters of soft drink. The soft drink became a household word in people’s life, and everyone knows that they can try the drink with low cost. The increased sales volume makes the soft drink manufacturers get more benefits from the marketing.

Compare the economics of the concentrate business to that of the bottling business: Why is the profitability so different?

The reasons for the differences can be explained in these aspects: a barrier to entry; substitutes; suppliers, buyers, rivals, etc. This question can be explained more clearly through giving a metaphor between cola war and real war. In the army, some troops’ position is at front-line, like sales in cola business. And other troops’ position is at base or logistic line, like the concentrate business or bottling business in cola-biz. The barrier to entry means quantity advantages and business secret in a way. The barrier to entry is the key to deal with this problem. Another important reason is business secret, the cola formula. Substitutes and rivals are the financial leverage. So it is the second reason why the concentrate industry has higher profitability than the bottling industry because of the interest expense which is from financial leverage. Suppliers and buyers are duopoly and competition market. In conclusion, duopoly even pure monopoly is a real dream for every firm or industry, just on profit margin section. But for consumers, it is a real nightmare.

On the other hand, this question can be explained like this. Concentrate manufacturers had supplier power: they could decide the price of sweeteners. However, bottling manufacturers had the buyers’ power on bargaining leverage. Concentrate manufacturers still want bottling manufacturers to buy and carry their product. Therefore, although concentrate manufacturers can decide some prices about sweetener costs, they still had to make attractive prices for the bottling manufacturers buy their product.

How has the competition between Coke and Pepsi affected the industry’s profits?

The war between the Coke and Pepsi adjusted operations or branding properly to increase the efficiency of deliveries to markets. Advertising budgets increased obviously. Initially, the budget was used to sales and made Pepsi and Coke knew by consumers, but now after the two giants established, the budget allocation has shifted to the branding and marketing. It affects sales directly because it influences people to buy the products.

Therefore, the effects can be summarized in three points. The first key point is vertical integration. Concentrate producer to build a nationwide franchise bottling network, Coke was the first mover and Pepsi followed it. New franchise agreements allowed bottlers to handle the non-cola brands of other concentrate producers. Bottlers could not carry directly competing for brands. The second point is the details of effects on industry’s profits. Throughout the 1980s, the growth of Coke and Pepsi put a squeeze on smaller concentrate producers. Shelf space for small brands declined and shuffled from one owner to another. The third point is acquisition during the Cola Wars. For example, in a five years period, Dr. Pepper was sold several times, Canada Dry twice, Sunkist once, Shasta one, and A&W once. Phillip Morris acquired Seven-UP in 1978 for a big premium, but racked up huge losses in the early 1980s, and then left the CSD business in 1985.
4. Can Coke and Pepsi sustain their profits in the wake of flattening demand and the growing popularity of on-CSDs?

There is no doubt that Coke and Pepsi can sustain their profits in the wake of flattening demand and the growing popularity of on-CSDs. At first, they focus their strength on the local market. They can improve recognition and brand awareness of their products, pay attention to substantial managerial influence in bottling and the distribution network by anchor bottling model and deepen their traditional products as well as introduce a variety of new products. Secondly, the overseas expansion also has an important position. Global soft drink sales growth slowed in the 2000s, but emerging markets such as China, India were still growing rapidly. Therefore, the Giants make a large investment overseas to develop new bottling plants, constructing more distribution channels, sales and marketing efforts as well as product research and development.