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Cocacola and the Soft Drink Industry

Essay by   •  December 2, 2017  •  Case Study  •  1,117 Words (5 Pages)  •  1,044 Views

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Economics and Industry Structure of the Soft Drinks Industry

For almost 100 years Coca-Cola and its major competitors have been able to earn above normal returns, especially for the concentrate and bottling segments.  This is largely due to strategic commitments to particular strategies that created competitive positions. Because of these competitive positions, only a few players such as Coca-Cola and Pepsi produce most of the world’s carbonated beverages. This is one of the primary reasons why the industry is so profitable, even during the sluggish years. There are also several other reasons why the industry is quite profitable.

  • The concentrate is relatively cheap to produce
  • Direct distributors decrease operating costs
  • Subsidiaries package, container, and produce the concentrate at deeply discounted prices.
  • Coca-Cola and Pepsi enjoy exclusive rights (CDAs) to provide beverages to certain restaurants, gas stations, and stores guaranteeing the distribution of their products exclusively.
  • Strategic partnerships with other brands which promotes a synergy for increased participation of the target customers

Greater Profitability of Concentrate Over Bottlers

The bottling segment purchases the concentrate, adds carbonation and sweetener and then bottles the product in metal, plastic, or glass containers. “Under this setup, a typical bottler’s costs of sales exceeded half of its total sales.” (Kim & Yoffie, 2012) After paying for the concentrate and sweeteners, a “bottler’s average operating margin was around 8%.” (Kim & Yoffie, 2012).  

Consequently, soft drinks entities contain their costs by associating themselves with the bottling firms; a condition that helps them to increase profits and lower their break-even points.

The concentrate segment, however, is more profitable than the bottling sector because of the ratio of the concentrate to water. The concentrate producers blend the ingredients and flavors and ship the mixture to bottlers. Due to this, the concentration producers enjoy protection from the barrier to entry which results from high fixed costs associated with bottling as the concentration producer’s fixed costs are a fraction of those of bottling entities. Therefore, as Kim and Yoffie mentioned, a typical concentrate plant could cost $50-100 million, however, it could supply several regions and ultimately yield a operating margin of 32%.

Coke and Pepsi’s Competition on the Beverage Industry and Industry Profitability.

Both Coca-Cola and Pepsi specialized on differentiating and advertising strategies in the 60s and 70s. Pepsi exhibited a prime example in 1974 whereby they hosted blind taste tests between their Pepsi products and that of Coke all in the bid of branding themselves better than their rival. The bottling segments of the two further lowered their prices in the supermarkets for the purpose of competing with store brands. The overall effect was a negative impact on the profit margins for the bottlers (Chalikias & Skordoulis, 2016).

On the other hand, as the bottling segment underwent the crises, both Coke and Pepsi managed to maintain their profitability ratios in the international sales. However, this did not last for long as the bottling entities made the decision to retreat the war on prices during the late 90’s after realizing that they were not doing any good to the industry following the raised prices. Coke emerged to be more successful than Pepsi globally since it exhibited an early lead in the international business shortly after World War II and the early 1970’s. To remain competitive, Pepsi undertook the course of venturing into the emerging markets and consequently failed to make a breakthrough in the European market.

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