<First Case Report: Cola Wars Continue>
Yeabin Lee(2016-13119), College of Liberal Studies
1. Why, historically, has the soft drink industry been so profitable?
It cost little to make soft drink, and Americans were in love with soft drink. For example,
cost of goods sold of soft drink accounted for 22% of net sales for concentrate
producers in 2009. Furthermore, a concentrate, a sweetener, and carbonated water were
the only three necessary ingredients in order to produce soft drink. High demand for
soft drink was being expressed by the fact that Americans drank more soda than any
other alternative beverage. Demand for coffee constantly decreased from 1970 to 2009,
while demand for soft drink had increased. The availability of soft drink and the
introduction of diet and flavored varieties were fueling this growth. Adjusting the price to
a more affordable level played a significant role as well. Also, unlike alcohol drinks which
could not be consumed by children and had a huge side effect, soft drink was enjoyable
to anybody without side effect the next day. Compared with milk or juice, soft drink was
a lot easier to keep in storage. Soft drink was what could most fulfill people’s thirst not
only physiologically but also psychologically, satisfying people of all ages and sex.
2. Compare the economics of the concentrate business to that of the bottling
business: Why is the profitability so different?
The role of concentrate producer was to blend raw material ingredients into packaged
mixture in plastic containers and ship those to the bottler. It required little capital
investment in the whole production process, so their most significant costs were for
marketing such as promotion and bottler support. The role of bottlers was to purchase
concentrate, add carbonated water and high-fructose corn syrup, bottle or can the
resulting product, and deliver to customer accounts. The bottling process was capital-
intensive and required inflexible production lines that weren’t suitable for other products
than cola. Bottlers had much more areas for spending money on, not only the
ingredients but also packaging and distribution networks, resulting in relatively low
operating margin of 8%, compared to high gross profits of more than 40%. But on top
of all that, I believe that the difference of market power between concentrate producer
and bottlers led to the difference in profitability. Bottlers were easily replaceable while
concentrate makers were not. Thereby they used their predominant status to make
favorable contracts with bottlers, often raising concentrate prices.
3. How has the competition between Coke and Pepsi affected the industry’s profits?
From 1975 through the mid-1990s, the competition between two companies alerted and
stimulated each one to pursue more successful strategies to beat each other,
contributing to each one’s success. This was possible because demand for carbonated
soft drink was significantly increasing every year, and they both achieved average annual
revenue growth of 10%. However this competition experienced a turnabout in the early
2000s, when Americans who are more and more concerned about health issues stopped
consuming soft drink as much as before. Nonetheless not only their sales but also net
profit/sales increased from 1975 to 2009. Faced with multiple struggles, each of them
charted in alternative beverages to ensure sustainable growth and profitability,
expanding their battlefield to other categories.
