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Coke Vs Pepsi Analysis

1986 words - 8 pages

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

Americans enjoy carbonated sugary beverages. The industry itself, because of its tasty product, focuses on marketing and advertising to make a profit. Coke and Pepsi employed the following technique to make the soft drink industry profitable: marketing (Yoffie 21).

Coke and Pepsi have dominated the market on soft drinks by offering a product that people enjoy, at a price that the average Joe can afford, and by utilizing marketing strategies and campaigns. Through effective leadership, an environment was created which enabled success and profitability as well as creative strategies and campaigns. Both Coke and Pepsi ...view middle of the document...

The bottling business, on the other hand, differs significantly. Bottlers must make large investments to build plants and production lines which have limited return on investment because the systems that are interchangeable only for products of a similar size and package (Yoffie 3). The cost of building a large bottling plant could range as high as $75 million and both Coke and Pepsi each required up to 100 plants to provide effective nationwide distribution (Yoffie 3), indicating that the market structure of bottling plants is far more competitive than that of concentrate producers. Bottlers must also purchase concentrate, which accounts for up to 45% of the cost of bottling sales (Yoffie 3), making concentrate an input to bottlers and indicating that CSD prices are subject to market forces influenced by concentrate producers (See Exhibit 2a).

Using several of Porters’ Five Forces Framework of Sustainable Industry Profits, the economic dynamics of both businesses may be compared further. Entry into the concentrate and bottling business is very strict. Prospective entrants into the concentrate business, though relatively inexpensive to that of bottlers, must challenge well-established oligarchs, thereby providing a significant entry barrier. Entry into bottling is far more expensive and the high number of bottling plants required for nationwide distribution indicates a highly competitive market structure, placing its own barriers on prospective entrants. A low concentration of concentrate producers and a high concentration of bottlers means that profitability for the existing concentrate producers is much higher than that of existing bottlers.

The input suppliers in this dynamic are concentrate producers. Oligopolistic behavior in the concentrate business keeps the number of input suppliers low and thus their bargaining power is high when dealing with bottlers. Bottlers are the buyers in this dynamic, and the high number of bottling plants bidding for concentrate drives the market price of concentrate upward. Other factors, such as foreign bottling plants, high switching costs, and the necessity to purchase other raw materials further decreases bottler buying power. A concentrate producer may switch bottlers with relative ease as compared to bottlers who want to switch concentrate producers, who would then have to make significant investments in changing their production lines to adhere to a new product. Given the low operating costs and concentration of suppliers and high operating costs and concentration of buyers, gross profits for concentrate producers were much higher in 2004 (See Exhibit 2b). Thus, it is understandable as to why number of U.S. soft drink bottlers had fallen steadily from more than 2,000 in 1970 to fewer than 300 in 2004 (Yoffie 3), largely due to high operating costs and thinner profit margins, and both Coke and Pepsi made strides to purchase bottling factories, which they maintained as publicly held independent...

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