Cola Wars

Case #2: Cola Wars Continue: Coke and Pepsi in 2006

1. Why is the soft drink industry so profitable?

American’s consumption of the soft drink has been increasing excessively 23 gallons of annually in 1970 to a little more than 52 gallons in 2004. Consumption grew by an average of 3% per year over the next three decades. Fueling this growth were the increasing availability of CSD, the introduction of diet and flavored varieties, and brand extensions. There were many alternatives to CSDs, including beer, milk, coffee, bottled water, juices, tea, powdered drinks, wine, sports drinks, distilled spirits, and tap water. Non-cola CSDs included lemon/lime, citrus, pepper-type, orange, root beer, and other flavors. This industry is absolutely duopoly between Coke and PepsiCo while others are a minor role. They have a power of negotiation for the material cost and bottlers’ sales price, and a power of new product innovations to dominate market share. Thus both companies have increased sales revenues around 4~8% only except year 2002. Operating profits of Coke and PepsiCo, Inc were average 29% and 21%. Moreover, net profits of Coke and PepsiCo, Inc were average 21% and 13%. This data (Table #1 Financial Data) explains both companies really have managed well their profit models with the system profitability through their various distribution channels. They made decisions concerning the degree of control desired over the marketing of their products and adapted the channel flexibility to changing conditions. Even though bottlers have high portion of long-term liabilities (approximately 40%) due to high capital investment for the facilities and factories, they also earn operating profits of average 8~9% and net profits of 13~22%.

2. Compare the economics of the concentrate business to the bottling business. Why is the profitability so different?

The economics of the concentrate business and bottling is very different from each other in terms of number...