Cola Wars Continue: Coke Vs Pepsi in 2006

Q) Why the soft drink industry is so profitable?
A). The soft drink industry is profitable because the industry has concentrated revenues between 2 major players and it is virtually impossible for a new player to compete with the key players. The industry giant’s wielded power over the retail outlets. Convenience stores, vending machines, fountains are widely distributed and hence they don’t have the power to bargain over pricing issues and they also contribute to about 80 % of the sales. This ensures that the companies quote a maximum price and still have the final say in the matter.
Q) Compare the economics of the concentrate business to the bottling business: why is the profitability so different?

A). A concentrate producer has to blend the raw materials and ship them to bottlers in plastic canisters. A typical concentrate manufacturing plant has an initial capital investment of 25-50 million$ and is capable of meeting the needs of an entire nation. Therefore the concentrate producer’s main line of work shifts to advertising, research, and bottler support which ensures them a gross profit of 80%. The concentrate producer also enjoys added value in the form of access to branded names and unique formulas. A bottler manufacturer, on the other hand, has a capital-intensive business on hand, which has high costs to deal with with-concentrate producers and packaging activities being the major costs (up to 90%). The bottler’s profitability is therefore considerably reduced with a gross profit of about 40%. Added to this the bottler also invests in distribution networks as a result of which the operating margins drop drastically to 7-9%. Therefore there is a wide disparity in the profitability of a concentrate manufacturer and a bottler manufacturer.
Q) How has the competition between Coke and Pepsi affected the industry’s profits?
A). The cola giants Coca-Cola and PepsiCo have, through their ‘Cola Wars’, brought about a revolutionary and welcome change in the industry. Both companies in vying with each other for the top spot have managed to create high-quality products spread over a wide range. Kicking off as soft drink manufacturers the companies diversified to other packaged foods and drinks thus increasing their consumer base as well as the industries. The introduction of the diet coke, for example, was lauded as the most successful consumer product launch in the 1980s. The aggressive entry of PepsiCo into the food business in the latter part of the 1990s also contributed handsomely to the company and as a result of the industry’s profit.
Q) Will Coke and Pepsi sustain their profits through the late 1990s? What would you recommend to Coke to ensure its success? To Pepsi?
A). As time has shown the profits of both Pepsi and Coca Cola from the CSD industry hit a plateau in the 1990s. The US soft drink market, which is the largest market for both companies, began to see a slowdown at the time. As a result, the cola giants sought markets elsewhere; the Latin American nations and the largely untapped markets in Asia and Europe provided the breakthrough. Both companies now entered the virgin markets to establish themselves-Coca Cola through its Classic Coke and vending machines and PepsiCo through its flagship drink and its foray into packaged foods. In the last decade, Coca-Cola has faced several execution (or non-execution) problems and lawsuits damaging the goodwill of the company; it must, therefore, concentrate on rebuilding its brand image and more importantly take chances on Mergers & Acquisitions. PepsiCo has been more successful and so needs to just keep up the energy and aggression of the last few years.
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