Coke and Pepsi have engaged in a cut throat competition for the world’s market for more than a century. The cola wars, fought over the $74 billion CSD industry in the United States, were very intense. The highly choreographed competitive struggle for the CSD industry lasted from 1975 until the mid-1990s. As a result both Coke and Pepsi were able to achieve an annual average growth of approximately 10 percent. Additionally, both the United States and global CSD consumption rose steadily every year. In the CSD industry, there exist the economics of the concentrates business and that of the bottling business. It is clear that that the profitability of the concentrate business and that of the bottling business is different. The concentrates business is more profitable compared to the bottling business.
The concentrate business, in which coke and Pepsi is involved, is more profitable because it involves relatively little capital investment in machinery, overheads and labor. The producers of concentrates simply blend raw material ingredients, packaged the mixture and in plastic canisters and ship the containers to the bottlers. For instance, a typical concentrate manufacturing plant, sufficient to cover the entire US, could cost between $50 million to $100 million to establish. The concentrate makers usually add artificial sweeteners to the CSDs. However, the concentrate producers had some significant costs such as advertising, promotion, bottler support and market research. It is important to realize that, in many instances; the concentrate producers jointly implement and finance marketing programs with the bottlers. The concentrates producers such as Coke, have the direct support of bottlers in matters relating to fast delivery, affordable prices as well as supply. The lucrative nature of the concentrates business made major players like Coke and Pepsi to expand rapidly and claim a combined 72 percent of the United States Carbonated Soft Drinks market’s sales volume in 2009. Furthermore, the concentrates producers determine the pricing of the end products. This ensures that they charge prices that maximize their profit margins.
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The bottling business, on the contrary, is less profitable. This is because the bottling process is capital intensive and involves high speed production lines that are often interchangeable only for products of similar type, and package of similar size. For instance, bottling and canning lines cost between $4 million and $10 million each, based on volume and package type. The bottlers also invest heavily in transportation trucks and distribution networks. The bottlers also purchase concentrates at prices set by the concentrate producers such as Coke and Pepsi. The bottling business is labor intensive. The bottlers require labor necessary for executing tasks such as DSD delivery and positioning of brand trademark labels. Other significant costs include packaging and overheads. It is also important to realize that the bottling companies bear much of the advertising and promotional cost. Therefore, the numerous expenses born by the bottling companies reduce their profit margins significantly as compared to concentrate producers. Furthermore, concentrate producers, particularly Coke, did not allow bottlers to distribute similar competitor products. This denied the bottlers the opportunity to diversify their products.
In conclusion, it is demonstrable that the concentrate business is more profitable than the bottling business. The bottling business requires heavy capital investment unlike the concentrate business. The concentrate producers have low labor, overheads and machinery costs. The concentrate producers also set the prices for the concentrates. This gives them the opportunity to set favorable prices that increase their profit margin. On the other hand, the profitability of the bottling business is dependent on the concentrate producers’ prices. Many at times, the prices charged on concentrates limit the profitability of bottling business.
References
Yoffie, D., Kim, R. (2010). Cola Wars Continue: Coke and Pepsi in 2010. Harvard Business School
