The soft drink industry has been so profitable for the period spanning three decades from 1970 due to the increased demand for the CSDs which led to a sharp augment in the U.S. per capita CSD consumption. In figures, the annual consumption of soft drink by an average American rose from 23 gallons of CSD in 1970 to 52 gallons in 2004. According to the U.S. Beverage Industry Consumption Statistics, the steady rise in the consumption of the CSDs, attributed to the ever increasing availability of a variety of CSDs and the introduction of diet and flavored varieties, is sole responsible for the high levels of profitability recorded by the soft drink industry across the United States of America and world over.
Secondly, intensified marketing and a stepped up distribution of the CSD through international franchisees and retail outlets such as supermarkets (32.9%), fountain outlets (23.4%), vending machines (14.5%), mass merchandisers (11.8%), convenient stores and gas stations (7.9%), small grocery stores and drug chains (9.5%) within the without the United States of America not only boosted the sales of CSDs drastically during the period of time due to the larger quantities of the carbonated soft drink products which could then be sold to larger number of people in the global beverage markets but it also created product awareness world over. The U.S. Beverage Industry Consumption Statistics indicates that Coca Cola alone has approximately 9 million outlets, located in more than 200 countries, sold Coke products in the year 2004. Having entered into a franchise arrangement with the bottlers, the concentrate producers (Coca Cola and Pepsi) managed to develop a worldwide franchised bottling network with advanced capacities to supply products and meet the demands of the CSD in the expansive beverage market.
Moreover, price reduction strategies of the soft drinks producing companies (Pepsi and Coke) also lured several other Americans (including the military) into the consumption of CSDs in the midst of inflation compared to those of alternative products such as beer, milk, coffee, bottled water, juices, tea, powdered drinks, distilled water and tap water. Continual modification of pricing, bottling and brand strategies over the same period of time also encouraged more Americans to consume higher quantities of CSD given that variety of products were repackaged to meet the taste and fashion of consumers in the wider beverage market. Additionally, escalated degrees of advertising and marketing of the CSD were at play too in increasing the public awareness about the existence, use, and availability of such products. These are the real success factors behind the boost flagging domestic CSD sales.
Why is the profitability so different between concentrate and bottling businesses?
It is most notable that profitability between concentrate business and the bottling business are so different despite the fact that both Pepsi and Coke worked round the clock to improve “system profitability”, an arrangement whereby bottlers and concentrate makers created and then divided total profits from the then beverage sales. The concentrate producers made larger margins of profits compared to the bottlers because they required fewer inputs namely natural flavors, citric or phosphoric acid, caffeine and caramel coloring to make a concentrate. On the other hand, bottlers need buy major categories of input with a higher production overhead in the course of their bottling business. The bottling inputs constitute of packaging materials (includes glass bottles, plastic bottles and cans) and sweeteners (natural high-fructose sugar and corn syrup and artificial aspartame). Considering the variable costs of bottling and concentrate businesses, bottlers are likely to get much lower profits at the end of it all due to the incurrence of additional production overheads.
Effects of Competition between Coke and Pepsi in the Industry’s Profits
The cut-throat completion between Coke and Pepsi called for an intensified marketing, advertising and promotion programs as well as development of new low cost products to the liking of their targeted consumers. Similarly, both the company adopted various price reduction strategies to ensure they outdid one another in offering low prices for products to their clients. Taking into consideration the high costs of these marketing and promotion programs coupled with the impacts of the widespread retail price discounting, the profit margins realized within the soft drink industry was reduced significantly. Furthermore, parts of the accrued profits were rechanneled by the two companies to upgrade their production plants and equipment and to support the launching of new products. As such, these companies increase their capital requirements and in turn lower their profit margins tremendously.
Considering the diminishing yet dwindling demands for the CSD and other related bottled products in the global beverage market, it is not authentic that Coke and Pepsi will sustain their profits in the wake of flattening demand and growing popularity of non-carbonated soft drinks. Profitability of the industry will be a subject to some external forces described by the Michael Porter in his model of a perfect competition. In his five forces analysis model that represents a model of a perfect competition in an industrial economics, Porter elaborates that the real forces that affect the completion within the carbonated soft drink industry include threats of new entrants , the rivalry between the existing firms, threat of substitutes, the bargaining power of suppliers and the bargaining power of customers. Pepsi and Coke could therefore sustain profitability or not depending on the extent of pressure exerted by these factors on the beverage market.