Has the Industry That Coke and Pepsi Compete in Generated High Profits Historically Relative to Other Industries? What About the Csd Bottling Industry? What Is Your Standard for “high”?

Has the industry that Coke and Pepsi compete in generated high profits historically relative to other industries? What about the CSD bottling industry? What is your standard for “high”?

To answer this question, one must dissect the Carbonated Soft Drink industry into its different players.

Producing concentrate is fairly easy, requiring very little capital investment. Given relatively stable and growing demand, no serious R&D is required. The more complex task for concentrate producers is the brand creation and bottler relationship management. Having beat imitation initiatives both in court and on the market, the built brands can be considered scarce goods. Although there is more intense competition over larger national accounts and the creation of new brands, the competition between the two major players in this industry can be described as oligopolistic (see Pepsi raising prices to be in line with coke in 1970s, concentrate price increase of both Pepsi and Coke in the 1980s). Thus, although the case is referred to as the cola wars, there was not much rivalry between Coke and Pepsi per se.

Bottlers on the other hand were responsible for the majority of the creation of the physical product including packaging solutions and delivery. With high investment costs and machine specificity, the possibility to switch to other products was fairly limited. A drastic fall in the number of bottlers is a symptom of harsh competition and the need for scale to remain competitive. In retail stores, bottlers have to fight for shelf space. Although there are trends to monopolization even in the bottling industry, which would incur monopolistic rents, the large dependency of the bottling firms on Coke and Pepsi and the possibility for the concentrate producers to partially by-pass the bottlers and sell directly to the retailers eat away any additional profits.

The standard for high would be measured in which share of the entire industry’s profitability is captured by any individual player in the value chain. Coke and Pepsi were earning $1,820 m. and $1,396 m. of net profits compared to $736 m. and $608 m. for their largest bottlers who additionally required substantially higher amounts of capital investments. Historically, the concentrate producers have enjoyed higher net profit margins as compared to the bottlers (32% vs 8% respectively for 2009 as per exhibit 4). Thus, the concentrate producers are clearly a profitable venture, pushing down the competitive pressure to the bottlers by pressuring them

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