Cola Wars

1. Why, historically, has the soft drink industry been so profitable?

First, the price of CSD is low and they can be easily found in supermarkets, fountain outlets, vending machines, etc. Therefore, people can buy them easily. Second, the annual CSD consumption rate grew 3~7% during the 1980s and early 1990s, so the CSD industry gained more and more profit each year. Third, Cola and Pepsi fought against each other during the Cola War by carrying various promotion and marketing programs, so the sales of CSD increased undoubtedly. Forth, fast food industry enhances the growth of CSD sales, as when ordering a set meal, it usually comes together with a CSD.

2. Compare the economics of the concentrate business to that of the bottling business.

Why is the profitability so different?

In comparing the manufacturing plant cost, concentrate manufacturing plant costs about $25 million to $50 million to build, while bottlers plant costs about $40~$75 million. In comparing the inputs, concentrate producers need to purchase 1 major input: the concentrate of colas, while bottlers need to purchase 2 major inputs: packaging and sweeteners. In comparing the delivery, concentrate producers deliver the concentrate to bottlers directly, while the bottlers need to deliver the finished goods to customer accounts, which costs much more money.

As seen as above, the bottling process is much more capital-intensive comparing to the concentrate producing process. As a result, the bottlers gain less profit than the concentrate producers.

3. How has the competition between Coke and Pepsi affected the industry’s profits?

The war between Coke and Pepsi not only enable them to expand revenue, but also broaden their base of innovation (introduction of new non-CSDs, different marketing strategy in different countries, etc.).