Why Has the Soft Drink Industry So Profitable?

Why has the soft drink industry so profitable? [Your answer should take Porter’s 5 forces into account.]

There are likely very many theories of why the soft drink industry became so profitable and clearly the fact that the industry behaves like an oligopoly is one of them. However, in the end, it is ultimately America’s penchant for sugar and caffeine that really led to the soft drink industry’s success. Once cola became seen as an “American thing” the rest of the world soon followed suit. It is clearly the extraordinary increase in consumption over the last century that led the soft drink industry to become a dominant financial player in the world. Indeed the soft drink industry is profitable and creates an extremely large potential industry earnings (PIE) but who historically has benefited from those earnings really is what has shaped and continues to shape the industry. So far in this course we have examined many examples of PIE and who the winners and losers are in any industry. We may want to feel bad for the so-called “losers” (i.e. CC&S) but also we must remember that every business is in the business to make a profit so even many of the losers are still very profitable. If they weren’t they would not be in the business. To use Porter’s five forces effectively, we need to break the soft drink industry into its two main component industries (concentrate producers (i.e. Coke and Pepsi) and bottlers) so for purposes of this discussion when we talk about the soft drink industry we mean the concentrate producers). So now we will examine Porter’s five forces effects on the concentrate producers.

1) Entrants- There has always been new entrants into the soft drink industry, however the threat of these new entrants is extremely low. Generally, the average soft drink user is very comfortable with drinking Coke or Pepsi and there is very little incentive for them to change. Soft drink consumption unfortunately starts at a very young age at a critical time when many patterns of adult behavior become set. It would be very unwise for a new company to spend billions of dollars acquiring the necessary production, distribution and marketing avenues necessary to change consumer preference, after all, its just a soda and they all taste relatively similar.

2) Substitutes- Although the soft drink industry has been extremely popular historically, the threat of substitutes clearly is the greatest current and future threat to the industry. In the last decade or two there has been a clear backlash against the soft drink industry. It is well established that soft drinks are a leading cause in the rise of obesity and the comorbities associated with it (i.e. diabetes, hypertension, cardiovascular disease). Concentrate producer attempt to solve this problem with the advent of diet soft drinks which has met with great success but also appear to be losing ground to substitutes