Cola Wars Continue - Hbr Case Answers
1. Why, historically, has the soft drink industry been so profitable?
Paradoxically, never-ending Cola Wars between Coke and Pepsi have been the primary cause of extraordinarily high profitability of soft drink industry. To be more specific, the lion’s share of market covered is the result of fierce competition between the two companies. First of all, they have spent a great deal of money on marketing or advertising of their soft drink products not only in the U.S. but also in many other countries worldwide. Excessive advertisement expenditures made soft drinks become one of the most famous drinks all around the world. As a result, soft drink consumption has been increasing steadily ever since. Secondly, Pepsi and Coke tried to integrate bottlers, which allowed them to exercise a great power on their bottlers. They prohibited bottlers from accommodating rival brands, which may decrease their profit. Furthermore, secret recipe for soft drink concentrate along with integrated production line mentioned above created a strong entry barrier. Soft drink industry dominated by Pepsi and Coke, has little threat of being attacked by new companies.
2. Compare the economics of the concrete business to that of the bottling business: Why is the profitability so different?
To start with the conclusion, the profitability of concrete business is way higher than that of bottling business. This is mainly due to the differences in manufacturing process of each business. In case of concentrate, all they need is physical capital including machinery, overhead and labor. The most important factor in this business is recipe and the ingredients themselves do not cost much. As a matter of fact, one factory is sufficient to support the demand of the entire United States. On the other hand, bottlers have to purchase concentrate (at a pre-set price by concentrate producers), add sweetener, carbonate water and bottle it. Furthermore, it is the duty of bottlers to deliver the products to customers or retailers. Hence, bottlers require much more physical assets and a