The Soft-Drink Industry

The Soft-drink Industry: Both concentrate producers (CP) and bottlers are profitable. These two parts of the industry are extremely interdependent, sharing costs in production, marketing and distribution—many of their functions overlap. The industry is already vertically integrated to some extent. This industry has been around for ages, and although consumer taste has changed over the years, the demand for carbonated soft-drinks has declined insignificantly. This industry as a whole generates positive economic profits.

Rivalry: Revenues are extremely concentrated in this industry, with Coke and Pepsi, together with their associated bottlers. The soft drink market can be described as a duopoly between Coke and Pepsi, resulting in positive economic profits. To be sure, there is tough competition between Coke and Pepsi for market share, and this has occasionally hampered profitability. For example, price wars resulted in weak brand loyalty and eroded margins for both companies in the 1980s.

Substitutes: Through the early 1960s, soft drinks were synonymous with “colas” for consumers. Over time there were other drinks like bottled water and teas that became more popular as consumers became more health conscious. Coke and Pepsi responded by expanding their offerings, through alliances (e.g. Coke and Nestea), acquisition (e.g. Coke and Minute Maid), and internal product innovation (e.g. Pepsi creating Orange Slice), capturing the value substitutes internally. Bottlers were able to overcome many operational challenges through consolidation to achieve economies of scale. Overall, because of the CPs efforts to diversify, substitutes became less of a threat.

Power of Suppliers: Supplier is low. The inputs for Coke and Pepsi’s products were primarily sugar and packaging. Sugar could be purchased from many sources on the open market, and if sugar