Historically, soft drink industry in the United States enjoyed great profitability, but in the beginning of 2010, the profitability declined because of low demand and low consumption of carbonated soft drinks. So, the companies have to respond in accordance with the demand and preferences of consumers.
Reason of Profitability of Soft Drink Industry
Soft drink industry is profitable because of its market strategies, competition with rivals, and cost of bottlers or products. Further, the Industry is profitable as buyers and suppliers do not exert their power on the industry, rivalry at internal level is intense, barriers to entry are high, substitutes are not enough for taking market share, as a result of which soft drink industry is enjoying more profitability. The industry is also profitable because of cheap production of concentrate for fountain sales and bottling, having direct distributors, production of concentrate via their own subsidiaries, and also because of strategic brand partnerships.
Availability of Substitutes
Historically, substitutes are available. They include coffee, water, and juices etc. They cost low, as compared to per ml of carbonated drinks. However, most of the substitutes were free. For example, tap water costs nothing, while carbonated drinks companies charge $1 or more for drinks.
Power of Suppliers
Suppliers have very little power because of higher switching cost, and also because agreements of franchise have locked the suppliers into exclusive deals. Concentrate is, however, 40-45% of cost of goods sold to the bottler or supplier, but concentrate products offer more advantages such as development of marketing brand, product development, and purchasing power for sugar and cans, etc. additionally, competitors are highly concentrated.
Buyers for Concentrate Manufacturer and Companies Making Money in the Middle of a War
Buyers are the retailers or consumers. The consumers are of cola industry are price sensitive. War is, however, measured from the starting, and there is no influence on price since 1970s. Competition is not on concentrated prices, rather it is on shelf space, brand name, life-style that is based on advertising, discounting on downstream products.
Economics of Concentrate Business
The bottling business and economics of concentrate business are associated with each other. They should be linked in order to ensure smooth functioning in the market. The concentrate products or CPs, however, conduct negotiation on behalf of their suppliers, and they are also dependent on similar customers. Concentrated products pass their savings to their bottlers. The profitability differs because of difference in added value. However, the major source of added value for concentrated products is their branded products as well as their proprietary. Further, coke and Pepsi are not easily replicable. Further, the companies have also focused on adjusting their sizes as well as types of packaging of carbonated soft drinks via segmenting the type and size of carbonated soft drinks to their target market because of which profitability differs.
Effect of Coke and Pepsi War on Industry’s Profit
The war between coke and Pepsi is exerting positive impact on profitability of the industry. The competition comprises of push-pull effect in the marketplace. This is because one company makes an entry into the marketplace with innovative product, motivates other company, which then attains new completion level in order to attain new market share, and achieve more success in the market.
Sustainability of Profits
Coke and Pepsi can sustain their market share in accordance with the increasing demand as well as increasing fame of non-carbonated drinks. They can sustain by ensuing alignment of their product line offerings of carbonated soft drinks and non-carbonated soft drinks with the demand of consumers, and by continuing diversification of their product lines. They can also ensure by finding way in order to reduce the cost for maintaining continuation of significant profit margins.
