Soft Drinks

Report
Jonathan Gacioch
Alec Kane
Taylor Wilson

Why soft drinks?
◦ $17.6 bn estimated revenue ($739.2 m profit)
◦ Falling demand is driving innovation
◦ Unique pricing strategies and monopoly power
through exclusive contracts
◦ Average Americans consume 44 gallons per year
◦ Customer loyalty
VS.
Background, Competition,
Organization, Major
Companies

What does the industry produce?
◦ Mixes ingredients with carbonated water
◦ Package and distribute beverages
◦ Does not include:
 Still beverages
 Carbonated water
 Functional beverages (e.g. energy drinks)
 Companies that only produce beverage ingredients or
distribute beverages
Source: IBISWorld

What is the basic technology?
◦ Combining water, flavorings and sweeteners, and
carbonating this mix, and then packaging
◦ Natural sweeteners to limit calorie content
◦ Energy efficiency in production and biodegradable
plastic bottles with smaller caps

How are the products distributed?
◦ Producers ship their products significant distances to a
large number of markets
 Completed in-house by larger producers
 Outsourced by smaller producers (often to larger players)
Source: IBISWorld

Who buys the products?
◦ Consumers buy soft drinks in both supermarkets
and food services and drinking places
◦ Demographics for sugar drink consumption:*
 Young people and men consumer sugar drinks more
frequently
 Lower income individuals consumer more sugar drinks
in relation to their overall diet
*Ogden CL, Kit BK, Carroll MD, Park S. Consumption of sugar
drinks in the United States, 2005–2008. NCHS data brief, no 71.
Hyattsville, MD: National Center for Health Statistics. 2011.
Ogden CL, Kit BK, Carroll MD, Park S. Consumption of sugar
drinks in the United States, 2005–2008. NCHS data brief, no 71.
Hyattsville, MD: National Center for Health Statistics. 2011.
Ogden CL, Kit BK, Carroll MD, Park S. Consumption of sugar
drinks in the United States, 2005–2008. NCHS data brief, no 71.
Hyattsville, MD: National Center for Health Statistics. 2011.

How many firms are there in the industry?
Market Share of Major Companies
35%
30%
25%
20%
15%
10%
5%
0%
Coca-Cola
PepsiCo
Dr Pepper Snapple Group
Cott Corporation

Herfindahl-Hirschman Index (HHI):
◦ Moderately concentrated industry
Company
Market Share
Market Share Squared
Coca-Cola
32.70%
1069.29
PepsiCo
17.50%
306.25
Dr Pepper Snapple Group
15.20%
231.04
3.20%
10.24
Cott Corporation
HHI
1616.82

The Coca-Cola Company

PepsiCo Inc.

Dr Pepper Snapple Group Inc.

Cott Corporation


Largest company in terms of market share
and revenue
Major Brands:
◦
◦
◦
◦


Coca-Cola
Diet Coke
Sprite
Fanta
Revenues boosted by consolidation
Recently acquired companies to move away
from carbonated soft drinks:
◦ Honest Tea



Challenged Coca-Cola during the Great
Depression with a 12 oz. bottle (same price
compared to 6.5 oz. Coca-Cola)
Notable marketing: Pepsi Challenge (1975)
Major Brands:
◦
◦
◦
◦
◦
Pepsi
Mountain Dew
Sierra Mist
Mug Root Beer
Izze




Former division of Cadbury Schweppes Americas
Beverages
Brand owner, bottler, and distributor
Limited offerings in healthy beverages will hurt
the company in the future
Major Brands:
◦
◦
◦
◦
◦
◦
Dr Pepper
7-UP
Schweppes
A&W Root Beer
Canada Dry
RC Cola




Largest producer of private label soft drinks
Sells to Safeway and J Sainsbury, which label
the beverages with store brands
Success in Canadian market by lowering
production costs while maintaining quality
and improving packaging graphics
Cancelled contract with Walmart negatively
impacted revenue in 2008
Source: IBISWorld

High levels of product differentiation:
◦ Make entry into the market difficult
◦ Entrants must differentiate themselves from other
products
◦ Alternatively, entrants might find specific niches

Existing producers have achieved economies
of scale:
◦ Capital investment is required in the mass
production

Increasing trends of vertical integration:
◦ The Coca-Cola Company formerly sold rights to
mix and bottle its beverages
 Acquired Coca-Cola Enterprises in December 2010
 Combine marketing, distribution, and bottling
◦ PepsiCo started reintegrating its bottling in July
2009
 Completed acquisition of Pepsi Bottling Group and
PepsiAmericas in February 2010
Eliminating Competition to
Gain Full Pricing Power

Exclusive rights to distribute on campus

Most based on 90:10 ratio for shelf space

Includes both vending machines and in-store

Ad space/sports

Eliminating competition=pricing power

Reduces the effect of preference
◦ If you can only get Pepsi, you’ll get Pepsi

College years are habit forming
◦ Investment to generate brand loyalty

Exclusive advertising and sales rights

“We looked at it as we could offer different
soft drinks and get nothing or just offer Pepsi
products and bring in a lot of money the
University otherwise wouldn’t have.”
-Bill Mahon,
Penn State Spokesperson
2/3
1/3
~1500
750
Source: Scott Jacobson (Coca-Cola Spokesman)

77,000 students

Signed 1992
◦ First collegiate contract

10-year

$14 Million

37,000 students

Signed 1998-2013

$28 million

Student life and
athletics
Television Ad Costs (2011)
Evidence for tacit collusion in
the soft drink industry



Through our own research we found that the
prices of soft drinks made by each of the big
3 producers are identical to each other.
Prices for Coke and Pepsi products were
exactly the same at numerous Ithaca
locations (Wegman’s, 7-11, etc.).
This suggests tacit collusion on prices.
• A Journal of Economics and
Management Strategy study
explored the possibility of
tacit collusion in the industry.
• The study covered the years
from 1968-1986 and focused
on Pepsi and Coca-Cola
• Findings suggest that there
is collusive behavior in
advertising, but not in pricing


Have things changed since the 1980s?
Is there collusion in pricing now that wasn’t
there previously?
Are you paying more for your
drinks depending on your
location?


Is there a difference in the price of a soft
drink depending on where you are?
Are soft drinks more expensive on Cornell’s
campus than they are off-campus?


Our research showed that soft drinks are in
fact almost the same price per ounce whether
you are on or off-campus.
Note that on-campus prices only include
Pepsi products, as Cornell has a contract with
them.




Cans of soda are more expensive than bottles
per ounce, though not by much (between .5
and 2 cents per ounce)
2 Liters of soda are significantly cheaper per
ounce than 12 oz cans or 20 oz bottles
A 2 Liter of soda at Wegman’s is the same
price as a 20 oz bottle.
Pricing takes advantage of those who buy
single servings (can or bottle).
Is the soft drink industry a
wise place to invest your
money?



Prices of sugar and other inputs of
production are rising much faster than the
price of soda
Revenues for the industry have been falling
for over a decade
Revenues for 2013 are projected to be less
than 70% of what they were in 2003
Year
Revenue ($ million)
Growth %
2003
25,726.0
-7.1
2004
25,751.3
+.01
2005
24,838.5
-3.6
2006
23,150.1
-6.8
2007
21,523.7
-7.0
2008
20,436.6
-5.1
2009
18,640.6
-8.8
2010
19,794.3
+6.2
2011
19,123.5
-3.4
2012
18,263.4
-4.5
2013
17,598.9
-3.6



We would not suggest investing in the
industry.
Steadily rising cost of inputs suggests that
industry revenues will not increase any time
in the near future.
Demand for soft drinks is steadily decreasing
as people search for healthier options.

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