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Cola Wars Continues

1. Why has the soft drink industry been so profitable?

This question is answered through the “five forces” framework. What basically can be said about the industry is that there are high entry barriers into the industry in the form of branding as the brand images of the major companies are very strong keeping smaller firms from gaining any larger market share without extensive marketing efforts. The firms in the industry are concentrated and generally very large giving them large bargaining power when purchasing inputs which can generally be seen as commodities (homogenous). Suppliers are generally quite concentrated though have lower relative bargaining power due to the powerful nature of the firms in the industry, inputs homogenous and seems to be a somewhat credible threat of forward integration as soft drink manufactures acquire distribution channels such as fast food restaurants. What would be seen as a larger threat to the industry would be that of substitutes as there are very many with a positive relative price performance and no switching costs. Though due to the heavy branding nature of the industry buyer propensity to substitute is low.

2. Compare the economics of the concentrate business to the bottling business. Why is the profitability so different?

The concentrate business is focused around the production of concentrate of the soft drinks and then selling this via franchise agreements to bottling firms. The production facilities for concentrate require low capital investment and input prices (ingredients) are low relative to sales price as branding leads to the ability of increasing margins. Large marketing costs are incurred by these producers (though marketing costs are split with bottlers by 50% or more), but the brand image creation in this sector increases the firms bargaining power with bottling firms. Thus these companies gain goodwill and split the cost of this with bottlers.

The bottling process is much more capital-intensive...