1. Historically, why has the soft drink industry been so profitable? We will use the Porter’s Five Forces framework to demonstrate why the soft drink industry – where Coke and Pepsi were, and still are, the two largest players – has been so profitable.
Historically, several factors indicated high barriers to entry. Firstly, the successful consolidation and vertical integration of Coke and Pepsi’s bottling networks created an extensive, and almost exclusive, distribution prowess. In addition, franchise agreements since 1987 restricted the flexibility of bottlers to handle directly competing brands. Together, it became challenging for smaller concentrate producers to tap Coke and Pepsi’s consolidated systems for distribution of their products. Secondly, economies of scale – particularly with respect to bottling and canning production units – allowed Coke and Pepsi to constantly introduce new products and packages before other existing and potential rivals could do so to compete. By the late 1980s, Coke and Pepsi each offered over 10 major brands and at least 17 container types. Thirdly, Coke and Pepsi dominated shelf space in supermarkets along with national pouring rights (89% combined in 2009). The two also invested hefty sums (over $370 million combined in 2009 alone) in advertising to help foster strong brand equity and loyalty. In short, mass availability and visibility of Coke and Pepsi made it difficult and costly for rivals to push their brands and products. The fear of retaliation, especially in terms of price wars, was possibly uninviting for smaller concentrate producers.
Next, a moderate buyer power relationship existed. Historically, the key buyers were supermarkets and fountain outlets, taking up 29.1% and 23.1% of the distribution. While the former possessed premium shelf space, they ought to benefit from holding CSDs, which accounted for $12