Coce Vs. Pepsi

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HBS Case 9-702-442 MSB30 June 2008 COLA WARS CONTINUE: COKE & PEPSI IN THE TWENTY-FIRST CENTURY. Houssem Ghorbel Page 1 of 4 HBS Case 9-702-442 MSB30 June 2008 1- Why is the soft drink industry so profitable? Both concentrate producers (CP) and bottlers are profitable. These two parts of the industry are extremely interdependent, sharing costs in procurement, production, marketing and distribution. Many of their functions overlap; for instance, CPs do some bottling, and bottlers conduct many promotional activities. They also deal with similar suppliers and buyers. Entry into the industry would involve developing operations in either or both disciplines. In 2000, CPs earned 35% pre-tax profits on their sales, while bottlers earned 9% profits on their `sales, for a total industry profitability of 12% (Exhibit 5). This industry as a whole generates positive economic profits. In addition, the producers of the basic commodities for the coke production (like Caramel Colouring, flavour, caffeine or additives, sugar, packaging) have no power over the pricing hence the suppliers in this industry are weak. Revenues are extremely concentrated in this industry, with Coke and Pepsi, together with their associated bottlers, controlling between 70% & 90% of the US retail outlets in 2000 (Exhibit 7). In fact, one could characterize the soft drink market as an oligopoly, or even a duopoly between Coke and Pepsi, resulting in positive economic profits. To be sure, there was tough competition between Coke and Pepsi for market share, and this occasionally hampered profitability. For example, price wars resulted in weak brand loyalty and eroded margins for both companies in the 1980s. 2Compare the economics of the concentrate business to the bottling business: Why is the profitability so different? Concentrate business is highly profitable compared to the

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