The concentrate business is much more profitable, it is them who pay for the majority of the advertising and marketing, Coca-Cola contributed over $700 million to it top bottler in advertising and marketing support in 2000 alone.
53 gallons/capita of CSD are consumed in the US per year, this is obviously a huge market. The power lies with the concentrate producers; they have the product that people want, the bottlers are only one means to get it to the consumer. The CSD producers could do it themselves. The bottlers are happy to get a tiny cut of the massive profits, and the CSD producers are happy to franchise the bottling operations as it ensures that the bottlers continue to try and cut their cost, so that the CSD producer can put up concentrate prices again.
Concentrate prices have risen above those of inflation 1998-2000 concentrate prices rose by 4.2% while inflation was 3.2%. The CSD producers are really putting the squeeze on the bottlers.
The cost of concentrate producers sales as a percentage of their profit is 17%, but for a bottler 65%, a truly massive difference. The selling and delivery costs are but 2% for the concentrate producer and 21% for the bottler. The concentrate producer has so much profit they spend whatever’s left on advertising and marketing on ensuring everybody knows about, wants and loves their product. The key to the success of these two brands is in their branding, why choose Pepsi over Coke or vice versa, it’s a subconscious desire to tap into the image they represent.
Indeed cola is such a part of our lives what party doesn’t have any?
The Cola companies have beaten all the other CSD companies, now they just want all the people who drink CSD’s to consume more of them. Already 29% of all beverages consumed in the US are CSD’s.
The early franchise agreements Coke agreed with its bottlers fixed concentrate prices that did not provide for contract renegotiation. In 1921, 1978 and 1987 ending with the Master Bottler contract, Coca-Cola managed with a lot of legal wrangling to negotiate new contracts that linked concentrate prices to the CPI. It also allowed for the bottler to decide the retail pricing. The bottler and concentrate producer had to be in agreement over packaging, advertising and promotions. Although the concentrate producer was not obliged to, it often subsidised these activities heavily.
Coke contributing $766 million in marketing support to its top bottler.
Certainly recently it is the concentrate producers that have been the driving force in all aspects of the CSD market both Coke and Pepsi have bought up most of their bottlers and consolidated them into Coca-Cola Enterprises (CCE) and Pepsi Bottling Group (PBG) respectively, these companies were then spun off to the public, making them ‘independent’. The top 10 bottlers for Coke and Pepsi produce 94% and 85% of the domestic volume of the respective franchisors.
The concentrate producers have forward integrated their business and now more or less control the bottling aspect of the CSD industry too.
Coke and Pepsi maintain the power (and the profits) in the battle between bottler and concentrate producer, because they are the keepers of these ‘magical’ products that everyone wants, nay needs. They are the brands, not the bottlers and that is the essence of the relationship; the bottlers are nothing without the concentrate producer.
Part II
Coke and Pepsi have for the best of a hundred years continually posted profit growth, in the 90’s alone they pushed up consumption of CSD’s by 25% in the US.
The Americans drink an astonishing 53 gallons of CSD per year. You only have to look at what the average in China is (with a population 5 times that of the US) to see that the scope for growth is enormous.
In the US, where the market has plateaued, indeed over the period 1998-2002, Coke Classic is down –4.4%, Pepsi by –9.4%, the giants have bought up poorly run and smaller bottlers, then spun them off to their independent bottling arm.
In an effort to keep costs down they have consolidated the bottling end of the market, so that there are fewer bottlers, which in turn also keeps transport costs down. Both companies continue to spend hundreds of millions on advertising and marketing. Both have pursued similar strategies abroad too, bearing the brunt of the cost in setting up massive bottling plants in far flung and untapped markets and assisting with establishing the infrastructure.
In an effort to bolster profits Coke and Pepsi upped the retail prices of their flagship products, as opposed to slitting each other’s throats by continually undercutting each other.
Coke put their prices up by 6.8% in ’99 and ’00 and the sales only fell by 1.5% and 0.8%
The area which has showed very strong growth in the last 10 years in the US has been the Diet market, which now has approximately 30% share of the CSD market (Beverage Digest), while regular CSD consumption fell by 4-6% diets were up by 4.5% between ’98-’02. Although of course it is questionable as to how much of this is new growth and not just a transfer of regular CSD drinkers to Diet.
This is seen as a key market for the future, especially the CSD industry concern over the so-called obesity issue.
The growth area in recent years has been in the non-CSD market, Sports drinks (Gatorade), chilled orange juice, dairy based drinks and especially water. As Pepsi’s vice-president for Business puts it, “if Americans want to drink tap water, we want it to be Pepsi tap-water.” This area again fits in well with the more health conscious market. If you look at the top brands in the CSD market all lost market share or remained flat in 2000, whereas all the non-CSD’s (including water) increased their market share, showing conclusively that the rend, in the US is away from CSD’s. A worrisome statistic for Pepsi and Coke, which is the main reason behind their recent acquisitions of Minute Maid, Dasari, PowerAde and Barqs by Coke and Gatorade, Lipton and Aquafina for Pepsi. This move away from CSD’s into all beverages is very significant. In 1999, non-CSD’s accounted for 80% of Pepsi’s and more than 100% of Coke’s growth.
In the US there will no longer be the massive growth in the CSD sector, however the rest of the world doesn’t drink CSD’s at all in comparison to the US. An American will consume 874 8 Oz. Cans a year whereas in China it is only 22 and in India only 6, if they can saturate either of these markets to the same extent as in the US it would create a $32 billion CSD market!
The possible growth in India is a hundredfold.
Coke rules supreme over Pepsi abroad, its international sales accounted for 62% of its revenues and only 9% of Pepsi’s revenues. Coke had gotten massive first starter advantage by always supplying to US troops wherever they were since the Second World War,
Can coke and Pepsi sustain their profits? I certainly think so, as long as they concentrate (!) on the foreign markets and try and break away from their All-American image, which puts off a lot of people who see it as another aspect of American Imperialism. There now exists several Muslim Colas!
Pepsi and Cola are too big and too powerful, not to be able to dominate all the emerging markets. They are very powerful brands of cool, which the young of the developing nations aspire to.
Bibliography:
David Yoffie, Harvard Business Review: Cola Wars Continue, March 2002.
‘Diet Colas Continue Growth’, Beverage Digest, August 29 2003.
