Jonathan Gacioch Alec Kane Taylor Wilson. Why soft drinks? ◦ $17.6 bn estimated revenue ($739.2 m profit) ◦ Falling demand is driving innovation ◦ Unique.

The Soft Drink Industry

Jonathan GaciochAlec 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

Introduction

Challenge

VS.

Industry StructureBackground, 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

Background

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)

Background

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

Background

*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.

Background

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.

Background

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?

Competition

Coca-Cola PepsiCo Dr Pepper Snapple Group Cott Corporation0%

5%

10%

15%

20%

25%

30%

35%

Market Share of Major Companies

Herfindahl-Hirschman Index (HHI):◦ Moderately concentrated industry

Competition

Company Market ShareMarket Share Squared

Coca-Cola 32.70% 1069.29

PepsiCo 17.50% 306.25Dr Pepper Snapple Group 15.20% 231.04

Cott Corporation 3.20% 10.24

HHI 1616.82

The Coca-Cola Company

PepsiCo Inc.

Dr Pepper Snapple Group Inc.

Cott Corporation

Major Companies

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

The Coca-Cola Company

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

PepsiCo Inc.

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

Dr Pepper Snapple Group Inc.

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

Cott Corporation

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

Competition

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

Organization

Collegiate ContractsEliminating 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

Collegiate Contracts

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

Incentives for Soda Companies

“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

Incentives for Colleges

Coca-Cola vs. Pepsi

Coca-Cola vs. Pepsi

2/3

1/3 750

~1500

Source: Scott Jacobson (Coca-Cola Spokesman)

77,000 students

Signed 1992◦ First collegiate contract

10-year

$14 Million

Penn State University (Pepsi)

37,000 students

Signed 1998-2013

$28 million

Student life and athletics

University of Minnesota (Coke)

Advertising Raw DataTelevision Ad Costs (2011)

Advertising Raw Data

Advertising Raw Data

Advertising Raw Data

Collusive BehaviorEvidence 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.

Collusive Behavior

Collusive Behavior

• 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?

Collusive Behavior

Pricing in the Ithaca Area

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?

Geographic Segmentation

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.

Geographic Segmentation

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).

Other Pricing Differences

Investment Recommendations

Is the soft drink industry a wise place to invest your money?

Soft Drink Consumption and Demand

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

Recommendations

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

Revenue Growth

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.

Recommendations