Jonathan Gacioch Alec 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

VS.

Background, 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 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) 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 *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

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

 How many firms are there in the industry?

 Herfindahl-Hirschman Index (HHI): ◦ Moderately concentrated industry CompanyMarket ShareMarket Share Squared Coca-Cola32.70% PepsiCo17.50% Dr Pepper Snapple Group15.20% Cott Corporation3.20%10.24 HHI

 The Coca-Cola Company  PepsiCo Inc.  Dr Pepper Snapple Group Inc.  Cott Corporation

 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

 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

 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

 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 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

 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

Eliminating 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

 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

 “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

2/3 1/3 750 ~1500 Source: Scott Jacobson (Coca-Cola Spokesman)

 77,000 students  Signed 1992 ◦ First collegiate contract  10-year  $14 Million

 37,000 students  Signed  $28 million  Student life and athletics

Television Ad Costs (2011)

Evidence 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.

A Journal of Economics and Management Strategy study explored the possibility of tacit collusion in the industry. The study covered the years from 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?

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?

 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.

 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).

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

 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

YearRevenue ($ million)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.