Defining the Market
The soft drink industry focuses on the marketing, production, and distribution of non-
alcoholic, water based beverages. All of these aspects are important to the industry. Marketing
plays a major role in introducing the product to the public and getting the final good into the
thoughts of the consumers. A lack of creative and influential marketing could leave an up and
coming company struggling in this industry. Soft drinks are produced in factories and plants.
First the syrup is mixed in with the water then it is bottled and ready for sale. Then the good that
is ready for sale gets brought to all of the outlets and stores which sell the product. All of these
procedures are vital to the overall success of a company in this industry because if one aspect
fails the whole business model would crash and burn. The three major firms in the soft drink
industry are the Coca-Cola Company, PepsiCo, and Cadbury-Schweppes. Coca-Cola has
products such as Coca-Cola Classic, Diet Coke, and Sprite, among others. Pepsi produces Pepsi,
Diet Pepsi, and Sierra Mist, as well as other products. Cadbury Schweppes makes 7-Up, Diet 7-
Up, and Dr. Pepper, while also making Snapple.
Soft drinks can come in many varieties. Seltzer water or sparkling water is one kind of
soft drink. Some others are all of the colas, iced teas, lemonades, sports drinks, and energy
drinks. Carbonated soft drinks are the leading products for all companies inside the soft drink
industry. Of the non-alcoholic beverages consumed worldwide almost 50% were carbonated soft
drinks (Deliotte Touche Tohmatsu, 2005, p.5).
Some beverages that are not considered soft drinks, even though they have no alcohol
content, are any hot teas, coffees, and milks. These differences in the makeup of the drinks help
draw boundary lines between the different industries.
In order to define the soft drink industry correctly there must be some sort of comparison
between other counterparts, alcoholic beverages and milk based beverages. Does the market
contain all of them or are they in different markets? A market is a group of firms that compete
against one another. They make the same kind of product and the consumer can choose between
them or other substitutes within the market. For example if you want Coca-Cola, but there isn’t
any then you might go ahead and buy a Pepsi. The ability to substitute one good for another
proves that they are in the same market. If that same person went into the store and there were
no Coca-Cola’s or Pepsi’s or any kind of soft drink, would that person appease their desire with a
beer, probably not, especially if that person was a child. Even if they could replace a soft drink
with a hot coffee or a glass of milk they probably wouldn’t. Therefore the cross elasticity
between soft drinks and alcoholic drinks, as well as soft drinks and milk based drinks are low.
This means that they are not close substitutes and they should not be considered in the same
market as soft drinks.
A relatively new market has arisen recently and that is the market for bottled water.
There has been somewhat of a craze in the past ten years over bottled water. The new healthy
and green thought process has given this industry a chance to strive. Water being viewed as the
new healthy thing to drink and it has recently changed many of its bottles to be more
environmentally safe. Do soft drinks actually compete with bottled water? If a party was being
thrown and the host went out to buy soft drinks, would the host buy bottled water too? It would
seem weird. They seem to be for two different needs. Bottled water is also in a unique position
because water is piped into every household and building in America, so people may not buy
bottled water due to its easy accessibility. If soft drinks were piped into every house in America
maybe these two things could be considered to be in the same market, but these two factors
separate the bottled water industry from the soft drink industry.
Worldwide Non-Alcoholic Beverage Industry Consumption
Source: Datamat and www.deloitte.com
Throughout past times carbonated water has been associated with good health. Mineral
baths and tonics made from natural herbs were looked upon as things that could help you stay
healthy. When trying to assess how the water attained and held onto its bubbles the scientists
were initially stumped. They soon realized that carbonization was the key. The first scientist to
figure this out was a British man named Joseph Priestley in 1772. By the end of the 18th century
carbonated water was available to the public. The first American credited with manufacturing
this soda water was Benjamin Silliman.
In the 1830’s producers of this carbonated water began to incorporate flavors into their
formulas. Adding sugar and flavoring encouraged new ideas on how to create soda water and in
the 1860’s the soda fountain was introduced. Soon after the soda fountain became a staple in
almost every pharmacy. Many new flavors began to regularly emerge onto the scene and one
that changed the soft drink beverage scene dramatically was the introduction of the first cola
drink in 1881.
The late 1800’s saw the emergence of many companies and brands that still exist today.
Dr. Pepper, Coca-Cola, Pepsi-Cola, among others were all introduced in the twilight years of the
19th century. Led by Coca-Cola companies soon began to make, manufacture, and transport their
goods the same way. Instead of having to make the soft drinks in one spot and transport them all
around, Coca-Cola started to sell it’s licensing to bottling companies. Now hundreds of bottling
plants around the nation were allowed to manufacture and ship the goods out. This cut down
tremendously on Coca-Cola’s transportation costs and made the brand and soft drinks, in
general, more available to the people. All other companies that could do this eventually
followed suit. This model is still used till this day.
Early in the 20th century the soft drink industry was the beneficiary of some questionable
actions. No longer being looked at as a medicinal remedy soft drinks were being consumed for
thirst quenching purposes. The Prohibition that America was faced with in the 1920’s and
1930’s helped sales. Instead of being able to sit down and have a beer, people had to resort to
soft drinks. Sales were up and the industry was in good shape. When the Prohibition ended the
industry was dealt a blow. Companies began marketing not only as soft drinks, but as a good
thing to mix with your alcoholic beverage.
Companies then began to try and differentiate themselves from one another. Coca-Cola
created new fountains which automatically mixed the syrup and the water in order to assure the
same taste every time, while Pepsi began to sell their drinks in a 12 ounce bottle instead of the
traditional 6 or 8 ounce bottles. During World War II the United States wanted to assure their
troops soft drink beverages so the government built overseas plants to make the drinks. This
would lead to future accessibility for companies to make and advertise internationally.
Started during the Prohibition companies began to use advertising to reach more and
more people. With the new overseas plants companies began to see the possibilities that the soft
drink industry had in front of them. Television commercials with movie stars began to air and
promote these drinks. In movie promotions and mass marketing toward targeted consumers all
began to pay dividends and pave the road for future success. Companies began to grow and
adapt as time went on. Growing bigger and more aware of consumer desires soft drink
companies made many important innovations. As health started to become more of an issue for
the everyday consumer soft drinks began to come out with diet drinks, caffeine free drinks, and
sugar free drinks, all to accommodate the buyer. When the environment became an issue the
companies started to manufacture with recyclable bottles. Appearing to be up to date and hip
with the ideas of the people helped these companies advance through the times.
As more time went on two companies began to separate from the rest of the field. Coca-
Cola and Pepsi-Cola were and still are the two powerhouses of the soft drink industry. They
tried in the 1990’s to begin attacking each other through commercials and public surveys. These
tactics didn’t really work due to brand loyalty and their symbolization that is seemingly
embedded in almost every aspect of our world today. These companies have grown to the extent
where they are recognized in any country in the world.
Supply and Demand Factors
The market’s demand could vary. The factors all depend on what kind of a person the
consumer is. For an average American maybe the demand changes depending on what time of
year it is. If it is hot out people buy more soft drinks to quench their thirsts. Holiday seasons a
lot of parties are being thrown and the demand for the soft drinks go up. Many of the firms
within this industry advertise and sell their products overseas. A person who is less well off and
lives in a struggling country might have a different set of priorities. When their economy is
running better and the per capita for soft drinks gets lower the demand for the drinks go up. This
is a smaller share of the products sold by these companies, but they none the less effect market
Supply in this industry is not really a big issue for existing firms. They can all produce
their goods at a reasonable cost. They distribute efficiently and they market well. There isn’t a
shortage on material needs. Land might become an issue for supply if a company wants to grow,
but there is a limit on what kind of land they can buy.
In all the soft drink industry’s supply and demand factors have an effect on the market.
The market is flooded with numerous different kinds of soft drinks and they all are relatively at
the same price. There aren’t many major fluctuations in supply and no reason for price
increases. The amount of competition and the amount of product on the market keeps prices
where they ought to be.
There are 294 firms within the soft drink industry that have 514 plants throughout the
United States (Census of Soft Drink Manufacturing, 2002, p.1). This number of plants is
significantly fewer than in the past. Ever since 1950 the number of plants has decreased, but the
production per plant has increased (Table 1). This can be credited to more efficient bottling
techniques. The number of different firms would seem to indicate good competition, but there
must be an assessment of the concentration inside of the industry. The top 4 firms within the
industry accounted for over 50% of shipments (Census, Concentration Ratios, p.8, 2002). This
indicates that the other 290 firms accounted for less activity then the top 4 companies.
This kind of top heavy concentration means that this industry is not at, or near, perfect
competition. The existence of three major companies Coca-Cola, Pepsi, and Schweppes knock
out the possibility of the soft drink industry being a monopoly. The ability for a small group of
companies to excel and take on more business than all the rest categorizes this market as an
oligopoly. The top 4 firms having a concentration ratio of over 40% further defines the industry
under the term of a loose oligopoly. Comparing these numbers to information compiled earlier
shows a slight increase in concentration as time went on.
There is one shortcoming of this data. The Economic Census data is only accounting for
companies and activity within the United States. Not taking into consideration the effect of
global markets and international businesses seem to ignore a significant amount of the market.
Concentration within the United States is a measure to have, but for the soft drink industry
neglecting to calculate international activities makes the statistic a weak calculation.
Number and Average Production of U.S. Carbonated Soft Drink Bottling Plants
Source: The U.S Carbonated Soft Drink Bottling Industry and Anti-Trust Policy since 1980
by the Federal Trade Commission
Economies of Scale
Economies of scale exist if larger companies can produce goods at a lower unit cost than
smaller companies. The soft drink industry is dominated by large firms and economy of scale
factors play a role in their dominance.
The mere size of the corporations and their plants play a big role in cutting costs. Bigger
machines and more personnel are capable of producing more goods in a period of time than other
competitors. Just having the bigger machines doesn’t work lower costs and raise production. In
order for the big machines to work to capacity the company needs a certain amount of workers
and production plan. With all this said producing more doesn’t always lower costs of
production. The size of Coca-Cola and Pepsi appear to fit this description. In the U.S. alone
they produced in total approximately 7.5 billion cases (192 ounce) in 2007(Beverage Digest,
2007, p. 1, 2). The whole soft drink industry sold 9.9 billion (Beverage Digest, 2007, p. 1, 2).
That means that Coke and Pepsi accounted for about 75% of sales. The sizes of their companies
allow them to produce this many cases.
Shipping costs become less of a factor as companies grow. If there is a small company in
the soft drink industry and they don’t have many plants they have to transport their goods from
one focal point to many stores. A large company may have a number of plants that can evenly
distribute the transportation therefore getting the goods to more people, quicker, and more
affordably. With international companies such as Coca-Cola in the soft drink industry there is
plenty of transportation cost differences between companies.
A big factor of how successful a company is doing is by checking out its market share. A
company that is doing well has a lot of its product being sold to a lot of different people, buyers,
consumers, etc. In the soft drink industry the major companies have a huge chunk of the market
and their number one goal is to maintain or increase their market share. Coke, Pepsi, and
Cadbury almost completely dominate the international market, so we will look at U.S. numbers
Data shows that Coca-Cola Company and Pepsi Company are the two leading firms in
terms of market share. Coca-Cola had 42.8 % (Beverage Digest, p.2, 2007) of the market share
in 2007 and Pepsi had 31.1% (Beverage Digest, p.2, 2007) market share in 2007. Other than
Cadbury-Schweppes, which had 15% (Beverage Digest, p.2, 2007) of the market, all other firms
had an almost nonexistent market share. In relation to Pepsi and Coke these other companies
seem to have a very limited market share to sell to.
The dominance of Coca-Cola and Pepsi, with their second tier competitor Cadbury-
Schweppes, has been something of a mainstay in the soft drink industry. Looking at numbers
from 1997 and 2002, the market share data almost looks like an exact mirror image. In 1997
Coke had a 43.9% (Beverage Digest, p.2, 1997) share of the market and Pepsi had a 30.9%
(Beverage Digest, p.2, 1997) share. 7-up and Dr. Pepper had a 14.5% (Beverage Digest, p.2,
2007) share of the market. Data from 2002 can be seen on Table 2. Cadbury-Schweppes
eventually took over 7-Up and Dr. Pepper, so they can correctly be compared to the 2007
numbers associated with Cadbury-Schweppes of 2007.
The market as a whole has recently been hit with a slowdown in volume sold. Since
2000 in the United States there has been at least 10 billion cases sold (192 ounce) per year
(Beverage Digest, p.2, 2007). In this past year, however, sales dropped to 9.9 billion for the first
time in the past seven years (Beverage Digest, p.2, 2007).
Top Soft Drink Industry Companies and Their U.S. Market Share
Source: Beverage Digest, 2002, 2007
When consumers are searching within a market they have different options to choose
from. If all products or services were the same people would have no bias and all companies
would have their fair share of business. In reality consumers often play favorites, either because
of a superior product, reputation, etc. These things that separate these substitutable products
from one another are features of product differentiation. In the soft drink industry there are two
factors that are worth mentioning. One is the availability of the products within the soft drink
industry. The second factor is a company’s ability to market new forms of their product to the
In America there are many different kinds of soft drinks available to the public. In any
store at any given time you can go in and buy a soft drink. Around the world in other countries
consumers don’t have the same luxury. Only certain brand names make it out to other countries.
Coca-Cola has always tried to appeal to the global market. Their global market helps
differentiate the Coca-Cola brand from the rest of the industry. Being able to provide to
countries that don’t have any other options to choose from gives Coke their own identity. Coca-
Cola’s unit case volume in China for the first quarter in 2008 was up 20% from the previous
quarter (Clifford, 2008, p.C3). Other companies could do so, but the amount of capital needed to
expend and the off shore plants needed to accommodate all the wants of a global market would
be too much for a midsized company. Many companies have trouble competing with Coca-Cola
and Pepsi in the United States, so trying to compete on a worldwide market wouldn’t be a smart
business move. The differences in availability on a global scale allows for product
differentiation to exist.
The soft drink industry is filled with a variety of products. Starting out with the
dominance of the cola’s the market has transformed into something of itself. The companies
began to produce diet soft drinks and caffeine free soft drinks. Introducing these new products
into the public eye gave the companies’ an opportunity to appear unique to consumers.
Creativity with new product exposure could begin to make a product seem different from the
rest. Recently Coke has launched a new product Coke Zero. It was essentially just another diet
soft drink, but Coke marketed it as a drink that tastes like regular Coke. They said it had the
same taste, but it had no calories. It didn’t come to rival any of the already existing products
over the long run, but that is an example of a company trying to create a new product that people
could look at as different.
Product differentiation may already exist in the consumer’s head. Products that have
been around for many years and have symbolic recognition already have a leg up on competitors.
Coca-Cola has one of the most recognizable symbols in the entire world. When people go to buy
a drink some may be under the impression that Coke is the best soft drink because they have seen
the symbol everywhere. Companies who are great at getting the consumer to believe that their
product is superior play into the ignorance of the consumer. That is one way product
differentiation is spawned in the soft drink industry.
For new companies to enter into the soft drink industry there are various barriers which
they must overcome. One is product differentiation, which was just discussed. If consumers
already have loyalty towards a specific product it would be hard for a new product to break into
the market. The new product would be produced, but no one would buy it. This would not be
ideal for a company starting out in the soft drink industry, especially with giant companies such
as Coca-Cola Company and Pepsi-Cola Company.
The amount of money that a new company would spend and never get back would hurt
its chances of survival. These are known as sunk costs. A lot of capital is needed to start out as
a new company. The purchasing of land, equipment, plants, etc. is all needed. If the company
doesn’t work out you can eventually sell all of these things back and recover, hopefully, a
majority of your money. Sunk costs are expenditures that you can never get back. For a new
company to break into the soft drink industry they would have to launch a full blown advertising
scheme, television commercials, radio ads, internet promotions, the whole deal. This would
ideally get their new product into the heads of the consumers, ultimately leading to the sale of
their new product. However this is not an ideal world. More than likely this plan would fall
short of what it was intended to do. Soon the sales aren’t adding up and your company is going
down. Now all the money you spent on advertising is gone and unrecoverable. These kinds of
sunk costs are major entry barriers for up and coming companies who are trying to enter the soft
In a market that sells their products to stores and supermarkets there is a war going on for
shelf space. Once a good is produced it has to get to the consumers. Companies in the soft drink
industry don’t sell their products directly to the consumer. They sell to the stores. The stores
then put the products on the shelves. The products that are in the front of the store and on the
front of the shelves get more viewing from consumers and usually lead to more sales. If a
product is on the back of every shelf in the store no one will see it and then no one can buy it.
The constant battle for shelf space is another entry barrier that a new company who has to deal
with if it tried to enter into the soft drink industry.
Over the past 30 years there has been a trend in mergers within the soft drink industry.
Besides the big companies occasionally taking over a minor competitor, the major corporations
have been taking part in a lot of vertical integration. Coca-Cola and Pepsi have been slowly
taking over bottling companies. Coke and Pepsi produced the syrup and the mixes for their
drinks, but had to get companies to bottle their final product. Coke and other companies got
tired of hiring another company to bottle their good so they began to takeover these factories. By
1998 Coca-Cola had 77.3% of its concentrate bottled by bottling companies it owned. Pepsi had
72.5% in 1998 (Saltzman: Levy: Hilke, 1999, p.38).
While Coke and Pepsi began to vertically integrated, Schweppes took on the opposite
role. They didn’t want to own the majority of the plants that bottled its product so they made a
joint commitment with Carlyle Group (Saltzman: Levy: Hilke, 1999, p.39). They split the
ownership of the bottling plants.
Large horizontal merging was attempted by major corporations; an attempt by Coke to
take over Dr. Pepper was stopped. Schweppes was eventually allowed to acquire 7-Up and Dr.
Pepper, but restricting Coca-Cola Company was an attempt to keep the soft drink industry as
competitive as possible.
Percent of a Company’s Concentrate Bottled through Company-Owned Bottlers
Source: The U.S Carbonated Soft Drink Bottling Industry and Anti-Trust Policy since 1980
by the Federal Trade Commission
Fair pricing is essential for fair competition within an industry. In the soft drink industry
pricing has been something that was very shady in the past. Price collusions charges were
brought to many. Caught red handed these companies admitted to collusion (more detail in the
Regulation/Anti-Trust section). There haven’t been any reports of price colluding nowadays, but
if it happened once it could happen again. With all that said, prices of soft drinks have remained
rather constant in recent years. The availability of many different products have not allowed for
one company to raise prices without negatively affecting sales.
Taking a look at some numbers produced by the Bureau of Labor Statistics the change in
the Consumer Price Index for juices and non-alcoholic beverages was 1.6% in January of 2008
(Crawford, 2008, p.14). This is less than the Inflation Rate of 4.2% at the end of January 2008
(Crawford, 2008, p.76). Benchmarking the Consumer Price Index of soft drinks against the
Inflation Rate we can see that the prices of soft drinks aren’t rising as fast as the inflation rate.
Bringing the product to the people’s attention is a vital aspect in establishing a brand
name. When speaking about firms in the soft drink industry you are talking about brand name
products, Coca-Cola, Pepsi, etc. Advertising plays a big role in getting into the public eye.
Coca-Cola has become an international symbol overtime due to its accessibility to the public.
In the soft drink industry the percentage of annual sales spent on advertising is 7.3%
(NAA Planbook, 2008). This ratio is significant due to the amount of advertising that takes place
within the soft drink industry.
The upcoming Olympic Games in China have created a conflict for Coca-Cola. Coke is
sponsoring the Olympic Games. They plan on launching huge marketing and advertising
campaigns to coincide with the games. Advertising and doing business in China is a thing that is
controversial today. China’s policies toward Darfur and Tibet cause a lot of conflicts with many
peace groups. These groups have recently attacked Coca-Cola for its support of the games in
China and to use China as a major part of their business strategy. Demonstrators feel as if Coca-
Cola could use their influence to try and get attention brought to the ongoing abuse of Darfur and
Tibet, but people feels as if Coke is hiding behind the Olympic Games and not trying to help the
cause. Coca-Cola is stuck between a rock and a hard place. On one end they can use the games
in China to advertise to a worldwide audience and a growing Chinese population. This would
directly affect sales and revenue. On the other hand negative publicity may be able to cancel out
any positives brought out by the games (Clifford, 2008, p.C3).
Throughout this whole conflict Coca-Cola has stood by its initiative and said they are
standing by the Olympic Games, no matter where the games may take them. Several other
sponsors of the Olympic Games have agreed to stay on board as well such as, McDonald’s,
Johnson & Johnson, Home Depot, etc. (Clifford, 2008, p.C3).
Advertising plays an important role in the establishment and development of firms in the
soft drink industry.
Being a firm in the soft drink industry there isn’t much that can be changed. There is a
beverage product produced and it is marketed to the public. Companies must think of a way to
appear new and innovative, while sending out a similar kind of product. A radically new product
wouldn’t sell because consumers are so use to traditional soft drinks.
The ability of a firm to reintroduce similar products to the market is one way for a
company to be innovative. Coke has numerous similar products. They have Diet Coke and
Coke Zero. They both are essentially diet sodas, but Coca-Cola markets them as two totally
different products. They reinvent products that are already in the market and play them off as
something new. The need to look new and up to date is important to companies in the soft drink
With new environmental issues and the need for companies to become greener, some new
innovations may introduce themselves. Other industries that bottle liquids have taken the
initiative and began to redesign their bottles to become more environmentally friendly. There
appears to be an opportunity for companies in the soft drink industry to try new things to appear
to be greener. Coke has taken advantage of this green opportunity by getting rid of old vending
machines and replacing them with new more efficient and greener machines (Gunther, 2008).
Coke even invested $40 million dollars in a research experiment with a group of other
companies, including PepsiCo, that are trying to develop these green innovations (Gunther,
2008). Nowadays in this industry these are the kinds of innovations that could be made in order
to appeal to the general public and its consumers.
The Federal Trade Commission (FTC) wanted to stop anti-competitive integration
between companies. In the 1980’s many companies within the soft drink industry were
vertically integrating. Companies were buying out their bottling companies. The FTC didn’t
attack any of these acquisitions because they viewed them as acts that could affect competition
neutrally or positively (Saltzman: Levy: Hilke, 1999, p.13). The FTC did block many takeover
bids. Horizontal mergers were treated differently in this same time period. In 1986 Pepsi tried
to takeover 7-Up and Coke tried to takeover Dr. Pepper. The FTC immediately challenged these
two acquisition attempts. Upon hearing of the challenge Pepsi dropped its takeover bid. Coca-
Cola had a different idea. They went onto court to try and fight this attempt to stop their growth.
On two different accounts the courts upheld the FTC’s appeal and didn’t allow for Coke to
purchase Dr. Pepper (Saltzman: Levy: Hilke, 1999, p.13-14).
Later in that same year, 7-Up and Dr. Pepper merged together to form DPSU (Saltzman:
Levy: Hilke, 1999, p.14). In 1995 Cadbury-Schweppes made an offer to acquire DPSU. The
FTC did not try to stop this acquisition because they thought it would help Schweppes, which is
a non-cola soft drink firm, to compete with the cola soft drink firms (Saltzman: Levy: Hilke,
1999, p.14). Later in 1995 the FTC allowed Coca-Cola to acquire Barq’s, a leading root beer
supplier. The FTC allowed this to take place without any opposition for two reasons. One,
Barq’s already had about 90% of its sales through Coca-Cola bottlers and two, Barq’s only
accounted for 0.6% of all carbonated soft drinks sold that year (Saltzman: Levy: Hilke, 1999,
p.14). The actions of the FTC varied due to the level of impact the horizontal merger would
have on competition and further concentration in the industry.
The soft drink industry was under major scrutiny for other actions in the 1980’s. The
department of justice opened an investigation looking into price collusion within the industry.
Price fixing, as it is also known, is an agreement for two or more companies to sell a product at
the same price. This effectively allows the sellers to maximize their prices creating more profits
for the sellers. The department of justice eventually got more than 40 bottlers and individuals in
10 different states to plead guilty to price collusion (Saltzman: Levy: Hilke, 1999, p.20). This
collusion took place throughout different areas of the United States reaching from Washington
D.C to Walla Walla, Washington. In some cases Pepsi and Coke were colluding with one
another and in other cases 7-Up and Dr. Pepper were colluding with both or just one of the top
two companies (Saltzman: Levy: Hilke, 1999, p.20-22). The collusion has been dealt with, but
its existence for a period of time means that it is possible for it to still be a problem today if not
Performance in the soft drink industry is propelled by the top companies. Coca-Cola,
Pepsi, and Cadbury-Schweppes currently account for almost 85% of the market capital in the
soft drink industry (finance.yahoo.com). Their success goes hand and hand with the success of
the industry as a whole.
In order to measure profits we can look at each of the three companies’ Net Profit Margin
Ratio. The soft drink industry average for Net Profit Margin Ratio is 9.2% (finance.yahoo.com).
Coca-Cola has a Net Profit Margin Ratio of 20.3% (finance.yahoo.com), PepsiCo’s is 10.2%
(finance.yahoo.com), and Cadbury-Schweppes’ is at 3.9% (finance.yahoo.com). All of these
numbers are as of 2007. Coke doubles the industry average which means that it has been turning
a profit at twice the rate of the industry average. Pepsi is just above the industry average, while
Cadbury-Schweppes is well below the industry mean. The top three as an average have a Net
Profit Margin Ratio of 11.4% (finance.yahoo.com), which is close to the industry average. This
average being that close to the industry average further proves that the top three companies in the
soft drink industry, basically, control the economic performance of the industry.
The soft drink industry is a branch of a bigger sector, the consumer goods sector. The
average Net Profit Margin Ratio for the consumer goods sector is 7.1% (finance.yahoo.com).
The soft drink average is generating more of a profit than the consumer goods market as a whole.
Coke and Pepsi are also beating this average as well. The average for all markets, consumer
goods, basic materials, conglomerates, financial, healthcare, industrial goods, services,
technology, and utilities, is 9.4% (finance.yahoo.com). The soft drink industry appears to be
right on track with all other markets at profit making. Its own 9.2% (finance.yahoo.com) Net
Profit Margin Ratio shows that the soft drink industry is right on par with the average market.
Coca-Cola Company appears to be blowing all of the averages out of the water making profits at
rates that more than double industry averages.
Growth and health of companies can be assessed by looking at past and present sales
growth. KO, PEP, and CSG have all had strong sales growth in recent years. By the end
December 31, 2007 the soft drink industry average growth rate was 23.7% (Reuters Global
Fundamentals, Factset Estimates). KO’s sale growth at the end of this period was 19.8%, PEP’s
was 12.3% and CSG’s was 66.8% (Reuters Global Fundamentals, Factset Estimates). Cadbury
had some amazing sales growth, but Coke and Pepsi were under industry averages. That doesn’t
cause any red flags because they both dominate all other companies in total sales. CSG’s sales
growth is a big leap forward in the small percentage of sales that aren’t made by KO or PEP.
However the firms growing at these rates are something that encourages investor optimism.
In the United States the Gross Domestic Product, or the GDP, was at a 0.60% rate of
change on April 30, 2008 (forecast.org, 2008). The sales growth in the soft drink industry has
been increasing a lot quicker than the GDP, meaning that the industry has been meeting society’s
Sales Growth of Top Three Companies
Latest 12 Months Sales - M illions (Left)
Sales Gr owth, Year/Year (R ight)
04 05 06 07 08 09
Latest 12 Months Sales - M illions (Left)
Sales Gr owth, Year/Year (R ight)
04 05 06 07 08 09
Cadbury Schweppes PLC (ADS)
Fiscal Year Sales - M il lions ( Left)
Sales Gr owth, Year /Year ( Rig ht)
4000.0 - 10%
90 92 94 96 98 00 02 04 06 08 10 12
Source: Reuters Global Fundamentals, Factset Estimates
Past Five Year Stock Performance of KO, PEP, CSG, and 3537 (Soft Drink Industry Avg)
2004 2005 2006 2007 2008
The top three companies in the soft drink industry have significant market share and there
are no signs of them losing any of it in the near future. Despite losses in volume sold in the
United States these companies are behaving very well in terms of their stock performance.
Looking at Coca-Cola Company (KO), PepsiCo (PEP), and Cadbury-Schweppes (CSG) in the
past five years they have all done remarkably well. Looking back at their stock prices of April
2003 and comparing them to their stock prices now, April 2008, there is a significant difference.
Coke and Pepsi have both increased their stock price by almost 100% (finance.yahoo.com).
Coca-Cola went from $35.75 dollars a share on April 1, 2003 to $61.44 dollars a share on April
1, 2008 (finance.yahoo.com). In that same time frame Pepsi went from $36.55 dollars a share to
$72.13 dollars a share. Cadbury-Schweppes had the biggest increase in stock price increasing
over 135% going from $19.21 dollars a share to $45.81 dollars a share (finance.yahoo.com). The
S&P 500 had a value of $858.48 on April of 2003 and a value of $1370.18 in April of 2008
(finance.yahoo.com). Over that five year span it increased more than 55%. These types of
numbers further prove that stock performance in the soft drink industry coheres with industry
and index averages.
We can further evaluate the stocks by looking at each one’s Return on Equity or ROE.
The ROE is the measure of a firm’s ability to use every dollar of net assets to generate a profit
and generate earnings growth. We can see that KO has an ROE of 30.9%, PEP has an ROE of
34.7% and CSG has an ROE of 10.3% (finance.yahoo.com). The soft drink industry had an
average ROE of 18.8% (finance.yahoo.com). Pepsi and Coke both outperformed the soft drink
industry average ROE, but Cadbury-Schweppes did not. Consumer goods as a sector had an
average ROE of 17.9% (finance.yahoo.com) and all sectors and markets combined had an
average ROE of 16.3% (finance.yahoo.com). The soft drink industry as a whole, Coca-Cola
Company, and PepsiCo had a higher ROE than the average firm in the consumer goods sector
and the average firm in all markets as a whole. Cadbury-Schweppes came up short, but in all the
ROE is an important ratio that allows people to assess the performance of a company. The soft
drink industry as a whole appears to have outperformed the average market, while KO and PEP
seemingly are leaps and bounds ahead of the average company in terms of ROE and overall
stock performance. This is a good sign of profitability within the soft drink industry.
Looking at the soft drink industry as a whole there are several money making prospects.
Firms that dominate the industry are protected by barriers that prevent new firms from entering
into their markets. Brand name loyalty and the amount of capital that Coca-Cola Company and
PepsiCo have make them powerhouses, not only within the industry, but worldwide. If looking
to invest in the soft drink industry, directly investing into one of these companies appears to be
the most lucrative path. Starting a new company in this industry would be difficult due to many
sunk costs and competing against such recognizable companies. Ultimately investing in already
existing leaders within the soft drink industry would be a good money making opportunity.
- Deliotte. Profitable Growth and Value Creation in the Soft Drink Industry. Deliotte
Touche Tohmatsu, 2005
- 2002 Economic Census. Soft Drink Manufacturing. U.S. Government, 2002
- 2002 Economic Census. Concentration Ratios. U.S Government, 2002
- Sicher, John. Beverage Digest. Bedford Hills: Beverage Digest Company L.L.C., 2008
- Sicher, John. Beverage Digest. Bedford Hills: Beverage Digest Company L.L.C., 2003
- Sicher, John. Beverage Digest. Bedford Hills: Beverage Digest Company L.L.C., 1998
- Clifford, Stephanie. “Coca-Cola Faces Critics of its Olympics Support.” New York
Times. 17 April 2008: p.C3
- Saltzman, Harold, and Levy, Roy, and Hilke, John. Transformation and Continuity: The
U.S. Carbonated Soft Drink Bottling Industry and Antitrust Policy Since 1980. Bureau of
Economic Staff Report Federal Trade Commission, 1999
- Crawford, Malik. CPI Detailed Report. Bureau of Labor Statistics, 2008
- NAA Planbook. The News & Record Advertising Department, 2008 (class handout)
- Gunther, Marc. Coke: The Green Thing. 17 April 2008.
- Reuters Global Fundamentals, Factset Estimates (from Financial Lab at St.John’s)