Soft Drinks Case

THE U.S. SOFT DRINK INDUSTRY IN 1986

With retail revenues estimated at $30 billion in 1986, the US soft drink industry had become an integral part of the American economy. Soft drinks were distributed through many outlets and sold in a variety of product forms and packages. Few industries could match the consistent and profitable growth of the major soft drink companies. However in 1986 the industry was changing and restructuring in ways that affected all competitors big and small.

INDUSTRY STRUCTURE

Three major participants produced and distributed soft drinks: 1) concentrate and syrup producers; 2) bottlers, and 3) retail outlets

Concentrate producers

Soft drinks consisted of a flavor base, a sweetener, and carbonated water. Some products also contained caffeine and artificial coloring.

Concentrate producers manufactured the flavors and sold them either to franchised or company-owned bottlers. Although there were over 50 concentrate producers in the US at the end of 1985, the industry was dominated by a few firms, notably Coca Cola and PepsiCo.

Besides these two leaders, there were several other national producers, including Royal Crown, Dr. Pepper, and Seven-Up. Many regional and private label producers, such as Canada Dry, Shasta and White Rock, sold a wide line of soft drink flavors, and claimed a small share of each regional market. They usually sold only to major food chains and distributed their products through the grocery chains´ warehouse systems. The larger companies sold to franchise bottlers.

Franchise Bottler System

Coca Cola and PepsiCo had long been granting franchises for the exclusive right to bottle and distribute their soft drinks in a defined territory. Franchisees were not allowed to market a direct competitor’s brand; for example, a Coca Cola bottler could not sell Royal Crown Cola. However, franchisees could sell no competing brands and could decline to market a concentrate producer’s secondary lines. Thus a Coca Cola bottler could turn down Coca Cola’s lemon drink Sprite in order to bottle Seven-Up.

Bottlers

Bottlers added carbonated water and sweetener to concentrate and bottled or canned the soft drink. Bottler salespersons loaded the soft drinks on bottling trucks and delivered directly to retail outlets, though a few smaller national brands distributed their products through food store warehouses.

There were four types of bottlers.

1) Privately owned franchise bottlers. Many of these were small and marketed only Coca Cola or PepsiCo products. However some private bottlers have achieved substantial growth by expanding the size of their plants or buying up franchise operations in contiguous areas and taking on secondary brands.

2) Large publicly owned, multibrand franchise firms, based in large metropolitan areas.

3) Diversified companies that owned bottling franchises of Coca Cola and PepsiCo.

4) Bottling operations owned by concentrate producers. Coca Cola re-franchised most of its territories between 1980 and 1985 and sold off most of its company-owned bottling businesses. By 1985, Coca Cola had only 11% of its US volume in company-owned bottlers. PepsiCo on the other hand, was committed to become a major player in the bottling system network. In 1970, PepsiCo embarked on an acquisition strategy to expand its ownership base, and increased the percentage of volume sold through its bottling group to 21% by 1985.

Seven-Up and Royal Crown also had directly owned some of their bottlers, which accounted for approximately 5% of the volume for each company.

Suppliers

Aside from the concentrate producers, packaging and sweetener firms were the bottlers’ major suppliers. The large concentrate producers negotiate directly with packaging suppliers on behalf of their bottlers to 1) encourage reliable supply, faster delivery and lower costs and 2) ensure that packaging innovations were readily available in sufficient quantity for their bottlers.

Five glass container manufacturers dominated sales to the soft drink industry: Anchor Hocking, Owens Illinois, Brockway, Midland and CGL.

Five can companies accounted for 98% of the cans sold to the soft drink industry: American Can, Continental Can, Crown Cork and Seal, National Can and Reynolds Aluminum. Most major sales were to bottling companies, although each of the concentrate producers negotiated with the canning suppliers about the design, availability and price of cans.

Three firms supplied most of the plastic containers: Dorsey, Brockway and Owens Illinois. By 1985 Owens Illinois remained the sole supplier of the newest three-litre plastic bottle. Concentrate producers were seeking new suppliers of the three-litre plastic bottle, and some large bottlers were investing in plastic extrusion machines to make two-litre plastic bottles.

Bottlers also purchased nutritive (or caloric) sweeteners such as sugar or high fructose corn syrup (HFCS). Sugar was purchased from refineries and HFCS was purchased from corn-wet mills. The soft drink industry used 8.5 billion pounds of nutritive sweetener in 1984, accounting for 31% of total US consumption. Concentrate producers were often able to influence the price that bottlers would be charge for sweeteners.

Retail Outlets

Industry analysts divided the retail channels for soft drinks into four categories:

1) Food stores. Here, rival bottlers fought for shelf space to ensure maximum visibility, accessibility and support for their product line or even a single brand. Safeway, the largest supermarket chain in the US made about 6% of total US food retail sales. No regional chain controlled more than 25% of the market in a major trading area.

2) Fountain outlets. These bought syrup from concentrate producers and mixed the syrup with carbonated water on site for immediate consumption. Soft drinks were highly profitable for fountain outlets. Large fast food chains accounted for one-third of fountain sales and were one of the fastest growing soft drink channels.

Coca Cola had historically dominated fountain sales and controlled the important McDonald’s account. Coca Cola sold syrup directly to the outlets of large chains bypassing the local bottler. PepsiCo won the Burger King account and with its purchase of Pizza Hut, Taco Bell and KFC made it the world’s largest fast food company and helped it achieve a commanding position in this market. Local PepsiCo bottlers handled the fountain accounts in their respective territories.

3) Vending

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