Market Analysis of the Carbonated Soft Drink Industry
Vaclav Vlcek
ECO 401
12/02/2009
The carbonated soft drink industry is the biggest beverage industry in the United
States. According to Beverage Digest, an authoritative publication covering the beverage
business, the total volume of sales in 2008 exceeded 9.6 billion 192-oz cases worth
approximately $72 billion. Per capita consumption of carbonated soft drinks (“CSD”)
reached 760 eight-ounce servings which accounted to about 30% of total liquid
consumption in the United States.1
The carbonated beverage industry is highly concentrated and profitable. Today,
about 90% of the CSD market is controlled by only three companies - Coca-Cola,
PepsiCo and Dr Pepper-Snapple. In 2008, Coca-Cola Company was the biggest out of
“the big three” with market share of 42.7%.2 Despite the ongoing economic crisis, CocaCola Company was able to attain net income of almost $6 billion during the same year.3
The high concentration and high profits in the CSD industry has raised some
concerns about the level of competition within the market. In last three decades, the
Federal Trade Commission has conducted several investigations on horizontal and
vertical acquisitions in the industry, and the Department of Justice has brought several
price-fixing cases against some CSD companies.4
In order to fully understand the current situation and be able to predict likely
future path of the carbonated soft drink industry, it is necessary to explain the historical
background of the product and the level of competition within its market. Carbonated soft
drink can be defined as flavored syrup combined with carbonated water. All nonJohn Sicher, “Top-10 CSD Results for 2008,” Beverage Digest 54, no. 7, 1-2, http://www.beveragedigest.com/pdf/top-10_2009.pdf (accessed November 28, 2009).
2
Ibid.
3
The Coca-Cola Company, “Financial Overview 2008,” http://www.thecoca-colacompany.com/
ourcompany/ar/financialoverview.html (accessed November 28, 2009).
4
Harold Saltzman et al., Federal Trade Commission, Transformation and Continuity: The U.S. Carbonated
Soft Drink Bottling Industry and Antitrust Policy Since 1980 (November 1999), 6, http://www.ftc.gov/
reports/softdrink/softdrink.pdf (accessed November 28, 2009).
1
alcoholic, non-carbonated and non-diary beverages manufactured by combination of
these two ingredients are considered as a carbonated soft drink and consequently belong
to CSD market.5
According to Harold Saltzman, the early history of the CSD industry can be
examined by focusing on history of the most successful and innovative soft drink firm
ever – the Coca-Cola Company.6 In 1886, John Pemberton, an Atlanta pharmacist,
created a new beverage by combining originally flavored syrup and carbonated water.
The beverage was initially advertised as a medicinal drink and was sold in Jacobs’
Pharmacy for five cents a glass. In late 1880’s, Asa Griggs Candler, a local businessman,
purchased the Coca-Cola brand for $2,300 and became the first president of the newly
created company. In next ten years, Candler, a gifted salesman, transformed the new soft
drink from “an invention into a business” by promoting Coca-Cola as a refreshing
beverage rather than a medicinal drink. This transformation proved to be a crucial
moment not only for the Coca-Cola Company, but also for the carbonated soft drink
industry as a whole.7
During the 19th century, there were many companies selling many various
flavored carbonated drinks. Majority of them were advertised as medicinal tonics and
were sold from soda fountains in local stores and pharmacies. According to Greer, there
were more than one hundred independently owned CSD brands during that period of
5
Ibid., 5.
Ibid., 6.
7
The Coca-Cola Company, “Heritage Timeline,” http://heritage.coca-cola.com/ (accessed November 28,
2009)
6
time.8 This indicates that the level of concentration in the CSD market was low and
competition high.
But that significantly changed after Asa Candler transformed the Coca-Cola
Company. After the Atlanta businessman engaged in an innovative advertising campaign
and allowed his unique drink to become more portable, the Coca-Cola Company became
the largest soft drink firm in the United States. Right after the purchase of the brand and
creation of the company in late 1880’s, Candler engaged in an aggressive advertising
campaign to attract new customers. To promote the new drink and gain reputation for the
company, he hired celebrity spokepersons, “gave away coupons for complimentary first
tastes of Coca-Cola, and outfitted distributing pharmacists with clocks, urns, calendars
and apothecary scales bearing the Coca-Cola brand.”9 He also brought several trademark
infringement suits against other cola makers and introduced a new patented swirl bottle to
distinguish Coca-Cola from its competitors.10
In addition, Candler was convinced by Benjamin Thomas and Joseph Whitehead
“to grant them the exclusive right, in perpetuity, to bottle and sell Coca-Cola throughout
most of the United States.”11 The two Chattanooga lawyers than expanded Coca-Cola’s
business geographically by dividing the United States into territories and granting
exclusive licenses to independent local bottling companies.12
The granting of perpetual exclusive territories to bottlers combined with effective
advertising campaign proved to be a very successful strategy. The company grew rapidly
8
Greer cited in Saltzman, 7.
The Coca-Cola Company, “Heritage Timeline.”
10
Mark Pendergrast, For God, Country, and Coca-Cola: The Definitive History of the Great American Soft
Drink and the Company That Makes It (New York: Basic Books), 62.
11
Ibid., 7.
12
Ibid.
9
and significantly increased its CSD market share. By 1920, Coca-Cola was bottled in
more than 1,000 plants and the soft drink was even sold outside the United States in
countries such as Canada, Panama, Cuba and France.13 The growth of the Coca-Cola
brand resulted in the company’s dominant position in the carbonated soft drink industry.
In 1940, Coca-Cola accounted for about half of CSD sales.14
Coca-Cola’s success and strategy inspired many other companies involved in the
CSD industry. New companies like PepsiCo, Royal Crown and Seven-Up “were founded
after Coca-Cola, and became its main competitors.”15 During the first half of the 20th
century, the three companies began to challenge Coca-Cola’s dominant position by
engaging in vigorous advertising and following Coca-Cola’s model of distribution. By
1960, the Coca-Cola Company, PepsiCo, Royal Crown and Seven-Up accounted for
about 75% of total CSD sales, with Coca-Cola holding about 37% of the market. In 1962,
Dr Pepper, a regional brand established before Coca-Cola, entered the national market
and became the fifth largest CSD company. In 1980, these companies controlled
approximately 80% of the CSD market.16
According to Saltzman, the level of competition within the CSD industry has been
affected by the system of distribution and relatively small number of competitors. During
the 1970’s, the Federal Trade Commission (“FTC”) issued several opinions that
concluded that exclusive CSD bottling territories have anti-competitive character and
violate antitrust law. For example, the Federal Trade Commission order from 1978
concluded that CSD bottling territories “were unreasonable restraints of trade because
The Coca-Cola Company, “Heritage Timeline.”
Saltzman, 8.
15
Ibid.
16
Ibid., 9.
13
14
they lessened both intrabrand and interbrand competition”17 and ordered the Coca-Cola
Company and its bottlers “to cease imposing in any manner territorial limitations or class
of customer restrictions on its licensed Coca-Cola or allied product bottlers, in connection
with the sale or distribution of soft drink products sold in other than refillable
containers.”18
The FTC challenge to the unique supply system allowing bottlers of different
CSD companies to be exclusive distributors and have full control over certain territories
was brought down by Congress. In 1980, Congress passed the Soft Drink Interbrand
Competition Act which declared that “exclusive territorial arrangements made as a part of
a licensing agreement for the manufacture, distribution, or sale of a trademarked soft
drink product are lawful under the antitrust laws provided such product is in substantial
and effective competition with other products for the same general class in the relevant
market or markets.”19 According to Saltzman, officials from both the Federal Trade
Commission and the Department of Justice opposed the act and described it as a “special
exemption” to the antitrust laws. For example, William S. Comanor, former Director of
the FTC’s Bureau of Economics testified “that intrabrand CSD competition should not be
restricted by exclusive bottling territories because there was considerable monopoly
power among interbrand competitors in the CSD industry.”20
After the controversial exclusive territory licensing was upheld by Congress, the
FTC began to focus on other contentious issues within the industry. During the 1980’s
17
Ibid., 12.
The Federal Trade Commission, In the Matter of Coca-Cola Co., 91 FTC 517 (1978),
http://www.ftc.gov/os/ decisions/docs/vol91/FTC_VOLUME_DECISION_91_(JANUARY__JUNE_1978)PAGES_504-679.pdf#page=14 (accessed November 28, 2009).
19
The Library of Congress, Soft Drink Interbrand Competition Act Summary, http://thomas.loc.gov/cgibin/bdquery/z?d096:SN00598:@@@L&summ2=m& (accessed November 29, 2009).
20
Saltzman, 13.
18
and 1990’s, the CSD industry went through a major structural change that led to several
investigations by the regulatory agencies. In particular, the FTC focused on the issues of
vertical and horizontal integration.21
The vertical integration became an issue after many independent bottlers holding
exclusive rights to bottle the major CSD brands were acquired by their franchisors during
the 1980’s and 1990’s. The number of independent bottlers fell by more than one-half
during that period of time which caught the attention of the FTC. The regulatory agency
engaged in investigation of Coca-Cola and PepsiCo vertical bottler consolidations and
found “such manufacturer/distributor acquisitions as pro-competitive or competitively
neutral.”22 Similarly, Harold Saltzman, Roy Levy and John C. Hilke found that the
vertical acquisitions by the Coca-Cola Company and PepsiCo did not lower the level of
competition within the market but instead resulted in lowering of CSD prices by 4.3%. 23
During the same period of time, the FTC also engaged in investigation of
horizontal merger cases. According to Saltzman, the regulatory agency “treated various
CSD parent company consolidations differently, depending on the circumstances that
were involved.” For example, in 1986, the FTC challenged proposed mergers between
PepsiCo and Seven-Up, and Coca-Cola and Dr Pepper. The FTC concluded that such
mergers would decrease the level of competition and engaged in actions that ultimately
led to the failure of both consolidations. In contrast, the regulatory agency did not
challenge the merger between Seven-Up and Dr Pepper which resulted in formation of a
new company called DPSU in late 1986. Similarly, the FTC did not oppose the merger
between Cadbury, the owner of brands such as Canada Dry, Sunkist and A&W, and
21
Ibid., 12.
Ibid., 13.
23
Ibid., viii.
22
DPSU in 1995. The agency also allowed Coca-Cola’s acquisition of Barq’s, one of the
biggest root beer syrup producers.24
In summary, it appears that the Federal Trade Commission allowed the major
CSD companies to acquire smaller syrup producers and expand their vertical integration
into CSD bottling. In contrast, the agency opposed mergers between syrup producers
controlling major share of the CSD market. Consequently, the CSD industry has become
more concentrated which has led to lowering of the competition level in recent years.
During the same period of time, the Department of Justice brought dozens of
cases against price-fixing practices within the industry. According to Saltzman, the
Department of Justice “had obtained more than forty bottler and individual guilty pleas
(or convictions) in ten states (Florida, Georgia, North Carolina, Ohio, Maryland, South
Carolina, Tennessee, Virginia, West Virginia, and Washington) and Washington, D.C.”
The defendants, consisting mostly of Coca-Cola and Pepsi bottlers, generally pleaded
guilty to “meeting and discussing promotional CSD prices, agreeing to set those prices,
and monitoring and enforcing their agreements.” For example, bottlers of Coca-Cola and
Pepsi supplying the Baltimore area colluded for more than three years between 1982 and
1985.25 Considering the number of price-fixing cases and the fact that the majority of
information about price-fixing practices is not publicly available, it appears that collusion
among bottlers was frequently practiced during the last two decades of the twentieth
century.
Recent history of the CSD market suggests that the level of competition has been
gradually decreasing since early 1980’s. As mentioned on the beginning of this paper, the
24
25
Ibid., 13-15.
Ibid., 20-22.
current level of competition is very low. The three largest firms, the Coca-Cola
Company, PepsiCo and Dr Pepper-Snapple control 88.8% of the CSD market. Coca-Cola
remains the dominant company with market share of 42.7%. PepsiCo and Dr PepperSnapple follow with 30.8% and 15.3% respectively. The remainder of the market is
covered by Cott Corp., National Beverage, Red Bull and many other small companies.26
Appendix A provides additional detail on the market share of the top ten companies. In
addition, the 2008 Herfindahl-Hirschmann Index for the industry was 3039 which
indicates very high concentration and low level of competition.27
All of companies try to attract more customers by differentiating their products
through advertisement and product innovation. The CSD companies use advertisement to
build brand loyalty among current and prospective customers. For example, Coca-Cola
“stresses the use of advertising to build up a long-term brand image for its products and
company. The company also uses integrated marketing communication strategy to
portray the brand and keep the brand fresh in the minds of current consumers.”28 In 2006,
the Coca-Cola Company spent approximately $2.6 billion worldwide on advertising of its
products.29 Coca-Cola’s long term investment in brand recognition made the company the
most recognized and most valuable brand in the world.30
The largest CSD companies have also engaged in product innovation to attract
new customers. In last three decades, the producers have introduced many new products
26
Sicher, 2.
HHI computed by using data published in Beverage Digest 54, no. 7, 1.
28
Fu-Ling Hu, “How Can Different Brand Strategies Lead to Retailers’ Success?” Journal of Global
Business Issues, 3, no. 1 (Spring 2009), 133.
29
The Coca-Cola Company, “FAQs – Advertising,” http://www.thecoca-colacompany.com
/contactus/faq/advertising.html (accessed November 30, 2009).
30
Emily Fredrix, “Coca-Cola Still Viewed as Most Valuable Brand,” USA Today Online, September 18,
2009, http://www.usatoday.com/money/advertising/2009-09-17-coke-brand_N.htm (accessed November
30, 2009).
27
that vary in flavor, color or formula. Diet Coke, Mt. Dew and Diet Pepsi are the three
most successful new products introduced by the Coca-Cola Company and PepsiCo.
Appendix B provides additional detail on the CSD market share of the top ten brands.
It appears that there are no ongoing issues concerning the level of competition in
the carbonated soft drink industry. After the series of vertical and horizontal merger
attempts during 1980’s and 1990’s, the situation within the market seems to be stabilized.
The only current issue I came across while conducting research for this paper is the
proposal of the so-called “soda tax.”
In recent years, a debate over the impact of high-calorie soft drinks on health has
been on the rise. Some argue that soft drinks, especially the carbonated soft drinks, have a
harmful impact on overall health and significantly contribute to obesity and tooth decay,
especially in children. Some economists and nutrition experts advocate levying higher
taxes on the sale of soft drinks to help finance the fight against obesity and health care
reform. In May, 2009, some Senate leaders considered to add a soda tax into the current
health care reform bill. The main purpose of the tax would be to generate revenue and
discourage people from consuming high-sugar soft drinks.31 But the soda tax was rejected
several months ago and is not included in the health care reform bill currently pending in
the Congress. According to Kenneth Thorpe, a health policy researcher at Emory
University, “the politics of health reform are too delicate right now to provoke an attack
from the sugar and beverage industries.”32
Janed Adamy, “Soda Tax Weighed to Pay for Health Care,” The Wall Street Journal Online, May 12,
2009, http://online.wsj.com/article/SB124208505896608647.html (accessed December 1, 2009).
32
Kenneth Thorpe cited in “Experts: Penny Per Ounce Soda Tax to Fight Obesity, Health Costs,” USA
Today Online, September 18, 2009, http://www.usatoday.com/news/health/weightloss/2009-09-18-sodatax_N.htm (accessed December 1, 2009).
31
Considering the current situation within the CSD market, it appears very unlikely
that the level of competition is going to change anytime soon. There are no signs that the
Federal Trade Commission and the Department of Justice want to change the current
situation and increase the level of competition through regulation. At the same time, the
possibility of a new company joining the market and challenging the three largest firms
seems highly unlikely. The dominant position of Coca-Cola, PepsiCo and Dr PepperSnapple is largely based on brand recognition which would be very expensive and hard to
achieve in a short period of time. In addition, economies of scale play an important role
in the CSD market. The producers have been able to decrease their average costs
throughout the time and benefit from increase in economies of scale.33
In my opinion, the current level of regulation of competition is not satisfactory.
Only three companies control overwhelming majority of the CSD market which makes it
hard for new competition to emerge. In addition, considering the anti-competitive
behavior in past decades, I believe that the existing companies will engage in collusion
and try to prevent new companies to enter the market once again. Consequently, the
regulatory agencies of the federal government should focus on behavior of CSD
companies and try to prevent them from engaging in anti-competitive behavior.
33
Saltzman, 10.
Appendix A
Rank
1
2
3
4
5
6
7
8
9
10
2008 Market Share of Top 10 CSD Companies
Companies
Market Share
Cases Sold (millions)
Coca-Cola Co.
42.7
4107.6
PepsiCo
30.8
2960.4
Dr Pepper Snapple
15.3
1471.2
Cott Corp.
4.7
448.0
National Beverage
2.6
247.5
Hansen Natural
0.8
79.0
Red Bull
0.7
67.2
Big Red
0.4
43.6
Rockstar
0.4
40.2
Private label and other
1.6
156.3
Source: Beverage Digest 54, no. 7, http://www.beverage-digest.com/pdf/top-10_2009.pdf (accessed
November 28, 2009).
Appendix B
Rank
1
2
3
4
5
6
7
8
9
10
2008 Market Share of Top 10 Brands
Brands
Market Share
Coke (Coke)
17.3
Pepsi-Cola (Pepsi)
10.3
Diet Coke (Coke)
10.0
Mt Dew (Pepsi)
6.8
Dr Pepper (DPS)
6.1
Diet Pepsi (Pepsi)
5.7
Sprite (Coke)
5.6
Fanta (Coke)
1.8
Diet Mt Dew (Pepsi)
1.8
Diet Dr Pepper (DPS)
1.6
Cases Sold (millions)
1664.6
990.9
960.3
653.0
586.1
550.3
536.7
175.8
169.6
157.6
Source: Beverage Digest 54, no. 7, http://www.beverage-digest.com/pdf/top-10_2009.pdf (accessed
November 28, 2009).
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2009).
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