The Carbonated
Soft Drink
Production
Industry in the
U.S.
Coca-Cola vs. PepsiCo
By:
Jacob Barker
Alisse Karpovich
Sarah Reeves
Jesse Riley
Table of Contents
Part I: BUSINESS RIVALS
2
Part II: OPPORTUNITY
8
Part III: INDUSTRY ANALYSIS
11
Part IV: STRENGTH ASSESSMENT
14
WORK CITED
17
1
PART I: BUSINESS RIVALS
1. The carbonated soft drink production industry is an industry which has already peaked and is on the
decline. It is expected to continue declining, as it is in the final stages of the industry life cycle
(IBISWorld 5). In this industry, companies that compete blend different ingredients, like sugar, with
carbonation to create beverages which they then package and distribute for resale. The top two companies
in the carbonated beverage industry are PepsiCo and Coca Cola Company, controlling about 80% of the
market share (IBISWorld 2-4). Ironically, both companies are important in other industries as well,
considering they both package and sell other products, mostly snack foods and bottled water.
Coca-Cola was created in 1886. The product first started as a fountain beverage which quickly grew to
become a global brand. At the beginning of the 1900s, the company began bottling the product to
distribute and sell. By the 20s and 30s, Coca-Cola began being distributed outside of the United States to
44 other countries throughout the world (Coca-Cola). As time went on, the company began focusing on
packaging. In the 60s, competition really kicked into gear, as Coca-Cola began focusing on its customers.
To this day, Coca-Cola is a global organization, but still has the community focus it once created. It is
now located at 1 Coca-Cola Plaza Atlanta, Georgia 30313 (Coca-Cola).
PepsiCo was created in 1965. It first started as Pepsi-Cola in 1898 which sold Pepsi, Diet Pepsi, and
Mountain Dew (PepsiCo). Pepsi became officially patented in 1903. WWI was the start of a downfall for
the company as the costs of the company increased. After “15 unprofitable years, Pepsi-Cola was once
again a thriving national brand,” (Andrew). In the 1970s, Pepsi was focused on customer preferences, as
they began producing lighter bottles that were recyclable and more user-friendly. According to research,
Pepsi became “the single largest selling soft drink brand sold in the U.S.” (PepsiCo). The 80s was a time
of strong competition for Pepsi (Andrew). To this day, PepsiCo continues to focus on its advertising
2
campaigns to be successful. PepsiCo’s corporate headquarters is currently located at 700 Anderson Hill
Rd. Purchase, New York 10577 (PepsiCo).
According to IBISWorld, these two companies are the leaders of the Carbonated Soft Drink Production
Industry. As previously mentioned, they own about 80% of the market share for this industry. A third
leader of the industry is Dr. Pepper Snapple Group which owns about 15% of the market share
(IBISWorld 4).
2. Overall, employment in the Carbonated Soft Drink Production Industry in the United States has been
on the decline in recent years. Companies have had to take drastic measures to cut costs to cover the
falling rate in product purchases. To mitigate losses, the Carbonated Soft Drink Production Industry has
consolidated operations. A major way in which the industry has accomplished this is through laying off
workers at an average annual rate of 9.5% over the years between 2006 and 2011. The Carbonated Soft
Drink Industry employment in 2011 is approximately 45,392 people (IBIS 8).
It is anticipated that Coca-Cola and PepsiCo will continue with layoffs as each company integrates with
their bottlers. This is one of the reasons that industry employment is anticipated to decline 2.7% in 2011
and at an annual rate of 1.0% through the next five years thereafter to 46,063 workers. Although the
employment rate will be at an overall negative rate over the next five years, it is predicted that there will
be sporadic increases in employment due to the expansion of smaller companies (IBISWorld 9). As of
December 31, 2010, Coca-Cola employed approximately 70,400 individuals located in the United States
(Coca-Cola 10-K form). As of December 24, 2010, Pepsi employed approximately 108,000 individuals in
the United States (PepsiCo 10-K form).
3
The IBISWorld graph below shows the revenue vs. employment growth in the industry. It is clear to see
that the revenue that the industry is bringing in has a direct effect on the employment rates. In the year
2008, revenue took a nose dive and the employment rate went right along with it.
3a.Return on Equity (ROE)- Return on equity gauges how profitable a company is by comparing net
income to its shareholder equity. Generally the higher the ROE the better that company uses invested
funds to generate earnings. The equation for return on equity is ROE = net income/shareholder equity.
PepsiCo had a higher ROE compared to Coke until the middle of 2009. This meant that PepsiCo was
using its invested funds to help grow the company. After 2008 it would seem that PepsiCo was not using
its invested funds to grow the company any further. Coco-Cola had a relatively stable ROE from 2006
through 2009 where it remained in the high 20%. With a constant ROE, this means that Coca-Cola was
concerned about maintaining the company instead of growth. In 2010 Coca-Cola used their resources to
grow the company. (IBISWorld)
4
PepsiCo
Coca-Cola
3b.Stock Price- The stock price of a company has no real significance when it comes to financial
analysis. It is simply the trading price of the company on the stock market. Both companies had an
increasing stock price through 2006 then saw a decline from 2007 through 2009. This decline is most
likely due to the economic downturn in the economy during those years. PepsiCo and Coca-Cola both
saw reduced revenue over that period. After 2009 the stock price of both companies began to rise with
the turnaround of the economy. (Fidelity)
PepsiCo
Coca-Cola
5
3c. Total Assets- Total assets are the sum of all the economic resources that are capable of creating value
for the company. Coca-Cola experienced some loss of assets from 2007 to 2008, most likely due to their
decline in revenue over this time. Both companies are currently increasing their assets. This is due to the
growth of both companies. They are acquiring assets so they can continue to be profitable in the growing
market (10-K).
Pepsi-Co
Coca-Cola
3d.Operational Efficiency (Inventory Turnover) - Inventory Turnover measures the rate at which a
company can sell its inventory. The equation for inventory turnover is: Inventory turnover =
revenue/average inventory on balance sheet (Young). Generally speaking, the higher the inventory
turnover, the better off the company is. The higher it is means that the company is getting its inventory
out more frequently throughout the year. PepsiCo was able to have a higher inventory turnover than
coke, so they turned over their inventory more times throughout the year. The decrease in turnover from
2006 to 2010 can be accounted for by a downturn in the industry over those years (IBISWorld).
6
PepsiCo
Coca-Cola
3e.Share of Industry Value- The share of industry value shows the total share that the companies have
in the entire industry. Share of industry value is calculated by dividing the company’s revenue by the
revenue of the entire industry. PepsiCo holds a greater share of the industry than Coca-Cola. The two
companies have both been able to grow their shares since 2006. Coca-Cola experienced a slight drop in
share from 2008 to 2009 but recovered and continued to capture more share. PepsiCo was able to
continue growing their share during that time period, although the growth was not as big as previous
years. After 2009 both companies experience a large jump in share. Coca-Cola gained around 2% of the
value while PepsiCo had a huge growth of almost 8%. (The data used for this calculation represents the
global soft drink and bottle water manufacturing industry) (IBISWorld).
7
PepsiCo
Coca-Cola
PART II: OPPORTUNITY
1. Companies in The Carbonated Soft Drink Production Industry blend various ingredients with
carbonated water and then distribute these products for resale through such sources as grocery stores,
vending machines, restaurants, fast food establishments, etc. Some of the major products in this industry
include Coke, Diet Coke, Dr Pepper, Mountain Dew and Pepsi-Cola (IBISWorld).
The Carbonated Soft Drink Production Industry has been experiencing a decrease in revenue over the past
five years. This is caused by a decline in sales volumes, as well as a decline in consumer response. A
large contributing factor to this decrease in sales is due to consumers switching to substitutes. In recent
years the United States has become much more health conscious and has been switching to healthy
alternatives. Carbonated Soft Drinks have been a large target for criticism and has been pegged as a major
contributor to childhood obesity (IBISWorld).
According to Standard & Poor’s Survey of the Food and Nonalcoholic Beverages Industry it is expected
that in the year 2011 and moving forward carbonated beverages will have more value-size offerings, as
manufacturers look to rejuvenate growth in the more profitable and impulse-driven convenience channel.
8
Carbonated Soft Drink Companies in the food and nonalcoholic beverage industry have also become
more sensitive to down turn in the economy, since carbonated beverages are relatively elastic (S&P). For
beverage companies, cost reductions and productivity improvements through better supply chain
management will help offsets cost pressures, particularly with Coca-Cola and PepsiCo. In 2010, both
companies bought a significant portion of their North American bottling operations as a way to improve
distribution and trim costs. Consequently, it is expected that there will be a more modest impact to
margins at beverage companies than at food companies (S&P).
The below graph from IBIS world shows the growth from 1998 through 2011 in regards to the revenue
for the Carbonated Soft Drink Production Industry in the United States. The percent of growth was
increasing until the year 2006 and then has been declining ever since through 2011.
As mentioned before, demand for the industry's products is for the most part, price elastic. Consumers
tend to change their soft drink buying habits when there are fluctuations in a person’s income and other
contributing factors. As a result, consumers may switch brands to a relatively more inexpensive option
such as a store brand product (IBISWorld).
9
2. There’s no question as to which country consumes the most carbonated soft drinks in the world. That
would of course be the United States. This is, in part, why we chose to focus our research on the United
States alone. When it comes to narrowing down specific geographic areas within the United States, it is
apparent that soft drink consumption is pretty evenly distributed across all states, with an increase in
consumption in areas that are more heavily populated such as California, Texas and New York. Despite a
recent spike in health concerns, the average American consumes over 50 gallons per year (Adams). In
fact, the Obama administration is asking food and beverage makers to sharply limit any advertising to
children and teens of foods high in sodium, saturated fat and added sugars, in an effort to curb obesity
(Adamy). This includes companies such as Coca-Cola and Pepsi.
The revenue over the years from 2011 to 2016 for companies in the carbonated soft drink industry is
expected to decrease at an annual rate of 2.0% to $15.4 billion. Furthermore, in 2012, revenue is
anticipated to decline by 4.5%. Economists expect macroeconomic conditions to improve, but researchers
believe consumers will stick to healthier habits (IBISWorld).
The IBISWorld graph below shows the industry’s revenue outlook for the next 6 years. Overall, growth is
expected to decrease.
10
PART III: INDUSTRY ANALYSIS
1. Every industry has five competitive “forces” that might possibly be threats to profit. These include
threat of entry, rivalry, buyers, substitutes, and suppliers. When examining these competitive forces, we
must decide on the level of threat each force is to our profit as a company. It is important to remember,
the higher the collective power, the lower we expect our profitability to be.
Threat of Entry – In the carbonated soft drink industry, the barrier to entry is high (IBIS). This means that
it is very difficult for new companies to come into the market and be highly successful. If an industry has
a high barrier to entry, only a few companies dominate the industry, almost to the point of monopoly.
Therefore, the “threat” of entry is going to be low. Looking more closely at the carbonated soft drink
industry of the U.S., Coca-Cola and Pepsi are the largest companies, nearly dominating the field. If you
walk through a grocery store, you will notice that both brands are the majority of products stocked on the
shelves. Generic brands, such as store brands, are targeted at price sensitive customers and are available
but are not nearly as successful as both Pepsi and Coca-Cola. These two companies have extremely high
brand recognition, have spent tremendous amounts of money on advertising and marketing, and have
close relationships with suppliers such as syrup producers and bottle producers. Because of all of these
factors, it would make it extremely difficult for a new company in the soda industry to become profitable
to the extent Pepsi and Coca-Cola are today.
Rivalry - The threat of rivals is low in the carbonated beverage industry. Coca-Cola and Pepsi are both
highly recognized brands throughout the world. Because of the high brand recognition, many consumers
pick a favorite and stick with it. There are consumers, however, that are price sensitive. These consumers
will purchase the generic brands that most retailers produce, to save on money.
11
Buyers – The threat of buyers is high in the carbonated soft drink industry. First, we will consider the fact
that soft drinks are not a necessity to most consumers. It is evident that in the past few years, the revenues
of both Coca-Cola and Pepsi have decreased. Several factors have contributed to this downfall. One of
the key factors is the economy. Research shows, “Industry revenue is expected to decline…This decrease
follows revenue drops of 9.3% in 2009 and 16.6% in 2008 that were due to lower consumer spending in
response to high unemployment,” (IBISWorld). This shows that as consumers are earning less money,
they are spending less money on things like soft drinks. Another key idea that shows a high threat of
buyers is that fact that “health awareness and education led people to switch away from sugary carbonated
soft drinks,” (IBISWorld). Over the past decade, consumers have increasingly become more worried
about their weight. As this fad increases, consumers will be spending less money on products that are not
“weight conscious”. Because of these factors, buyers can be a significant threat.
Substitutes – The threat of substitutes is moderate. Substitutes of soft drinks can be anything from bottled
water, to energy drinks, to juices, and ready to drink teas and coffees. Alcoholic beverages are also
substitutes for soft drinks. Research suggests that competition with substitutes has increased significantly
over the past five years (IBISWorld). Consumers, however, are in need of caffeinated beverages to keep
up with the fast paced lifestyle and are staying with soft drinks to get that energy.
Suppliers - The threat of suppliers is high for the carbonated soft drink industry. According to research,
beverage syrup suppliers and flavoring producers have a significant impact on the industry providers
(IBIS). Major bottling companies merging with both Coca-Cola and PepsiCo have contributed to the high
dependence on the suppliers. “Because of the high degree of interdependence between soft drink bottlers
and syrup and flavoring producers, the cost structure of this upstream industry has an effect on soft drink
producers” (IBISWorld). One of the key reasons the threat of suppliers is so high is because companies in
12
the industry rely heavily on packaging for advertising and brand recognition. This means the bottling
companies are crucial to the profitability of Coca-Cola and PepsiCo.
2. Analyzing the above five forces, we can see that the carbonated soft drink industry in the U.S. has two
categories that hold low threat levels. This means that a business who is average on key success factors in
this industry will make about enough profit to cover the cost of capital.
3. Key success factors are specific resources and activities companies must excel at in order to be
profitable and defend against any high power threats. Key success factors are competitive attributes that
differentiate a company from its competitors in an industry. In simple terms, they are what makes a #1
company in an industry on top. Inventory turnover is an example of a key success factor in the carbonated
beverage industry. Inventory turnover can be explained as the number of times inventory is used in a
particular period. Economies of scale is also an important key success factor. Economies of scale can best
be defined by an increase in production which benefits the company by lowering costs. The more of a
single product a company produces, the less they will spend on costs per unit. Manufacturing efficiency is
also a key success factor. This KSF focuses on how well a manufacturing process operates. A final key
success factor important to the carbonated beverage industry is the index of sustainable growth which
represents how much a company can grow internally given its profitability.
13
4.
KSFs
Coca-Cola
Pepsi
Inventory Turnover
$35,119 / $2,502 (in millions)
$57,838 / $2,995 (in millions)
=(Revenue / Average Inventory)
= 14.04
= 19.3
Economies of Scale
$13,977 / $72,921 (in millions)
$22,814 / $68,153 (in millions)
=(Total Costs / Total Assets)
= .19
= .33
Manufacturing Efficiency
$12,693 / $35,119 (in millions)
$26,575 / $57,838 (in millions)
=(COGS / Sales Revenue)
= .36
= .46
(1-.35) * 42.5
(1-.48) * 33.2
= 27.6
= 17.3
G*: Sustainable Growth Index
=(1-dividend payout ratio)*ROE
5. Manufacturing efficiency is a key success factor that protects against the threat of buyers. By having a
higher manufacturing efficiency, companies are improving the manufacturing process and producing
better quality products. In the carbonated soft drink industry, bottling and packaging are crucial to the sale
of these products. Companies such as Coca-Cola and PepsiCo, over the years, have focused heavily on
the production and design of the bottles in which their products are sold. By improving their
manufacturing processes, they can save costs while appealing to their customers.
Inventory turnover is also a key success factor that is important to the success of a company in the
carbonated soft drink industry. It helps protect against the high power threat of suppliers. A higher
inventory turnover rate means that the company is selling its products more frequently over a particular
period of time. When a company is selling its products faster, it will need a better relationship with its
suppliers. Thus, with better supplier relationships, the less threatening they are to the industry
14
PART IV: STRENGTH ASSESSMENT
1.
Key Success
Coca-Cola
Factor
G*
(1-.35) * 42.5 =
=(1-Dividend
27.6
Coca-Cola
PepsiCo
PepsiCo
Distinctive
Distinctive
Competency
Competency
Score
Score
5
(1-.48) * 33.2 =
1
17.3
Payout
Ratio)*ROE
Scale
$72,921,000,000
3
$68,153,000,000
3
Economies
($13,977,000,000
5
($22,814,000,000
1
of Scale
/
/
=(Cost of
$72,921,000,000)
$68,153,000,000)
Sales/Total
=
=
Assets)
.19
.33
Inventory
$35,119,000,000 /
Turnover
$2,502,000,000 =
$2,995,000,000 =
=(Revenue/Aver-
14.04
19.3
=Total Assets
1
age Inventory)
15
$57,838,000,000 /
5
2.
Coca-Cola
Key Success
Raw Score
Factors
PepsiCo
Strength
Raw Score
Assessment Score
Strength
Assessment Score
G*
27.6
5
17.3
1
Scale
$72,921,000,000
3
$68,153,000,000
3
Economies of
.19
5
.33
1
14.04
1
19.3
5
Scale
Inventory
Turnover
Average Strength
Assessment Score
3.5
-
2.5
-
3. Within the carbonated soft drink production industry there are two main competitors that have
separated themselves from the rest of the competition. The two largest competitors are Coca-Cola and
Pepsi-Co. Of these two, Coca-Cola has the sustainable competitive advantage. With an average strength
assessment of 3.5, based on the four key success factors deemed necessary to dominate the industry,
Coca-Cola beats Pepsi-Co’s 2.5 strength assessment score. Thus, Coca-Cola is more likely to continue to
have a firm grasp on the industry.
16
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