Why the soft drink industry is dominated by Coke and Pepsi
Coca-Cola and PepsiCo spend enormous amounts of money on innovation, advertising and marketing, and on strengthening their distribution network. It would be difficult for a new entity to make the substantial capital investments required to compete with these firms.
Nov. 24 2014, Updated 12:00 p.m. ET
A rivalry for the ages
The Coca-Cola Company (KO) and PepsiCo, Inc. (PEP) have dominated the non-alcoholic beverage industry for ages. Coca-Cola is the world’s largest non-alcoholic beverage company with more than 500 brands, including 17 brands that generate more than a billion dollars each in revenue. PepsiCo owns leading brands across its snack foods and beverage portfolio, including 22 brands that generate more than a billion dollars each in revenue. According to Beverage Digest, the companies have a combined share of about 70% of the US carbonated soft drink (or CSD) market.
Both companies have a wide geographic presence in more than 200 countries. The rivalry between these two companies, popularly called the cola wars, is legendary. Both have spent huge sums of money on mutually targeted advertisements over decades.
Threat from new entrants
The industry does not face any major threats from new entrants because Coca-Cola and PepsiCo each have an extensive bottling and distribution network and huge economies of scale. For example, Coca-Cola has about 250 bottling partners and 900 plants worldwide. It would be difficult for a new entity to make the substantial capital investments required to compete with these firms. Dr. Pepper Snapple Group, Inc. (DPS) has seen impressive growth in the US CSD market, yet it lacks the international presence of these giants.
Significant investments
Coca-Cola and PepsiCo spend enormous amounts of money on innovation, advertising and marketing, and on strengthening their distribution network. Since 2010, Coca-Cola and its bottling partners have invested more than $50 billion in new facilities, distribution infrastructure, equipment, and retail customer activations. PepsiCo spent 5.9% of 2013 net revenue on advertising and marketing.
Other companies in the non-alcoholic beverage industry include Cott Corporation (COT) and Mondelez International Inc. (MDLZ). You can also invest in the non-alcoholic beverage sector through the Consumer Staples Select Sector SPDR ETF (XLP) that has notable holdings in Coca-Cola and PepsiCo.
In the next part of this series, we’ll look at the reasons for disappointing growth in the non-alcoholic beverage industry.