Understanding the value chain of the soft drink industry

Soft drinks constitute a major part of the US food and beverage industry. Syrup or concentrate producers and bottlers play a vital role in the value chain of the soft drink industry.

Companies in the soft drink industry reach the end market in two ways. One way is by selling finished products, made at company-owned bottling facilities, to distributors and retailers.

Another, is by selling beverage concentrates and syrups to authorized bottling partners, who then make the final product by combining the concentrates with still or carbonated water, sweeteners, and other ingredients. The bottlers then package the product in containers and sell these beverages to distributors or directly to retailers.

Also, both bottling partners and companies manufacture fountain syrups and sell them to fountain retailers. Fountain retailers include restaurants and convenience stores, which produce beverages for immediate consumption.

The extensive reach of The Coca-Cola Company (KO) and PepsiCo, Inc. (PEP) allows them to produce or distribute third-party brands. For instance, Coca-Cola is licensed to produce and distribute certain brands of Dr Pepper Snapple Group, Inc. (DPS) and Monster Beverage Corporation (MNST). PepsiCo sells Lipton and Starbucks brands under partnerships with Unilever and Starbucks, respectively.

Coca-Cola and PepsiCo’s wide distribution network gives them significant pricing power. Carbonated soft drinks have similar prices due to the intense competition in the industry. Often, soft drink companies extend lower prices under promotional offers. In recent times, such promotional offers have been used to boost volumes of the carbonated soft drinks. That’s because they’re under pressure due to rising health concerns and competition from healthy substitutes such as tea, energy drinks, and water.

The non-alcoholic beverage industry is part of the consumer staples sector. You can invest in this sector through the Consumer Staples Select Sector SPDR ETF (XLP), which has notable holdings in Coca-Cola and PepsiCo.