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In the years between 1975 and 1993 the Coca Cola Company posted an average return on equity of 305 Similarly PepsiCo Inc recorded an average return on equity of 212 Although these figures likely include the return form non-soft drink operations its difficult to tell from the available information in the Yoffee and Foley case it is clear that the soft drink industry is extremely profitable--profitable that is for concentrate producers such as Coke and Pepsi For other members of the soft drink supply chain the soft drink industry is not nearly as attractive Pretax profit for a typical bottler by way of example is less than one-third of that of a standard concentrate producer This discrepancy between the profitability of concentrate producers and that of bottling companies results from the competitive structure of the two separate industries Concentrate Providers A Structural Analysis Using a basic structural analysis of the market for soft-drink concentrate it is easy to see why the industry is so profitable First there are few direct competitors within this market Coke and Pepsi make up 72 of the entire market with only a handful of additional providers making up the remaining 28 Furthermore competition among these companies is limited by strong brand recognition especially for Coke and Pepsi Because the major players can rely on their strong differentiated brands they are able to price their products substantially above long-term average costs1 Secondly the basic cost structure of the industry - low fixed costs relative to high variable costs - helps concentrate producers avoid descending into stiff price competition2 The tendency for competing on price is further limited by Coke and Pepsis near-century of competition - a history that has allowed them to learn how to avoid destroying profits in mutually damaging price wars Third concentrate providers have a strong strategic advantage vis--vis their suppliers Because the concentrate producers purchase undifferentiated raw materials from a large host of supplier firms they are
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