Cola Wars
these bottling companies to address this issue. Indeed, if the
franchise arrangements were working well at the time – and all evidence seems to point
to their dramatic success – it would have been a better strategy to encourage the larger
bottling franchises to take over the small franchises. Given the financial resources of the
major concentrate providers, this seems like a fairly simple task, at least relative to
pursuing a policy of vertical integration.
Many bottlers were located near a company-owned bottler. It is difficult to see exactly
why this would help encourage a change in strategy of the major concentrate providers.
Presumably, there had been franchises located near company-owned bottlers in the
1940s, 1950s, 1960s, and 1970s, but it wasn’t until the 1980s that Coke and Pepsi began
buying up independent franchises in earnest.
Many bottlers were under-investing. The major concentrate providers had long
encouraged bottling companies to increase their investment in various areas of the
business. For example, Coke and Pepsi’s push to have bottlers implement DSD is an
investment in their relationship with the various retailers. If the major concentrate
providers really wanted to encourage investment on the part of the bottlers, they could
have easily done so through modified franchise agreements. This would have achieved
the same ends, while keeping the balance sheet as trim as possible.
Understanding the Push for Vertical Integration
According to Stuckey and White, there are only four ways a company can benefit from
vertical integration:
• Capturing market power of those in adjacent stages in the industry chain
• Increasing entry barriers and obtaining the opportunity to price discriminate
• Promoting the formation of a “mature market”
• Addressing vertical market failure3
Unfortunately, none of these rationales provides a very satisfactory explanation of why
Coke and Pepsi began buying up their bottling franchises in the 80s and 90s. Indeed, the
first three reasons to vertically integrate have little to do with the reality of the soft drink
industry.
If Coke and Pepsi indeed pursued a rational policy, the only possible explanation is that
the two companies saw a potential change in the nature of the vertical market failure they
were facing. As the economies of scale in the bottling industry grew and the minimum
3 Ironically, this is the exact market dynamic that had long benefited the major concentrate providers and
provided an incentive for disaggregating concentrate manufacturing and bottling.
efficient scale of bottling increased, more and more bottling companies were destined to
go out of business. For example, between 1960 and 1983, the average bottling plant
volume increased from approximately 400,000 cases to 3.5 million cases.
It is possible that Coke and Pepsi foresaw a time when there would be only a handful of
bottling companies – a situation in which their market power would be seriously
compromised. In essence, then, perhaps Coke and Pepsi feared a transformation from
one in which there were few sellers and many buyers to one in which there were few
sellers and few buyers.
Perhaps both companies were attempting to promote their long-term strategic advantage
by locking in a set of relationships before the bottling industry began to consolidate in
earnest. This would accomplish two objectives. First, both companies would assure
themselves bottling capacity long into the future. Second, [next page]