As far back as 1884, when Coke entered the marketplace, Coke and Pepsi used bottling companies to bottle and distribute their products. However, over the last 20 years both companies have been internalizing what was efficiently externalized. Why the change? In Timothy J. Muris, David T. Scheffman, and Pablo T. Spiller’s paper “Strategic and Transaction Costs: The Organization of Distribution in the Carbonated Soft Drink Industry” the authors attempt to answer not only why both companies began to bottle and distribute their own products, but how this change has affected the marketplace.
Before the change, Coke and Pepsi utilized bottling distributors with whom they had long-lasting agreements with and exclusive rights over territory. Back then the bottlers had the right to distribute Coke and Pepsi products in certain areas in return for the right to invest in company assets, create distribution networks, and invest in advertising and marketing. Within this framework, Pepsi and Coke had to make few changes in marketing. They also endured less competition and didn’t need coordination in retailing on a national level.
However, the authors of the paper suggest that all of this has changed over the last thirty years. Instead of relying on their bottlers, Coke and Pepsi began to rapidly purchase or take stakes in their bottlers. Today both companies are owners of nearly half their bottling distributors. They also hold stakes in nearly 20 percent of the remaining companies.
According to the authors, the reason for externalizing the bottling and distribution of their products is because of major changes in the structure of the market. This change has forced the companies to adapt internally as a firm as well as change their strategies. One of the first changes was the size and complexity of the transactions between Coke and Pepsi and their bottle companies. Earlier transactions were with one territory, while the new and evolved transactions require the companies to sell to multi-market players.
The second change involves marketing and media campaigns. Modern marketing promotions, new product promotions, and media campaigns require quick, efficient, and coordinated responses and cooperation from bottling companies. Finally, there are fewer plants today than there were in 1950; the remaining bottling plants produce 2/3 of all industry sales, which means costs have gone up. Therefore due to changing market needs and increasing transaction costs, the soft drink industry has purchased 50 percent of bottling companies and has taken part control of nearly 20 percent of the rest.
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