Over the last 30 years, both Coke and Pepsi have changed their relationships with their bottlers. In the paper “Strategic and Transaction Costs: The Organization of Distribution in the Carbonated Soft Drink Industry” by Timothy J. Muris, David T. Scheffman, and Pablo T. Spiller, the authors suggest a groundbreaking and fascinated view that attempts to explain the changing relationship.
Since the foundation of Coke around 1884 up until the middle of the 20th century, both Coke and Pepsi utilized bottling distributers with whom they created binding contracts and exclusive rights over territories. However, this changed over the last 20 years. Pepsi and Coke started aggressively purchasing or taking stakes in their bottle companies. Today both companies are owners of nearly half their bottling distributers and are share owners of nearly 20 percent of the remaining independent bottlers. The authors discuss why the companies began to internalize bottling and distributing and the ways in which this change has affected the market.
According to the paper, it was cost-effective for the companies to internalize bottling and distributing for one main reason: the costs of independent bottles have increased over the years. The increase has been due to evolving technology, marketing, and marketplace. In the beginning Coke and Pepsi were characterized by occasional changes in marketing, they didn’t require national coordination in retailing, and both companies experienced less fierce competition than today. With an exploding market back then, Coke and Pepsi were able to expand regional sales without the need for inter-area coordination or any strategy/marketing changes.
However, all of this has changed in the last thirty years. According to the authors of the paper, the evolving market has required a change within in each company and a change in strategy. First, the size and complexity of transactions began to change, and, secondly, marketing and media campaigns began to require national coordination and quick response from bottlers.
Also watch this related presentation on youtube about Why Firms Win.