Why Pepsi Has Problems

Fighting the Cola Wars, Pepsi might have lost another battle.

In 1974, Pepsi started making concentrate in Cork, Ireland. Prepared with a secret formula, the concentrate has the flavor. Then, during its next stop in the U.S., the bottler adds the water, carbonation, and sweetener. Because of its low corporate tax rate, Ireland was a logical place to start.

Now, not so much.

Pepsi’s Problems

Tariffs

When Pepsi sends concentrate back to U.S. bottling plants, it will cost an extra 20%. Reflecting the tariff slapped on the EU, all goods entering the U.S. will bump up by one-fifth. (Do note that WSJ said 10%. However, Cork is in the Republic of Ireland, a part of the EU. The EU tariff is supposedly 20%…today…)

By contrast, untariffed, Coke’s (ultra secret) concentrate originates in Atlanta and Puerto Rico. The other Pepsi rival, Dr Pepper makes its concentrate in Texas.

Cans

Thinking of tariffs, we cannot forget the soda can. Hit by the February 10 Aluminum Presidential Proclamation, empty aluminum can have a 25% tariff. Here, Coke and Pepsi both say they are considering more plastic. We should note that they did sign a sustainability pledge (that they soon reduced) to shrink their use of plastic.

Competition

Perhaps though, Pepsi’s biggest problem is Dr Pepper (no period after Dr). The Dr Pepper story started in 1885 when Charles Alderton blended 23 flavors in his pharmacy:

Different from Coke and Pepsi, Dr Pepper was an uncola that bottlers with a Coke or Pepsi non-compete agreement could still sell according to a 1963 court decision. As a result, wherever you had Coke or Pepsi (it could not be both), you had an alternative. We could say that it took 62 years for an alternative to become #2.

Our Bottom Line: Oligopoly

Coke still has close to 20% of the soda ((or pop depending on where you live) market. And although it is behind, Pepsi is almost tied with Dr Pepper:

Economists call the soft drink market an oligopoly. As a market that has several large, mass producing dominant firms and many customers, market entry and exit are difficult. Competing in an oligopolistic market, it is crucial for the three leading companies to achieve product differentiation through non-price competition.

On a competitive market structure continuum showing ascending firm power, oligopolies are closest to monopoly because of their size and pricing power:

Concluding, we can say that at #2 Dr Pepper became a leader in pop culture (unless you say soda).

My sources and more: Thanks to WSJ for inspiring today’s post. From there, with more on the Irish tariff, the BBC had the facts. Then, this executive order and article describe the aluminum tariff.

Please note that several of today’s sections were in a previously published econlife post.