Cola Wars: Coke vs. Costco

For many years, at business schools throughout the world, professors have taught a case study about the "cola wars" - i.e. Coke's long-running battles with Pepsi. Actually, the case focused mostly on the structure of the carbonated soft drink industry, and it helped students understand why the industry as a whole has been wildly profitable for decades. As part of that analysis, we always discussed the utter lack of buyer power in the industry. In other words, consumers, bottlers, and retailers had very little leverage relative to Coke and Pepsi. You simply had to have these products on your shelves, often on Coke and Pepsi's terms.

The world has changed though, as the grocery channel has consolidated dramatically in the United States (and other parts of the world). We've also seen the increased dominance of mass merchandisers such as Wal-Mart, and the rise of warehouse clubs such as Costco, BJ's and Sam's Club. Now, in 2009, the retail channel appears far more powerful than it was back in the 1960s and 70s. Indeed, this week's events in the soft drink business show just how much the soft drink industry has changed. Costco announced this week that it would no longer sell Coke products, after a breakdown in negotiations between the two firms. Now, the firms will almost assuredly settle their differences. However, the very fact that Costco would make such a pronouncement appears rather startling, given that Coke and Pepsi had very little reason to worry about such manifestations of buyer power for much of their history.