Before going to deep into this discussion, I recommend either clicking here or clicking on the graphic above, to fully appreciate the scope of the information provided. Don’t worry. I’ll wait.
(tapping foot. Humming a happy tune)
Good! You’re back!
There’s a lot of information in there, and even more if you wandered over to Philip H. Howard’s full article on just how little variety there is in the beverage industry. You can get a full idea on what he’s trying to say right up front in “background”.
Three firms control 89% of US soft drink sales . This dominance is obscured from us by the appearance of numerous choices on retailer shelves. Steve Hannaford refers to this as “pseudovariety,” or the illusion of diversity, concealing a lack of real choice . To visualize the extent of pseudovariety in this industry we developed a cluster diagram to represent the number of soft drink brands and varieties found in the refrigerator cases of 94 Michigan retailers, along with their ownership connections.
In other words, there are two variables at play in the marketplace that give the appearance of variety, but in reality, that variety is almost an illusion. Let me reword this a bit with some of my own observations.
When three major corporations control nearly 90% of the beverage market, innovation slows to a trickle, if not completely. New products, introduced under the auspices of “innovation” and “variety”, really are nothing more that simulacra of other products already released by one of the other two corporations. So while a release of a product gives the impression of variety, in reality, that variety was already established by someone else.
For example, let’s take tea. Dr. Pepper owns Snapple, Coca-Cola owns Nestea (and others), and Pepsi owns Lipton. While between these brands there are forty-two varieties, in reality, the true number of variety of teas is roughly fourteen. You could make the argument here for any number of beverages, from fruit juices, to water, to even colas.
Now add the variable of frequency of product. For example, a shop is more likely to carry Coca-Cola, rather than, say, Jolt Cola. Let’s choose a number of shops as an example, say, ten. Out of those ten shops, all ten will have Coca-Cola and Pepsi-Cola. Only one may have Jolt Cola. So while the marketplace allows for Jolt to exist, and even claim a tiny bit of the market, the reality is that Coke and Pepsi control 90% of the shelf space allotted to Cola’s.
The one variable not mentioned in the report (and really, the report is little more than a statistic’s dump, albeit one that results in a lot of questions), is that of slotting fees.
For those of you unfamiliar, slotting fees are the fees paid by companies for the use of the real estate in the aisles of convenience stores, supermarkets, and drug stores throughout the United States. Those with deeper pockets can afford to shell out the money for larger portions of space on the shelves, include the prime locations of those shelves that sit right at eye level. So, while Jolt Cola may be able to get room on the shelves, they may have to sit on the upper most, or lower most shelves.
So what the numbers give is the appearance of variety, when in fact, there is actually very little variety available, at least after the shelving space is doled out to the big three.
“But Kate!”, I can hear you proclaiming. “I see new variety of products being released by Coke or Pepsi all of the time!”
To which I say “Well, variety really isn’t the issue. Innovation is.”
My argument, un-sussed out, goes something like this.
When there is innovation in the marketplace, one of two things happens. It’s either pushed aside by one of the big three, through the use of slotting fees and other similar tactics (distribution mostly, as getting a new product to market is often more logistically complicated than producing the innovative product in the first place).
After passing the “reaching the initial market” hurdle, if the product shows any life on the shelves it will either (eventually) plateau in sales, or it will reach a distribution agreement with Coke or Pepsi, or Dr. Pepper, and find a larger audience that way.
After passing the distribution hurdle, if the product shows any life on the shelves, it will either (eventually) plateau, or get purchased by one of the big three if:
- Is a product that effectively reaches a new market segment.
- Is a product that one of the other two companies have a simulcra.
There are likely other, smaller variables, but those are the big two.
If the new product gets purchased by one of the big three, that means even more exposure, and a likely larger market segment.
So here’s my question to you out there. When was the last time that Coke, Pepsi, or Dr. Pepper took a risk and created their own new product? Vanilla Coke? Code Red Mountain Dew? Aren’t those just extensions of already established brands?
The typical path of innovation often happens outside of the big three, and if the idea is successful, they use their clout and deep pockets to buy that innovation and call it their own. While Mr. Howard says that all of these products are, at their root, nothing more than sugar water (and to some extent he’s right), my point is that there are a multitude of flavors of sugar water, enough that establish some measure of variety. The real problem surrounding an oligopoly is that of innovation.