Why Do Some Fast Food Establishments Only Serve Pepsi or Coke?
Introduction
Fast food chains often have exclusive contracts with beverage companies like Coca-Cola and Pepsi. These agreements aren't simply about choosing one brand over another; they are intricate business partnerships. This article explores the reasons behind this practice and how it impacts the beverage market in fast food establishments.
The Dynamics of the Soft Drink Market
The soft drink market is highly competitive, with agents for both Coca-Cola and PepsiCo competing fiercely for restaurant contracts. The decision to serve one brand over another is driven by many factors, including customer preferences, regional popularity, and the profitability of exclusive deals.
When a fast food restaurant signs up with Coca-Cola or Pepsi, they are not just agreeing to sell one soft drink—they are committing to the entire product line. For instance, if a restaurant wants to offer Sprite and Fanta, they must sign with Coca-Cola; if they want Dr. Pepper, Mountain Dew, or 7-Up, they must go with Pepsi. There are no crossovers allowed.
Economic Benefits for Fast Food Chains
The exclusive contracts between fast food chains and beverage companies can be quite lucrative for the franchise. These agreements often come with rebates, which are incentives for the restaurant to exclusively sell the contracted product. The restaurant receives a better price on the soda, which increases their profit margins.
For example, consider McDonald's. They sell Coke products and receive a great price on them due to their high volume. Similarly, Taco Bell and KFC sell Pepsi products, and both have strong incentives to keep the agreement exclusive.
The Contractual Agreement
For the vast majority of fast food joints, there is a contractual agreement in place that ensures they are the exclusive drink provider. However, there are exceptions. For instance, the AW Canada location serves AW Rootbeer, which was contracted through a separate deal.
These agreements are not just about selling one or the other brand. Restaurant owners can often negotiate better pricing and incentives by signing with one supplier over another. This is because the soft drink contract usually comes with no-crossover provisions, meaning that once a restaurant is signed with one company, they cannot switch to the other.
The Case for Competitive Strategy
Some fast food establishments, like the food court location mentioned in Charlies Philly Cheese Steaks, choose to offer non-Coke or Pepsi products. For example, they might sell lemonade, Orange Julius, or other specialty drinks. However, these establishments are the exception, not the rule.
A significant factor in the choice of exclusive contracts is the economic advantage. Fast food restaurants use fountain dispense soft drinks instead of cans and bottles. This method is far more profitable due to the sophisticated and expensive equipment required to blend and carbonate the beverage at the point of dispensing.
Installing and servicing this dispense equipment can be prohibitively expensive for restaurants. As a result, the soft drink contract is typically signed with only one supplier, either Coca-Cola or PepsiCo, to cover the investment in the dispense equipment.
These insights reveal the complex interplay between market competition, economic incentives, and contractual agreements that shape the beverage landscape in fast food restaurants.