Executive Summary For more than a hundred years Coke and Pepsi had enjoyed an age of peace. However, as the consumer’s concern of health is increasing, they are facing the profitability decrease of the CSD industry. They sometimes had hard time and tried various tactics to survive. To maintain profit and stable growth rate, they have to find innovative win-win strategy.
Analysis The role of concentrate producer is blending raw materials, packaging the mixture, and delivering it to the bottler. The concentrate producing process needs relatively little capital investment; the building cost of a general plant which is able to cover the whole U.S. domestic area is around $50 to $100 million. On the other hand, the bottling process is capital intensive and the process needs fast production line which is hard to interchange between products of different types and size. This being the case the operating margin gap between those two producers is pretty big (see Exhibit 1).
There are two reasons why Coke and Pepsi bought their bottlers. First of all, they wanted to play more direct role with their stakeholders. They had been cooperating with their bottlers by spending huge amount of money in marketing and promotion event. Moreover, they helped their bottlers to negotiate contracts with suppliers and retailers in better conditions. By bottler acquisitions, they could enact directly with the suppliers of bottlers so that they can increase management efficiency and decrease operating cost. Secondly, they could negotiate with their bottlers more easily by acquiring petty bottlers and selling them in better condition to the big bottlers, which makes bottling market to be managed by big bottling company. If bottling companies go broken continuously, it takes enormous cash to invest in the capital-intensive bottling business for Coke and Pepsi. At the same time, Coke and Pepsi gave their bottlers exclusivity so that they can control their products management effectively by...
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