Cola Wars Continue
Cola Wars Continue: Coke and Pepsi in 2010
1. Why, historically, has the soft drink industry been so profitable?
Soft drink industry is profitable because the industry has concentrated revenues between 2 major players and it is virtually impossible for a new player to compete with the key players. The industry giant's wield power over the retail outlets. Convenience stores, vending machines, fountains are widely distributed and hence they don't have the power to bargain over pricing issues and they also contribute to about 80 of the sales. This ensures that the companies quote a maximum price and still have the final say in the matter.
2. Compare the economics of the concentrate business to that of bottling business. Why is the profitability so different?
A concentrate producer has to blend the raw materials and ship them to bottlers in plastic canisters. A typical concentrate manufacturing plant has an initial capital investment of 25-50 million and is capable of meeting the needs of an entire nation. Therefore the concentrate producer’s main line of work shifts to advertising, research and bottler support which ensures them a gross profit of 80. The concentrate producer also enjoys added value in the form of access to branded names and unique formulas. A bottler manufacturer, on the other hand has a capital-intensive business on hand, which has high costs to deal with-concentrate producers and packaging activities being the major costs (up to 90. The bottler's profitability is therefore considerably reduced with a gross profit of about 40. Added to this the bottler also invests in distribution networks as a result of which the operating margins drop drastically to 7-9. Therefore there is a wide disparity in the profitability of a concentrate manufacturer and a bottler manufacturer
3. How has the competition between Coke and Pepsi affected the industry structure? The cola giants Coca-Cola and PepsiCo have, through their Cola Wars, brought about a
1. Why, historically, has the soft drink industry been so profitable?
Soft drink industry is profitable because the industry has concentrated revenues between 2 major players and it is virtually impossible for a new player to compete with the key players. The industry giant's wield power over the retail outlets. Convenience stores, vending machines, fountains are widely distributed and hence they don't have the power to bargain over pricing issues and they also contribute to about 80 of the sales. This ensures that the companies quote a maximum price and still have the final say in the matter.
2. Compare the economics of the concentrate business to that of bottling business. Why is the profitability so different?
A concentrate producer has to blend the raw materials and ship them to bottlers in plastic canisters. A typical concentrate manufacturing plant has an initial capital investment of 25-50 million and is capable of meeting the needs of an entire nation. Therefore the concentrate producer’s main line of work shifts to advertising, research and bottler support which ensures them a gross profit of 80. The concentrate producer also enjoys added value in the form of access to branded names and unique formulas. A bottler manufacturer, on the other hand has a capital-intensive business on hand, which has high costs to deal with-concentrate producers and packaging activities being the major costs (up to 90. The bottler's profitability is therefore considerably reduced with a gross profit of about 40. Added to this the bottler also invests in distribution networks as a result of which the operating margins drop drastically to 7-9. Therefore there is a wide disparity in the profitability of a concentrate manufacturer and a bottler manufacturer
3. How has the competition between Coke and Pepsi affected the industry structure? The cola giants Coca-Cola and PepsiCo have, through their Cola Wars, brought about a