Cola Wars
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Q1. If we consider that Coke and Pepsi have been in a very profitable industry, why have very few firms successfully entered this business over the last century?Answer:Â The reasons for very few firms successfully entering the business over the last century can be attributed to the fact that the market has been dominated by two players. This was achieved through:Litigation (
Capital Expenditure: The manufacturing process for concentrate was simple and required little capital investment. A typical concentrate manufacturing plant which could cover a geographic area as large as the United States cost between $50 million to $100 million to build. The bottling process was extremely capital-intensive and involved specialized, high-speed lines. Lines were interchangeable only for packages of similar size and construction, thus each major package type requires separate bottling equipment. Bottling and canning lines cost from $4 million to $10 million each, depending on volume and package type. The cost of a large plant with multiple lines and automated warehousing could reach hundreds of millions of dollars. Other Costs: A concentrate producer’s most significant costs were for advertising, promotion, market research, and bottler support. Marketing programs were jointly implemented and financed by concentrate producers and bottlers. For bottlers, their main costs components were concentrate and syrup. Other significant expenses included packaging, labour and overheads. Bottlers also had to invest money in trucks and setting up their distribution networks.Business Aspects: The concentrate producers usually took the lead in developing the programs, particularly in product planning, market research, and advertising. Bottlers assumed a larger role in developing trade and consumer promotions. Concentrate producers employed extensive sales and marketing support staff to work with and help improve the performance of their franchised bottlers. They set standards for their bottlers and suggested operating procedures. They also negotiated directly with their bottlers’ major suppliers (primarily sweetener and packaging vendors) to achieve reliable supply, fast delivery and low prices. Profitability: Bottlers’ gross profits exceeded 40% but operating margins were usually around 8%, about a third of concentrate producers’ operating margins. (Operating income – $0.30 per case i.e. 32% of net sales) One of the reasons as highlighted above was the huge difference in capital investment. Although Coke and Pepsi had different terms and conditions in their contract with their bottlers but they ensured that they had the bargaining power or the upper hand in setting the concentrate prices. Also over the last two decades, concentrate makers regularly raised concentrate prices, often by more than the increase in inflation [change in CPI (1988 – 2009): 2.9% whereas change in concentrate price – 3.6%]. Bottlers had the final say in decisions about retail pricing. Pressures from concentrate producers on bottlers to spend more on advertising, product and packaging proliferation, widespread retail price discounting – together, these factors resulted in higher capital requirements and thus lower profit margins. Over the time bottlers also had to manage an ever increasing number of SKUs (CSDs and non-CSDs) which led to increased costs (logistics and operations) resulting in lower margins.