Compare the economics of the concentrate business to that ofthe bottling business: Why is the profitability so different?

1 )Why, historically, has the soft drink industry been soprofitable? Soft drink plays an important role in the people’s daily life.There is no doubt that this industry is profitable. The soft drinkcan be found in everywhere in the world, and the reasons of itshigh profit have several aspects. The first aspect is a little capital investment and materialcost. They include that machinery, overhead, labor, and materials.The machinery, overhead, and labor are the basic requirements andfor soft drink industry, the levels of these conditions are notvery high. So the cost of those is low and reasonable. On the otherhand, the manufacturers add the concentrate flavors to the drinkand improve people’s desire for the soft drink. Of course, theconcentrate flavors are not expensive, just like caramel coloring,phosphoric or citric acid, natural flavors and caffeine. What’s more, the marketing channels are increased in a way.People can buy the soft drink in different channels, and they canenjoy the drink everywhere. For example, they can buy themthroughvending machines, in fast food chains, in supermarkets orother restaurants. It is convenient for people to solve the thirstyproblem so that the soft drink manufacturer can get profits fromit. The last reason is that high consumption needs in the market.The manufacturers increased the advertising budgets for a softdrink. It is easy for people to know that what the soft drink isand the characters of soft drink. The soft drink became a householdword in people’s life, and everyone knows that they can try thedrink with low cost.  The increased sales volume makesthe soft drink manufacturers get more benefits from themarketing. 2) Compare the economics of the concentrate business to that ofthe bottling business: Why is the profitability so different? The reasons for the differences can be explained in theseaspects: a barrier to entry; substitutes; suppliers, buyers,rivals, etc. This question can be explained more clearly throughgiving a metaphor between cola war and real war. In the army, sometroops’ position is at front-line, like sales in cola business. Andother troops’ position is at base or logistic line, like theconcentrate business or bottling business in cola-biz. The barrierto entry means quantity advantages and business secret in a way.The barrier to entry is the key to deal with this problem. Anotherimportant reason is business secret, the cola formula. Substitutesand rivals are the financial leverage. So it is the second reasonwhy the concentrate industry has higher profitability than thebottling industry because of the interest expense which is fromfinancial leverage. Suppliers and buyers are duopoly andcompetition market. In conclusion, duopoly even pure monopoly is areal dream for every firm or industry, just on profit marginsection. But for consumers, it is a real nightmare. On the other hand, this question can be explained like this.Concentrate manufacturers had supplier power: they could decide theprice of sweeteners. However, bottling manufacturers had thebuyers’ poweron bargaining leverage. Concentrate manufacturersstill want bottling manufacturers to buy and carry their product.Therefore, although concentrate manufacturers can decide someprices about sweetener costs, they still had to make attractiveprices for the bottling manufacturers buy their product. 3) How has the competition between Coke and Pepsi affected theindustry’s profits? The war between the Coke and Pepsi adjusted operations orbranding properly to increase theefficiency of deliveries tomarkets. Advertising budgets increased obviously. Initially, thebudget was usedto sales and made Pepsi and Coke knew by consumers,but now after the two giants established, the budgetallocation hasshifted to the branding and marketing. It affects sales directlybecause it influences people tobuy the products. Therefore, the effects can be summarized in three points. Thefirst key point is vertical integration. Concentrate producer tobuild a nationwide franchise bottling network, Coke was the firstmover and Pepsi followed it. New franchise agreements allowedbottlers to handle the non-cola brands of other concentrateproducers. Bottlers could not carry directly competing for brands.The second point is the details of effects on industry’s profits.Throughout the 1980s, the growth of Coke and Pepsi put a squeeze onsmaller concentrate producers. Shelf space for small brandsdeclined and shuffled from one owner to another. The third point isacquisition during the Cola Wars. For example, in a five yearsperiod, Dr. Pepper was sold several times, Canada Dry twice,Sunkist once, Shasta one, and A&W once. Phillip Morris acquiredSeven-UP in 1978 for a big premium, but racked up huge losses inthe early 1980s, and then left the CSD business in 1985. 4. Can Coke and Pepsi sustain their profits in the wakeof flattening demand and the growing popularity ofon-CSDs? There is no doubt that Coke and Pepsi can sustain their profitsin the wake of flattening demand and the growing popularity ofon-CSDs. At first, they focus their strength on the local market.They can improve recognition and brand awareness of their products,pay attention to substantial managerial influence in bottling andthe distribution network by anchor bottling model and deepen theirtraditional products as well as introduce a variety of newproducts. Secondly, the overseas expansion also has an importantposition. Global soft drink sales growth slowed in the 2000s, butemerging markets such as China, India were still growing rapidly.Therefore, the Giants make a large investment overseas to developnew bottling plants, constructing more distribution channels, salesand marketing efforts as well as product research anddevelopment. Please answer the question by using the above informations. 1) Why, historically, has the soft drink industry been soprofitable? 2) Compare the economics of the concentrate business to that ofthe bottling business: Why is the profitability so different? 3) How has the competition between Coke and Pepsi affected theindustry’s profits? 4) Can Coke and Pepsi sustain their profits in the wake offlattening demand and the growing popularity of non-CSDs? . . .


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