Cola Wars Continue
1. Is the soft drink industry profitable? If so, how much & why?
The soft drink industry is very profitable. It is more profitable for the concentrate producers than for the bottlers. Exhibit 3 clearly indicates how much this industry is profitable to the concentrate producer as compared to the bottlers. This industry as a whole generates positive economic profits. The other reason why the soft drink industry is profitable is: * Bottling Network: Coke and Pepsi have agreements with existing bottlers which prevents it from taking on new competing brands. So no scope for future competitors due to high capital costs in setting up a new plant. * Advertising: Huge advertising costs by Pepsi and Coke which cannot be matched up to. * Brand Image/Loyalty: It is virtually impossible for a new entrant to match this scale in the market. * Retail Distribution: Significant margins of 15-20% for the shelf space. New entrant finds it hard to convince the retails for this space. * Price Wars: New entrant does not stand a chance due to the large scale production of Pepsi and Coke. * Commodity Ingredients: Basic commodities are Sugar,Additives,Colour,Flavour.The producers have no say over the pricing hence the suppliers are weak in this industry due to alternative such as HFCS in sugar prices go up.
Soft drink industry diversifies itself by offering substitutes to shield them from competition.
2. Compare the concentrate business to the bottling business in terms of profitability and level of vertical or horizontal integration?
The concentrate business is highly profitable as compared to the bottling business. Firstly, there are a higher number of bottler’s as compared to the concentrate producer’s which leads to competition of the bottler’s to get a contract with the big 2 of the industry. This leads to reduced margins in the bottling section. Secondly, huge capital cost to set up a bottling plant whereas the capital costs required in the
The soft drink industry is very profitable. It is more profitable for the concentrate producers than for the bottlers. Exhibit 3 clearly indicates how much this industry is profitable to the concentrate producer as compared to the bottlers. This industry as a whole generates positive economic profits. The other reason why the soft drink industry is profitable is: * Bottling Network: Coke and Pepsi have agreements with existing bottlers which prevents it from taking on new competing brands. So no scope for future competitors due to high capital costs in setting up a new plant. * Advertising: Huge advertising costs by Pepsi and Coke which cannot be matched up to. * Brand Image/Loyalty: It is virtually impossible for a new entrant to match this scale in the market. * Retail Distribution: Significant margins of 15-20% for the shelf space. New entrant finds it hard to convince the retails for this space. * Price Wars: New entrant does not stand a chance due to the large scale production of Pepsi and Coke. * Commodity Ingredients: Basic commodities are Sugar,Additives,Colour,Flavour.The producers have no say over the pricing hence the suppliers are weak in this industry due to alternative such as HFCS in sugar prices go up.
Soft drink industry diversifies itself by offering substitutes to shield them from competition.
2. Compare the concentrate business to the bottling business in terms of profitability and level of vertical or horizontal integration?
The concentrate business is highly profitable as compared to the bottling business. Firstly, there are a higher number of bottler’s as compared to the concentrate producer’s which leads to competition of the bottler’s to get a contract with the big 2 of the industry. This leads to reduced margins in the bottling section. Secondly, huge capital cost to set up a bottling plant whereas the capital costs required in the