Cola Wars Continue
Yin Dongfang (2014-27148)
1) Why, historically, has the soft drink industry been so profitable?
According to Exhibit 3a, the operation profit margin of the two giants kept robust growing from ~10% in 1970s to ~20% in 2005. That probably resulted from two reasons: 1) net sales enjoyed robust growth; 2) COGS and other expenses cowered fast.
Net sales enjoyed robust growth.
According to Exhibit 1, consumption per capita increased by 3% per year lasting for 3 decades since 1970s, due to
A. Increasing demands of CSD and the introduction of diet and flavored varieties.
a) Availability increased due to cowering real price
B. The introduction of diet and flavored varieties which led to CSD’s share increased from 12.4% in 1970 to 18.7% in 1981, 25.7% to 1990 and 29% in 2000 of total beverage consumption per capita. (Source: Exhibit 1)
High consumption per capita caused lower bargaining power of consumers but high bargaining power of manufacturers.
On the other side, less threats from substitutes was also a reason that market players can enjoy profitable business. According to P2, Americans drank more CSD although there were many alternatives.
COGS and other expenses cowered.
A. Less investment than other industry.
B. Relative high consolidated market landscape caused market players enjoy high bargaining power to suppliers, which means COGS will be low.
2) Compare the economics of the concentrate business to that of the bottling business: Why is the profitability so different?
Economics Comparison of CSD and Bottling Business
Source: Exhibit 6
Reasons that caused such huge differences
A. Territorial rights made the CSD manufacturers get the bargaining power with bottlers. Then, CSD makers regularly raised the concentrate prices, often by more than the increase in inflation, which caused Bottlers have higher COGS. (Source: Exhibit 5)
B. Significant costs of CSD makers included advertising, promotion, market research fees and bottler support. Therefore, marketing expense
1) Why, historically, has the soft drink industry been so profitable?
According to Exhibit 3a, the operation profit margin of the two giants kept robust growing from ~10% in 1970s to ~20% in 2005. That probably resulted from two reasons: 1) net sales enjoyed robust growth; 2) COGS and other expenses cowered fast.
Net sales enjoyed robust growth.
According to Exhibit 1, consumption per capita increased by 3% per year lasting for 3 decades since 1970s, due to
A. Increasing demands of CSD and the introduction of diet and flavored varieties.
a) Availability increased due to cowering real price
B. The introduction of diet and flavored varieties which led to CSD’s share increased from 12.4% in 1970 to 18.7% in 1981, 25.7% to 1990 and 29% in 2000 of total beverage consumption per capita. (Source: Exhibit 1)
High consumption per capita caused lower bargaining power of consumers but high bargaining power of manufacturers.
On the other side, less threats from substitutes was also a reason that market players can enjoy profitable business. According to P2, Americans drank more CSD although there were many alternatives.
COGS and other expenses cowered.
A. Less investment than other industry.
B. Relative high consolidated market landscape caused market players enjoy high bargaining power to suppliers, which means COGS will be low.
2) Compare the economics of the concentrate business to that of the bottling business: Why is the profitability so different?
Economics Comparison of CSD and Bottling Business
Source: Exhibit 6
Reasons that caused such huge differences
A. Territorial rights made the CSD manufacturers get the bargaining power with bottlers. Then, CSD makers regularly raised the concentrate prices, often by more than the increase in inflation, which caused Bottlers have higher COGS. (Source: Exhibit 5)
B. Significant costs of CSD makers included advertising, promotion, market research fees and bottler support. Therefore, marketing expense