1. Compare the economics of the concentrate business to that of the bottling business: Why is the profitability so different?
The reason why their profitability is so different can be known by the fact that the costs they have to meet differ greatly. The concentrate producers need lower cost for building a manufacturing plant about $25 million to $50 million, and just one plant is needed. Concentrate producers pay the costs for advertising, promotion, market research, and bottler support. They have to invest for their trademarks continuously. Also they need a number of employees who work with bottlers. However, as to bottlers, there are much higher costs that they have to meet. To build a plant could cost $75 million. Bottling and canning lines cost maximum $10 million. They need to pay for packaging and sweeteners and it accounts for high portion of sales. However, the bottlers are allowed to handle the non-cola brands as well and they have the right to decide on final retail pricing; and top bottlers get contribution from the main companies such as Coca-Cola.
2. How has the competition between Coke and Pepsi affected the industry’s profits?
In the 1980s, Cola Wars between Coke and Pepsi started to heat up. To get more profits than the other, they tried in doing so many things such as a huge investment for advertising, evolving structures and strategies to improve system profitability, and developing non-CSDs. These efforts affected on the share of total beverage consumption which reached 28.7% in 2004 from 12.4% in 1970 according to the exhibit 1. It is a result of their struggling for getting a bigger market share. Also the bottlers and concentrate producers should have struggled as well to make more profits. The war made these efforts, and the efforts made profitable results.
3. Can Coke and Pepsi sustain their profits in the wake of flattening demand and the growing popularity of non-CSDs?
I would say they will sustain their...
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