Why Historically Has the Soft Drink Industry Been So Profitable?

Sree Ramya Gunukula

2018-27901

1) Why, historically, has the soft drink industry been so profitable?

Answer  1:

It is profitable

a)The inputs are mainly sugar and packaging.

 Sugar can be purchased from many sources and if it gets expensive, concentrate producers can always shift to alternatives such as fructose syrups, artificial sweeteners etc

Packaging. As per the cases,“ often two or three can manufacturers competed for a single contract”, hence soft Drink manufacturers such as coke and Pepsi can have extremely favorable agreements with packaging suppliers.

Hence switching suppliers is easy, thus reducing the bargaining powers of suppliers.

b)CSD’s are sold through five different channels. Food stores,convenience stores, fountain, vending and mass merchandising. Due to the high degree of fragmentation, the bargaining power of buyers was higher in the channels, except mass merchandising segment.

c)new entrants have difficulties to compete with the existing giants in the industry. New CP’s should overcome high advertising and marketing costs and should compete with Coke, Pepsi and few others who had established relations with retail channels through DSD’s On the other hand, entering bottler industry is capital intensive and the soft drink Interbrand competition act  prevented new entrants in the already taken market.(long-term contacts of bottlers)

d) The threat of substitute product is countered by soft drink industry by huge advertising, brand equity, and making their product easily available for consumers, which most substitutes cannot match

e)as the case suggests, coke and Pepsi showed high rivalry,  attracting customers with aggressive price cuts and high-impact marketing campaigns.

2) Compare the economics of the concentrate business to that of the bottling business: Why is the

profitability so different?

Answer2:

1)A higher number of the bottler’s when compared to the concentrate producer’s which fosters competition and reduces margins in the bottling business

 2) A higher number of the bottler’s when compared to the concentrate producer’s which fosters competition and reduces margins in the bottling business

3) Costs for distribution and production account for around 65% of sales for bottler’s while in the concentrate business it’s around 17%

4)higher added value for the CP’s such as coke and Pepsi in terms of their proprietary, branded products. Unlike concentrate producers, bottlers do not have branded products or unique recipes. Their value is mostly seen in terms of their relations with CP’s(through long-term contracts and Interbrand competition act)  and customers. (to whom they provide DSD’s and reducing customer costs and maintaining relations)