Although the concentrate business and the bottling business both work together to ensure that the finished products are delivered to the retailers and then the consumers, their economic responsibilities are very much separate from one another. Firstly the concentrate producers are responsible for blending the raw materials and packaging the blended mixtures into containers that will later be shipped to the bottlers for more processing. Much of the concentrate business deals with very little machinery and overhead costs compared to the bottlers associated costs. A normal concentrate manufacturing plant would cost roughly $50 to $100 million and could handle a population the size of the U.S. Most of Concentrate expenses come from advertising, promotion, market research, and bottler support. This causes the gross profits for the concentrate business to be at 32% margin for their operating expenses. Besides their production responsibilities, the concentrate business is also the one who builds relationships and negotiates with large retail corporations, while the bottlers take over small regional accounts in restaurants or cooler freezers. The concentrate business is also always looking for ways to improve the bottlers operations to make it more efficient, sometimes even negotiating with the bottlers’ suppliers. This is why the concentrate manufacturers have more influence over the economics of the business.
On the other hand, bottlers are responsible for purchasing the concentrate, adding carbonated water and high-fructose corn syrup, and then packaging the product into bottles or cans and transporting it to their customer accounts. Bottlers incur a lot of manufacturing costs because their processes calls for very expensive high-speed mass production lines, for every product type that differs in canned or bottled, sizes and specifications, there needs to be a separate assembly line each costing roughly $4 to $10 million. A plant with multiple lines and automated warehousing could end up costing hundreds of dollars and since Coke and Pepsi both have about 100 plants worldwide each, their associated costs could be in the billions of dollars. Thus although the gross profits for the bottling industry is well over 40%, their operating margin is only at 8%. Since Coke and Pepsi have consolidated many bottlers into subsidiaries under their franchises we have seen a significant decrease in the amount of independent bottlers and thus making their influence in the business smaller and smaller because they have to abide by Coke and Pepsi’s terms and conditions. One of probably the most important stipulations of Coke and Pepsi agreement with their bottlers is that they are not allowed to handle any competitors’ brand of the concentrate producers. All these issues lead to the economics and the profitability of bottlers resting in the hands of Coke and Pepsi concentrate producers.
The five forces of competition in the bottling industry are supplier power, buyer power, threat of substitutes, threat of new entry, and rivalry among existing competitors, The suppliers have very little to no bargaining power mainly because their success lies with Coke and Pepsi due to the fact that these companies and there isn’t much room for negotiating with them. Buyer power is also limited to around nothing because the bottlers bargaining power was weakened when they went into a franchise agreement with Coke and Pepsi, and also when these companies bought out their competition in restaurants so they could gain control of those markets in fountain drinks and local regional accounts. There aren’t many threats of substitutes even though there has been a decrease in CSD consumption because Coke and Pepsi have both expanded their product diversification into bottled waters and juices for people who are little more health conscious. Any threats of new entry are not substantial because quite simply put, they just don’t have the capital to come in a large scale and concentrate makers raise prices and enact trademark infringements on bootleggers. Rivalry amongst existing competitors Coke and Pepsi make each other more successful because they are both fighting for the shelf space at checkout coolers, both invest in large amounts to their bottler manufacturers, and they both are expanding their product line to appeal to more potential customers.