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Cola War

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Cola War

1. Why, historically, has the soft drink industry been so profitable?
First, high entry barrier. Both of them have long history and large investment in advertisements which make Coke and Pepsi become the culture symbol of America. And their franchise system gets large economies of scale for them. Second, limited competition. In CSD industry, Coke and Pepsi are the main competitors. They claimed a combined 72% of the US CSD market’s sales volume in 2009. Third, their fixed customers are bottlers and consumers. Last, convenient channels. Coke and Pepsi occupied limited shelf, vending machines, and allow products to be available anywhere for consumers, which created a huge obstacle for newcomers.
2. Compare the economics of the concentrate business to that of the bottling business: Why is the profitability so different?
For concentrate producers, they blended raw material ingredients, packaged the mixture and shipped containers to the bottler. The process involved little capital investment in machinery, overhead or labor. And a typical manufacturing plant cost 50 to 100 million dollars. The most significant costs were for advertising, promotion, market research, and bottler support. Also, they invested heavily in trademarks by using innovative and sophisticated campaigns.
Cost of sales is more in bottlers than concentrate producers. For bottlers, the bottling process was capital-intensive and involved high-speed production lines. The cost of a large plant with multiple lines automated warehousing could reach hundreds of millions of dollars. The main costs components were concentrate and syrup. Other significant expensed included packaging, labor and overhead. Bottlers also invested in capital in trucks and distribution networks.
Moreover, bottlers relied on concentrate producers who bottlers purchased concentrate from. Due to the increase of...

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