Question 2: Compare the economics of the concentrate business to that of the

bottling business: why is the profitability so different?

Concentrate business:

The concentrate producer blends the raw material ingredients, packages the
mixture in plastic canisters and ships those containers to the bottler. For diet
CSDs, concentrate makers often added artificial sweetener.
A concentrate manufacturing plant costs between $50 million to $100 million.
This process involved relatively little capital investment in machinery,
overhead or labor but has significant advertising, promotion, market research
and bottler support costs.
Concentrate producers negotiated customer development agreements
(CDAs) with nationwide retailers such as Wal-Mart. They also negotiated
directly with the bottlers suppliers to achieve reliable supply, fast delivery
and low prices.
Among national concentrate producers, Coke and Pepsi claimed a combined
72% of the U.S. CSD markets sales volume in 2009.

Bottlers:

Bottlers purchase concentrate, added carbonated water and high-fructose

corn syrup, bottles or cans the resulting CSD product and delivers it to the
customer accounts. Coke and Pepsi bottlers are responsible for direct store
door (DSD) delivery.
The bottling process was capital-intensive and involved high-speed
production lines. For bottlers, their main cost components were concentrate
and syrup. Other significant expenses included packaging, labor and
overhead. Bottlers also invested capital in trucks and distribution networks.
The number of soft drink bottlers in U.S. had fallen steadily from more than
2,000 in 1970 to fewer than 300 in 2009.
Coke was the first concentrate producer to build a nationwide franchised
bottling network and Pepsi followed suit.
Franchise agreements with both Coke and Pepsi allowed bottlers to handle
the non-cola brands of other concentrate producers. Bottlers could choose
whether to market new beverages introduced by the concentrate producer.

Vertical Income Statement Analysis all values in %

Concentrate Business
Bottlers
Sales
100
100
Cost of Goods Sold
22
58
Gross Profit
78
42
Marketing Expenses
21
10
Selling and Delivery
18
Expenses
General Admin Expenses
26
6
Operating Profit
32
8

Income Statement Analysis

Operating Profit

General Admin Expenses

Bottling Business

58

10

Selling and Delivery Expenses

Cost of Goods
Sold
Concentrate
Business

22

21

18

6 8

Marketing Expenses

25

32