1. Why is the soft drink industry so profitable?
There are several reasons soft drink industry is so profitable. Carbonated soft drinks are low cost to produce for both concentrate producers, and bottlers, and can yield high profit margins. Suppliers and buyers do not have power over the industry. Internal rivalry between two giants Coca-Cola and Pepsi Co have strongly affected the profits of soft drink industry due to their effective strategies in advertising and promotion. They have strong brand identities. They have several contracts to be exclusive providers of fountain drinks for restaurant chains, supermarkets, and retail outlets. These contracts set a high barrier to prevent competitors from entering the industry, which again, contribute to the maximization of profit margins. Substitutes products were not enough to take away market share, as carbonated soft drinks has always been the most consumed beverage nationwide.
2. Compare the economics of the concentrate business to the bottling business: Why is the profitability so different?
Two major participants were involved in the production of soft drink are concentratre producers and bottlers. Starting and maintaining a concentrate manufacturing plant involved little capital investment in machinery, overhead, and labor. .A typical concentrate manufacturing plant cost approximately $25 million to $50 million to build, and one plant could serve the entire United States. Significant costs were for advertising, promotion, market research, and bottler relations. Eventually, bottlers paid an agreed percentage – typically 50% or more – of promotional and advertising costs.
Bottlers purchased concentrate, added carbonated water and high fruscote corn syrup, bottled delivered it to customer accounts. In contrast, the bottling process was capital-intensive and involved specialized, high-speed lines. Minimum cost to build a small bottling plant was $25 million to $35 million. The cost of an efficient large...