Coca-Cola in 2011 - in Search of a New Model

Analyze the economics and industry structure of the soft drink industry. Specifically, compare and analyze the profitability of the concentrate and bottling segments of the industry.

Socioeconomic factors have played a significant role in both the economics and industry structure of the soft drink empires. 2014 marked the tenth straight year that carbonated soft drink volume has declined, with both Pepsi and Coca Cola posting modest declines. The result is a carbonated sales volume that is the lowest it has been since the mid-1990s. Many of these Socioeconomic factors are detailed in the article, suggesting an increase in overall health awareness and a culture that is quick to point at the removal of sugary soft drinks as a critical step towards a healthier life for both children and adults. This combined with the availability of other alternatives and the change in consumer demands has resulted in a challenging economic environment that is feeling pressure under existing infrastructure given the competitive market. The concentrate and bottling segments are the two main components that present varying degrees of upside as well as specific challenges.

Concentrate

Infrastructure in the concentrate side of the business requires less upfront investment. 30 principal plants each costing between $50-$100 million handle the 200 countries Coke is currently marketed to. While the ingredients needed to make the concentrate are relatively straight forward, the price was fixed, regardless of cost increase or inflation. This has since been adjusted, but historically has been a point of contention between concentrate and bottlers. Costs were significantly decreased with the shift to high fructose corn syrup from sugar saving 40%.

The real cost in the concentrate business is with the marketing and relationships. This is critical to building powerful global brands, with promotion and shelf space being the foundation of these costs. In 2010 alone, Coke spent $2.9 billion in advertising expenses, and $5 billion in CDAs.

Bottlers

Bottlers require significantly more up front infrastructure costs. Each beverage runs a specialized high speed production line that is not usually interchangeable between products. Costs can be north of $100s of millions of dollars for one plant running a specialized line. As diversity of products grows, these issues are magnified and trickle down to shipping processes. Additionally, most bottlers are now third-generation owners and the innovation and investment to stay relevant in the “cola wars” can be lacking. This has lead Coke to purchase certain bottlers, improve production infrastructure, and then sell back to companies in the market who are performing. On average, bottlers’ cost of sales exceeded half of its total sales.

The cost of a these large plants with multiple lines is in the hundreds of millions. The bottling process known as “cold-filled” was the most profitable with high-volume, high-demand sodas. Bottlers are also responsible for selling and delivering drinks to customers.

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