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There is a large difference in profitability between bottling and concentrate enterprises. As shown in the comparative analysis done by Yoffie and Kim, annual net profit both in Pepsi and Coca-Cola bottler companies did not exceed 5% over the period from 2000 to 2009 (16). In the same time, concentrate sellers managed to achieve 10-20% for the same period (Yoffie & Kim 15). There is a number of reasons why the situation occurred. Firstly, the setup investments are relatively lower in concentrate industry as the equipment needed is cheaper and less sophisticated whereas automated lines and storage facilities in bottling can be quite costly. The high cost of entry dictated mainly by costly technologies can also be one of the challenging factors in establishing a profitable bottling factory. Therefore, the operating costs of the concentrate production are also different as bottling facilities have larger amortization, labor, packaging, and other expenses.
Another reason for the difference in profitability might be in cost competition among bottlers. Franchise agreements allow them to change pricing policies as they see fit. For instance, Coca-Cola and Pepsi rivalry on the market places an additional burden on the companies, who are sometimes forced to lower the price of a final product on the shelves to stay competitive. This exemplifies the high-liability price competition mentioned by Porter, who stated that if the products are very similar, price can be one of the first things that swing the customer to pledge loyalty to another brand (85). The cost of such price cuts is often placed on the bottler.
Although the marketing and advertising costs are subsidized by the franchisor, the weight of unpopular design decisions dwells primarily on bottler companies. For example, a rebranding attempt made by Coca-Cola Company in the 1980s meant as an innovation turned into a disaster that only dissatisfied customers (Investopedia). Since the bottlers are unable to drastically change the range of their products without big investments into new equipment, they seem to have limited abilities to adapt. In addition, bottlers rely heavily on their suppliers. The franchise agreement often restricts them to cooperate with rivaling brands, which undermines their productive capacity provided there is a small difference between product lines in terms of package shape. For example, bottling companies bound by the franchise agreement with Coca-Cola cannot make aluminum cans for Pepsi, which deprives bottlers of a great deal of profit. There is, however, an opportunity to deal with relatively small players such as 7UP, but it can doubtfully be considered a major improvement.
All things considered, there are several reasons for the difference in profitability between concentrate producers and bottlers. The latter has a higher price of entry, operating costs, and low adaptability. Above that, bottling companies are often bound by the agreement with only one major supplier. Finally, they deeply suffer the cost of bad design and marketing decisions.
Works Cited
Investopedia. “5 Products That Failed And Why.”Forbes Magazine. 2011. Web.
Porter, Michael E. “The Five Competitive Forces that Shape Strategy.” Harvard Business Review, vol. 86, no.1, 2008, pp. 25-40.
Yoffie, David B., and Renee Kim. Cola Wars Continue Coke and Pepsi in 2010. Web.
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