Case Analysis
Historical Analysis of soft drink industry
The soft drink industry has been profitable because the people or the consumers are less health conscious in the previous times. Therefore,their intake of soft drinks was huge. If we take a look at the trends of consumption of Americans of the soft drinks, then we will come to know that the consumption has increased. Americans have consumed 23 gallons of carbonated soft drinks per capita annually in 1970 and this consumption has grown at the rate of 3% annually over the next three decades reaching consumption of 53 gallons per capita in 2000. This volumetric growth turns out to be a profitable venture for the soft drinks manufacturers.
Another reason for the profitable growth is the wider distribution of these soft drinks, which increases their volumetric growth. The introduction of new varieties of soft drinks in the form of diet and flavored drinksopens the new avenues of growth in the bottom line of the soft drink manufacturers. The inflation adjusted prices continue to reduce over the period of time, which make the soft drinks affordable to the consumers and more consumers mean more growth in the product line.
The presence of alternatives in the shape of beer, bottled water, tea, etc. does not prevents the consumers to alter or reduce their consumption of the soft drinks, which leads to better growth in terms of profitability. This is due to the reason that more consumers mean more growth, which through economies of scale help to increase the bottom line.
The low fixed investment required by some of the industry participants means lower fixed cost per unit if the participants of the industry are able to attain economies of scale. This low fixed cost per unit means higher profitability if we see the historical volumetric growth in consumption of the soft drinks.
The variable costs of some of the industry participants like in terms of overheads and labor force costs tend to be very lower so that the industry participants again are able to take advantage of these lower costs and increase their profitability.
The nature of the contracts signed between the industry participants like among retailers, producers, bottlers and suppliers try to benefit one party as compare to another. The producers were able to benefit greatly as compared to bottlers due to the nature of the contracts signed between the parties.
Comparison of the concentrate business to that of the bottling business and profitability difference
Concentrate producers are one of the participants of the soft drink industry whose main job is to mix the raw materials, packaged them and send the semi-finished goods to the bottlers. Bottlers are those participants of the industry who add carbonated water to the semi-finished goods (concentrate) and then pack them as per the requirements of the customers.
Concentrate producers do not need to bear heavy fixed investments in the business;therefore,they are able to carry lower fixed costs per unit if they are able to attain economies of scale. On the other hand, the bottlers require large capital investments to start the project, which increases the fixed cost per unit even if the economies of scale are achieved.
The most significant costs of the concentrate producers are advertising, promotion costs, market research costs and bottler support program costs.On the other hand,the most significant costs to the bottler are syrups, concentrate and packaging.
There are lower overhead costs for the concentrate producers, whereas bottlers have a high overhead costs. There are lower labor costs for concentrate producer show ever;there are significantly higher labor costs for the bottlers. Both the lower labor costs and overhead costs for the concentrate producers tend to have a beneficial effect on the bottom line of these producers if they are able to attain the economies of scale.
Different Profitability:
There is difference in the profitability of concentrate producers as compared to that of bottlers. Through an estimated income statement, it can be deduced that the net sales per case is $0.98 for the concentrate producers and for bottlers is $4.63. From this top line, it can be said that the bottlers will have a higher bottom line percentage as compared to concentrate producers. However,this is not the case.
The bottlers’ operating income is $0.36, which is 8% of the net sales. On the other hand,the concentrate producers operating income comes out to be $0.30 per dollar case which is 32% of the net sales per case. The reason is that the concentrate producers have lower cost of goods sold, lower direct marketing expense as their buyers are specific, therefore there is no selling and delivery expense, and lower general and admin expense........................
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