Q1. The Economics of the Concentrate Business and Bottling Business

Differences in the profitability of the concentrate and bottler business could be attributed to various reasons. First, the bottling industry is capital-demanding as compared to the syrup business. For instance, the concentrate manufacturers mixed raw material constituents, packed the syrup in plastic containers and dispatched them to the bottling companies. In this sense, the syrup production process required little finance investment in overheads, machinery, and labor as a typical concentrate manufacturer covering a geographic area equal to that of the United States cost between $50 and $100 million (Yoffie and Kim 2). On the other hand, bottling business is capital intensive as it involves high-speed production lines that were interchangeable only for similar products and packages of the same size. As such, bottlers had to invest in bottling and canning lines for different outcomes depending on the volume and package type. Such requirements inflated the capital needed to operate a bottler as the cost of multiple lines and automated warehousing exceeded $100 million. For instance, DPS completed the construction of its production facility in California at $120 million in 2010 (Yoffie and Kim 3). Therefore, the difference in capital intensity in the two business had a significant contribution to the difference in the profitability of the two firms.

Secondly, the two businesses had differences in inputs required during the production process. Fewer raw materials are necessary for concentrate production as compared to the bottling process. For instance, inputs for regular cola productions consisted of caramel coloring, phosphoric or citric acid, natural flavors, and caffeine while bottlers had additional inputs, packaging, and sweeteners that included artificial sweeteners and high fructose corn syrup. The majority of the U.S CSDs were packaged in cans because they were appealing packaging material due to ease of handling and display, lightweight and were eco-friendly (Yoffie and Kim 5). The choice of packaging also increased the difference in profits as the concentrated producers had a better strategy in handling suppliers as compared to bottlers. The concentrate manufacturers had better relationships with their suppliers as they were the leading metal can consumers which gave them bargaining power as compared to bottlers. As such, differences in inputs for production and the bargaining power over suppliers increased the profitability of the concentrate producers as compared to that of bottlers.

Question 2: Effect of Competition between Coke and Pepsi on Industry Profits

The intensity of competition between Coke and Pepsi stimulated changes in operations and branding as the two companies initiated proper branding and increased efficiency in operations. Also, the budget allocations for advertisement increased as the two companies strived to better their branding and marketing and acquire the needed market share. Effective branding and marketing had a direct impact on sales as it influences the buying behavior of consumers. The consequences of intensive marketing competition were the Pepsi’s national challenge that forced coke to introduce rebates, cuts in retail prices and intensive advertising aimed at challenging the Pepsi move though it had already battered coke’s market share (Yoffie and Kim 7). Therefore, the profit margins of the industry declined as the operational costs increased because the two giants had almost doubled their marketing budgets and were shifting to better production strategies.

Recommendations

1. Coca-Cola Should Consider Venturing into the Hot Beverage Business

The global market for hot beverages especially tea and coffee indicate an increasing growth rate. Even though the growth rate slowed in the recent past, the sector has significant potential, especially in the coffee business. The anticipated growth is attributed to the growing coffee-culture among young adults. Therefore, Coca-Cola can tap into this industry and gain a significant share since it is an established brand globally. It can expand its presence in the hot beverage business by acquiring existing companies as this will help it move beyond soda and into broader beverage categories.

1. Introduce Healthier Products

The rise in obesity rates and diseases threatens the future of Americans’ health. Most of the obesity cases have been attributed to unhealthy diets that mostly consists of carbonated beverages and other junk foods. However, the threat seems to be reducing as most American have become health conscious as they are interested in healthier products. Due to this demand and mass interests, coke should continuously update its healthy products to tap into the potential of this emerging market segment. Not only has the trend affected the United States, but it is also spread on most parts of the globe, and even developing countries are launching campaigns against unhealthy foods and beverages.

1. Explore other Business Options

Coke can venture into other business and fast track its ambitions to move beyond soda. The company could venture into other sectors such as the real estate. According to Koyfman, the real estate has been a successful venture for enterprises such as the McDonalds; the fast-food giant has ventured in the real estate business, and it has been performing better as compared to other participants. Therefore, coke can venture into such businesses as it has the necessary resource to offset such enterprises to or any other industry that aligns with its ambitions.

Works Cited

Koyfman, Alex. “Meet the McDonald’s of Cannabis.” Wealth Daily, 17 January 2019, www.wealthdaily.com/articles/meet-the-mcdonald-s-of-cannabis/91194. Accessed 11 Feb. 2019.

Yoffie, David, and Renee Kim. “Cola Wars Continue: Coke and Pepsi in 2010.” Harvard Business School, May 2011. Harvard Business School, www.hbs.edu/faculty/Pages/item.aspx?num=39738. Accessed 11 Feb 2019.

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