Profitability in Bottling Industry

Bottlers are responsible for mixing fructose to the concentrate purchased, bottle or can it and
deliver it to customers. They manage the supply chain and are responsible for the distribution
of the product.

Below is the analysis of the 5 competitive forces from Porters Model:

Threat of entry/Barriers to entry

Below characteristics of the bottling industry make it difficult for new entrants to join the
market.
Capital Intensive Requires an initial investment of $75 million to setup a continuous
production line of capacity 40 million cases. 80-85 such plants are required for full
distribution across the US.
High Switching costs For the bottlers, concentrate producers are the
customerssuppliers. The production line setup by the bottlers, is used to produce one type
of packaging and switching to other size or concentrate involves significant amount of
switching cost. Also, to switch to another CP, they need to make sure that the asset
utilization remains high. This makes the cost to switch very high for the bottling industry.
Lower Profit Margins Given the huge capital investment, the pre-tax profit for the bottlers
is a mere 9% of the sales. To make a higher dollar amount profit, the bottlers have to make
sure high levels of revenue i.e. for a $1 billion revenue the bottlers would make $90 million.
Considering that the gross profits are as high as 35%, a low net profit margin indicates
high operating costs in the industry. The operating costs would be even higher if the
concentrate producers contribute less towards the marketing expenses.
Market SaturationIncumbency Advantages independent of size It is very hard for tThe
bottlers have been assigned geographic territories to operate in and to get any more
share/shelf space in the assigned given the exclusive share of territories would be
difficultthat concentrate producers have. for a new bottler.

Bargaining power of suppliers

The power of suppliers is moderate high for the bottling industry. With only a handful of
concentrate producers, the profitability of bottling industry is heavily eroded by the suppliers.
Under the 1987 Master Bottler Contract, Coke reserved the right to determine concentrate
price and other terms of sale. Coke was not obligated to share advertisement and marketing
expenditures with the bottlers. Even though Cokes 1987 agreement did not give complete
rights on setting price to Coke, Pepsis Master Bottling Agreement required bottlers to
purchase concentrate from Pepsi at terms and conditions fixed by Pepsi. One can observe
that the price of concentrate increased steadily from 1988 to 2000, even though the retail price
decreased in 1992, 1994 and 1998.
Consider Coke and Pepsi for example, they have pushed all the operating costs to the bottling
industry and have kept the advertising, marketing and promotional activities in the bottling
industry space. This limits the bottlers from increasing the price and have thus reduced the
margins of the bottlers. Exhibit 5 clearly depicts how the margins of the bottlers is impacted.
Although, the gross profit is over 40%, the pre-tax profit is only 9% of dollar sale value.

The bottlers face high switching costs in changing suppliers. The suppliers also have the
capability for forward integration where Coke and Pepsi can set up their own bottling plants.
The concentrate producers also have the power to lock-in bottlers to produce for them with
exclusivity in a particular geographic region. Despite, employing different approaches and
franchise agreements with their bottlers, Coke and Pepsi exercise tremendous power over the
bottlers. Costs for distribution and production account for 65% of sales for bottlers as opposed
to a mere 17% for the concentrate producers. Despite these facts, the concentrate producers
maintain a healthy relationship with the bottlers as their sales depend on the bottlers sales.

Bargaining power of buyers

The strength of buyers is high for the bottlers as there are multiple brands and substitutes
available for the buyers to choose from. Bottlers have to fight for the limited shelf space
available. There are few switching costs for the buyers. Also, intermediate buyers like
supermarkets can impact the buying decisions of the ultimate consumers which increases the
power of buyers.

Threat of Substitutes
The threat of substitutes is relatively low for the bottlers. It is difficult to replace the
bottles/cans. Although fountain sales is an option, it is not possible to make them available
everywhere. The case tells that fountain stores make up 23% of the sales while super-markets,
food-stores, convenience stores etc. make up the majority of the marketing/distribution
channels. To meet the concentrate producers vision of a Coke/Pepsi at arms length, bottlers
play an integral role and hence cannot be replaced easily.

Rivalry
The above factors add to the intense rivalry in the bottling industry. High number of bottlers
as compared to the concentrate producers fosters high competition and eventually reduces
the profit margin. This also makes tThe exit barriers are high as the bottlers use specialized
machinery. .

Conclusion
- High barrier to entry
- Moderate power of suppliers
- High power of buyers
- Low threat of substitutes
- Intense Rivalry
According to Porters five forces, the above characteristics of the bottling industry make it less
profitable or less attractive to enter