Cola Wars Continue

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Due to the bottlers diminishing profitability, bottlers simply could not afford the promotional and marketing initiatives demanded by concentrate suppliers. To combat this, concentrate companies themselves entered the bottling business through acquisition and used their deep pockets to consolidate small bottling companies. Concentrate company's newly acquired bottling businesses were able to improve profitability by streamlining expenses and improving overall supply chain efficiency. Furthermore, concentrate companies were able to block some competition to the CSD market as new entrants now had to work through concentrate company's bottling networks.

A second contributing factor to profit inequality is capital expenditure. The bottling business is very capital intensive and requires high speed production equipment that is not easily interchangeable or adaptable for alternative uses. Manufacturing facilities can often cost several hundred million dollars. Investment in trucks, distribution networks and skilled labor further increased overhead costs. The combination of such costs and franchise contracts resulted in high switching costs and minimal bargaining power for bottlers. These fixed costs are part of what lead to an operating margin of 8% despite gross profits of 40%. On the other hand, the Concentrate business involves relatively little capital investment in machinery, overhead or labor and most significant costs pertain to advertising, promotion, market research and bottler support. Many of these functions can be sub-contracted to smaller firms at competitive rates.

Another key component to concentrate supplier’s value (and therefore profitability) is brand recognition. Concentrate makers invested significant capital towards marketing and advertising which allowed them to exceeded bottler’s control over marketing strategy. Strong branding empowered concentrate producers to keep the prices of concentrate relatively constant and maximize profits from both bottlers and consumers.

Lastly, Concentrate suppliers are free to capitalize on emerging markets and trends which fuel growth and profitability. Although this drove concentrate profitability, due to franchise agreements and high cost of capital investment, bottlers are constrained to a contractual geographical territories with a limited potential for new customers. Therefore, the biggest business driver for bottlers was volume through diversified channels within their allocated distribution regions and localized consumer knowledge.