Biz Strategy Case Solution - Coke War

1. How do the economics of concentrate production differ from the economics of bottling? Should Coca-Cola and Pepsi Co. try to vertically integrate into bottling (beyond just owning minority shares in independent bottling companies)?

The profitability of Concentrate Producers and bottlers are different. The fundamental difference between Concentrate Suppliers and bottles is added value.

• For Concentrate Producers, the biggest source of added value is the coke recipe and branded products. Coke has protected its recipe for over a hundred years. Meanwhile, their suppliers are all commodity producers who supply homogenous ingredients. As a result of successful marketing efforts, Coke and Pepsi are respected household names, giving their products an aura of value that cannot be replicated by others. Based on the two reasons, Concentrate Producers are able to hold the advantageous position in the negotiation table.  
• Unlike their Concentrate Producers, bottlers have significantly less added value. The biggest reason is that they do not have branded products or unique formulas. Generally speaking, the bottling process is capital intensive and involved high speed production line that are only interchangeable for analogous products. Such operational effectiveness is not a driver of added value, however, as operational effectiveness is easily replicated. The exclusive territory right creating some value-add to the bottles. But the overall value add is still limited.

Based on the above analysis, we do not recommend the vertical integration into bottling. Because the integration should only be proceeded when the integrated firm has potential synergy.  Considering the current dynamics between the industry value chain, we do not believe that there is any significant synergy could be created through the vertical integration.  In addition, the botting process is more capital-intensive and also involves high-speed production lines. So the integration which is irreversible is viewed to be costly with a very long payback time period. It could cost a significant level of investment for both Coca-Cola and PepsiCo. Moreover, as the concentrate suppliers, Coca-Cola and Pepsi may lack the “know-how” in the bottling process, which means their internal bottling cost may be higher than specialized suppliers in the relevant field.

Finally, if the bottles are independents, bottlers could produce non-cola products of concentrate producers’ competitors, using their analogous production and packaging production lines. However, once integrated, this flexibility will be lost. As a result, the cost is highly likely to increase to some extent. To put it in a nutshell, the integration is less likely to create any significant synergies but is likely to bring in some additional cost.

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2. What may be gained by Coca-Cola and Pepsi taking on more of the advertising burden from their bottlers? What may be lost?

Benefits Coca-Cola and Pepsi will have by taking more advertising burden from bottlers includes:

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