Coca Cola Case Study - Is the Concentrate Market Profitable? Why?

1. Is the concentrate market profitable? Why?

The concentrate market is very profitable because of number of reasons-

a) The primary costs incurred by concentrate producers were advertising, promotion, market research, and bottler relations. As the costs for promoting products, developing trade and consumer promotions were shared with bottlers - typically at 50%, concentrate producers didn't bear significant advertising, and marketing costs. However the bottlers paid for 66.7%r of promotion cost and concentrate produce bear only 33% cost, maximizing concentrate market's profit.

b) The costs for establishing a concentrate manufacturing plant was quite low (compared to building a large efficient bottling plant. One concentrate manufacturing plant could serve the entire US domestic market, while it took many bottling plants to serve the US domestic market.

c) Concentrate producers had higher gross margins compared to bottlers. From Table A it can be observed that the Gross profit for concentrate producer is 73% of net sales while 40% for bottler. Pretax profit for concentrate producer is 18% and 9% for bottler.

d) Bottlers were also responsible for adding sweeteners to the drinks, and the costs associated with sugar or high-fructose was borne by the bottlers. So, if the price of sugar or high-fructose rose, bottlers would be forced to absorb the costs, while the price of the product would remain the same, essential leaving the gross margins of concentrate producers unaffected by growing costs of input.

e) Most of the brand equity created in the business remains with concentrate producers.

Hence concluding from all above points the concentrate market is more lucrative than the bottler market.

5. Was the Pepsi Challenge a good idea?

a) Pepsi challenge, though a boosted market share of Pepsi, lived for a short time frame of 10 years (1970-1980).

b) In 1974 Pepsi cola had a third market position, behind both Coca cola and Dr Pepper. PepsiCo launched "Pepsi Challenge" in 1974 in Dallas, Texas. Pepsi challenge was indeed a good idea as post challenge campaign, Taste results favored Pepsi and its results were significant in the shape of increased market share and Pepsi eventually became number two brand in Dallas.

c) In 1977, Pepsi challenge was launched nationwide and by 1980, in this campaign taste comparison between two colas was tested and Pepsi got more favor about taste from the consumers. Pepsi cola brand gained in additional market share lead of 1.3% over Coca cola in food stores.

d) The campaign led to eroding of Coca-Cola's market share, and making PepsiCo the dominant beverage company in food store