Coke Case Study

COCA COLA Vs PEPSI COLA AND THE SOFTDRINK INDUSTRY : CASE STUDY

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1. Is the concentrate market profitable? Why?

Concentrate market is more profitable business. Following observations supports our opinion:

• Higher number of bottler’s when compared to the concentrate producer’s which fosters competition and reduces margins in the bottling business.

• Huge capital costs to set up an efficient plant for the bottlers while the capital costs in concentrate business are minimal

• Bottlers usually paid for two third of promotions costs, while advertising costs were typically 50/50.

• The pretax profit is 18% of net sales for concentrate producer and 9 % of net sales for bottler.

• Most of the brand equity created in the business remains with concentrate producer’s

2. Evaluate the Phillip Morris acquisition of Seven-up.?

Phillip Morris’s acquisition was a bad move on the part of the company, It acquired 7 Up at $520 millions, which was a very high premium, i.e. a 20 times earnings of 7 Up as against 5 times in market. Though it succeeded in increasing the sales of 7up but it failed to increase profit margins. As shown in the table below (comparing the net income/sales).

| |Net Income/Sales |Net income/equity |P/E Ratio |

| | | |( =1/( Net income/equity)) |

|1975 |1980 |Average |1975 |1980 |Average |1975 |1980 |Average | |The Coca- Cola Company |9.0 |7.7 |8.35 |20 |21 |20.5 |5 |4.76 |4.88 | |PEPSICO, INC. |4.6 |4.4 |4.5 |18 |20 |19 |5.55 |5 |5.28 | |SEVEN-UP Company |9.5 |5.7 |7.6 |23.6 |19 |21.3 |4.24 |5.26 |4.75 | |

Finally Phillip Morris sold the 7 up’s domestic and international operations in $486 millions, thus resulting in net loss of $34 millions.

3. How do the developments in the soft-drink industry affect the smaller...