Question

1. There are two downstream key buyers of Pepsi’s (or Coke’s) soft-drink concentrate (syrup): fast-food restaurants and franchised distributors (often called franchised bottlers – they sell within a fixed geography – think of their addressable market as defined geographically by either Coke or Pepsi). Restaurants can serve Coke or Pepsi products or even both – but generally, restaurant chains choose either Coke or Pepsi and they have relatively short term contracts. Franchise bottlers have a long-term contract with either Coke or Pepsi and they cannot sell both. Both of these buyers mix the concentrate syrup with water and carbonation and then sell the product down the chain – restaurants sell fountain drinks directly to end customers who drink it in the store or at home and franchised bottlers sell bottles/cans of soda to retailers like supermarkets and convenience stores. But essentially both fast food firms and franchised bottlers buy soda concentrate from Pepsi/Coke and then re-sell it to make a profit.  

Coke and Pepsi tend to earn less per unit on what they sell to restaurants relative to the unit price they earn on sales to franchise bottlers.   As a result, the restaurant chains earn more profit per unit than either Coke or Pepsi (the firms selling the syrup) or than does the franchise bottler on its sales per unit to retailers.   Can you identify the key factors that explain the following: Profit on soda sales per unit are higher for restaurants than for franchised bottlers. Related to this fact, concentrate is sold to restaurants for a lower unit price than what restaurants are charged. You need to think about the differences in the two addressable markets – one market is made up of restaurant chains and one market is made up of franchise bottlers who sell to stores. 250-350 WORDS

Answer 1

In general beverages make more profit margins than the food in fast food restaurants. Profit on soda sales per unit is higher for restaurants than for franchised bottlers because:

- The fast food chain is selling directly to the end consumer whereas bottlers have other intermediaries in between before it reached the end user. Therefore apart from the cost of the concentrate and then adding water and carbonating it the difference in cost and selling price completely goes to the fast food chain. For bottlers the profit margin has to be further shared by the retailer too.

- For a fast food chain the space utilised is only the space required for a vending machine. There is no storage required, while a bottler and distributor required a warehouse that is going increase the cost of the product for him.

- The investment for a Franchised bottler is much higher, a bottling unit, trucks and lorries, warehouses, storage units, packaging material etc are all required. Restaurants need just the limited space and the vending machine.

- In a restaurant the end user comes to the restaurant and consumes the product there itself. There is no transportation and distribution costs involved.

- The likelihood of suffering losses in damages of the product due to transportation,distribution and storage are almost nil.

- The quantity of final carbonated drink got out of a particular quantity of syrup will be higher for a restaurant. For eg: A 300 ml glass of pepsi/coke will also be filled with ice so some quantity of the beverage is displaced by the ice, whereas a 300 ml can or bottle of pepsi/coke will have the exact quantity of the beverage.

Therefore it is understood that the overall cost involved in the product reaching the end consumer is much less in a fast food restaurant than for a franchised bottler or distributor.

These two markets of Franchised bottlers and Fast food restaurants have to be treated separately. They have to be considered as two different channels or paths of distribution. Different pricing strategies have to be adopted.