Exercise 10.1

The profitability of the leading cola syrup manufacturers PepsiCo and Coca-Cola and of the bottlers in the cola business is very different. PepsiCo and Coca-Cola enjoy an 81 percent operating profit as a percentage of sales; bottlers experience only a 15 percent operating profit as a percentage of sales.

Which of the following statements explains why the cola syrup manufacturing business is potentially so profitable relative to the bottling business? Check all that apply.

Pepsi and Coke enjoy great brand loyalty.

High capital costs mean that the bottling industry has considerable barriers to entry.

Bottlers have unique suppliers (Pepsi and Coke) while the manufacturers buy their inputs from numerous vendors.