Canning Coke Cans - Solved Case Part II
... Continued from Canning Coke Cans - Solved Case Part I
OK, I have a question here, does it cost more to package in plastic bottles or cans?
Plastic, being man made, is less expensive compared to aluminum, which has to be mined. Also, aluminum can manufacturing is more sophisticated, since they have a lining of plastic inside anyway to reduce thermal conductivity. As it happens, plastic bottles will cost 1 cent cheaper for Coca-Cola, compared to aluminum.
So, let’s go back to my table. I had a figure of 140 million drinks per day, out of which 40% or 0.4 * 140 = 56 million are cans. So, the savings in switching from cans to plastic will be 0.56 or half a million dollars per day. For a whole year, the savings will be 0.56 * 365 = 204.4 million dollars, or 200 million dollars approximately.
So, is this what you would recommend coca-cola to do, switch everything to plastic bottles, so that they save 200 million dollars per year?
Before I recommend that, I would like to understand the bargaining power of the can and bottle manufacturers. Will a negotiation with the can manufacturers that we are going to switch to bottles reduce the can prices?
Not likely, since the margins are already squeezed out.
How about the bottle manufacturers? Will they raise prices, once they know that Coke has switched to bottles?
No, coke has a ten year contract whereby bottle prices will actually go down, if coke buys more and more bottles.
OK, good, so the savings will be at least 200 million dollars per year.
Is there anything else you would like to consider before making the recommendation to Coca-cola?
Yes, I have seen the new 12 can packages for coke and C2. They are compact. Consequently, shipping them takes less shelf space on trucks, and storing them takes less shelf-space in grocery stores. How will that equation change once the 12 packs change to bottles?
Why don’t you tell me?
How much does shelf space cost for a 12 pack soda can in stores like Wal-Mart, and how much does shipping cost for a 12 pack soda-can as opposed to a 12 pack soda in bottles?
Sure, as far as shipping goes, the costs will be the same, since both packages weigh the same, and coke already has a design in place to make packaging more compact for bottles, and ships its packages using its own trucks. As far as shelf space in the likes of Wal-Marts is concerned, it will be about 25% more, and for a 12 pack, it will go up by a cent.
Thanks for that. Economically, what this means is that it will cost roughly 1 cent more for 12 bottles, where as the savings we calculated will be 1 cent per bottle.
Yes.
So, to do an easy calculation, 1 cent will be lost for roughly 10 bottles because of shelf space, or 0.1 cent per bottle will be lost in shelf space, or we will lose 10% per bottle from the savings of 200 million dollars per year. That still leaves a savings of $200 - $20 = $180 million per year.
So, you think it is a good idea to switch to bottles? Would you like to consider anything else?
Yes, bottles conduct heat less slowly compared to metal. Frequently, the hand gets wet while holding cans, and that hassle will go away for coke drinkers. The soda will stay chilled longer. This will improve the quality of the product served, along with the gains in cost savings.
OK, good, can you summarize the case for me then?
Sure. Coke, Diet Coke, and C2 constitute a 25 billion market for coke. 40% of the market is currently served in cans. Assuming a cost saving of 1 cent per bottle, switching cans to bottles will result in a yearly saving of $200 million dollars for your firm. This will also improve the product quality for coke consumers, since the drinks will stay chilled longer in bottles. Wal-Mart and grocery stores may charge higher pricing for shelf space, since it will increase by 25%. But as per my calculations, this will cost only $20 million more. So, the net savings will be $180 million per year.
Also, since you have contracts in place with plastic bottle suppliers, savings are likely to be more in the future. This, coupled with the fact that drinks will stay chilled longer, will make your product even more attractive compared to the competition with Pepsi and other competitors, and the $25 billion market can only increase for coke, and there is no down-side risk. If that happens, savings will further increase, and eventually, can inch up to even $250 million, or a quarter of a billion dollars per year. So, Coca-cola should switch from cans to bottle immediately.
Great job. Thank you for your time. Let me walk you up to Jane Client who is waiting for you. She will give you your next case to solve.
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