Drinks economics: the unit case split, excise and price and mix
How the money from one case of soft drinks is split between brand owner and bottler, what a hectolitre of beer earns after tax, why mix matters as much as volume, and why whisky ties up cash for years.
Industry brief, with a one-minute summary: BeveragesKey takeaways
- In drinks, the brand owner earns a high margin on a small slice of the money, while the bottler or brewer earns a thin margin on the big, heavy part of the business.
- Drinks companies split revenue growth into volume (how many litres or cases) and price and mix.
- Worked case: Who earns what on one unit case of soft drinks.
- Worked case: What a brewer keeps from one hectolitre.
Key idea
In drinks, the brand owner earns a high margin on a small slice of the money, while the bottler or brewer earns a thin margin on the big, heavy part of the business. Volume, price and mix (which drinks and packs people buy) together decide revenue, and taxes can take a large bite out of the shelf price before anyone in the chain is paid.
Worked case
Who earns what on one unit case of soft drinks
The prompt
A fictional bottler sells one unit case to shops for USD 5.00 (after discounts). Per case, it pays the brand owner USD 1.10 for concentrate, spends USD 0.45 on sweetener, USD 1.10 on packaging, USD 0.40 on making and filling, USD 1.05 on distribution and selling, and USD 0.30 on overheads. The brand owner's cost of making the concentrate is USD 0.25 a case, plus USD 0.35 of marketing and USD 0.10 of overheads. What does each earn per case, and at what margin? All figures are illustrative.
The structure
- Profit per case for each company = what it is paid minus its own costsThis comes from the goal: split the money for one case between the two businesses.
- Bottler: price to shops minus concentrate, sweetener, packaging, production, distribution, overheads
- Brand owner: concentrate price minus concentrate cost, marketing, overheads
Working it through
1. Bottler profit
5.00 minus all six costs.
Bottler operating profit (USD per case):5 - (1.1 + 0.45 + 1.1 + 0.4 + 1.05 + 0.3) = 0.62. Bottler margin
0.60 divided by 5.00.
Bottler operating margin (fraction):0.6 ÷ 5 = 0.123. Brand owner profit
1.10 minus 0.25, 0.35 and 0.10.
Brand owner operating profit (USD per case):1.1 - (0.25 + 0.35 + 0.1) = 0.44. Brand owner margin
0.40 divided by 1.10.
Brand owner operating margin (fraction):0.4 ÷ 1.1 = 0.3636
The recommendation
The brand owner earns about 36 percent on its USD 1.10, while the bottler earns about 12 percent on USD 5.00, so the two should be judged by different measures. First, the bottler earns more dollars per case (USD 0.60 against 0.40) but needs factories, trucks and coolers to do it. Second, this means the brand owner's return on the money it puts in is far higher, which is why some brand owners sell their bottling businesses to partners. The risk in the split is that a price war in shops hits the bottler's thin margin first. As a next step, compare each company's profit with the assets it needs, not only with its revenue.
Risks: Concentrate prices are often set as a share of the bottler's price, so the two share the gains and losses from price changes; Packaging costs follow aluminium, PET resin and glass prices.
Beer: a hectolitre after tax
Worked case
What a brewer keeps from one hectolitre
The prompt
A fictional brewer in Europe invoices EUR 180 per hectolitre (100 litres) of beer to shops and bars, including EUR 30 of beer excise that it collects and pays to the government. Per hectolitre, malt, hops and other ingredients cost EUR 15, packaging EUR 35, brewing energy and labour EUR 15, distribution EUR 25, marketing EUR 15 and overheads EUR 15. What is its net revenue, operating profit and margin per hectolitre? All figures are illustrative.
The structure
- Operating profit = (invoiced revenue minus excise) minus costs
- Net revenue = 180 minus 30
- Costs: ingredients, packaging, brewing, distribution, marketing, overheads
Working it through
1. Net revenue
Excise belongs to the government.
Net revenue (EUR per hectolitre):180 - 30 = 1502. Operating profit
150 minus the six costs.
Operating profit (EUR per hectolitre):150 - (15 + 35 + 15 + 25 + 15 + 15) = 303. Operating margin
30 divided by net revenue of 150.
Operating margin on net revenue (fraction):30 ÷ 150 = 0.24. Packaging share
Packaging as a share of all costs before marketing and overheads.
Packaging share of ingredients, packaging, brewing and distribution (fraction):35 ÷ (15 + 35 + 15 + 25) = 0.3889
The recommendation
The brewer keeps about EUR 30 per hectolitre, a 20 percent margin on net revenue, and packaging is its biggest cost, more than twice the cost of the beer's ingredients. First, about 39 percent of the costs of making and moving the beer are cans, bottles and kegs. Second, this means a 20 percent rise in aluminium or glass prices costs about EUR 7 a hectolitre, almost a quarter of the profit. The risk is that an excise rise, which the brewer must pass on, cuts volume. As a next step, check how much of the volume is sold in kegs to bars, where packaging costs least.
Price and mix: not only how much, but what
Drinks companies split revenue growth into volume (how many litres or cases) and price and mix. Price is what they charge for the same drink. Mix is the shift between drinks and packs: a premium beer instead of a mainstream one, a small can instead of a big bottle, a 12-year-old whisky instead of a blend. In mature markets volume often barely grows, so growth comes from price and mix. This is called premiumization. But pushing price too hard loses drinkers to cheaper brands or to retailers' own labels, so the case question is often how far price can go.
A spirits company's volume fell 2 percent, while price and mix together raised revenue per case by 5 percent. By how much did its revenue change, as a decimal? (Multiply the two effects.)
New whisky costs USD 4 a litre to distil and put in a cask. Storing it costs USD 0.30 a litre each year. What has a litre cost by the time it is 12 years old, before bottling and tax, in USD? (Illustrative figures; some whisky also evaporates while it ages, which raises the cost further.)
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and terms
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