Snapple 2008 Annual Report Download - page 47

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businesses. Our capital costs include investing in, and maintaining, our manufacturing and warehouse equipment
and facilities. Our raw material costs include purchasing concentrates, ingredients and packaging materials from a
variety of suppliers. Our selling and distribution costs include significant costs related to operating our large fleet of
delivery trucks and employing a significant number of employees to sell and deliver finished beverages and other
products to retailers. As a result of the high fixed costs associated with these types of businesses, we are focused on
maintaining an adequate level of volumes as well as controlling capital expenditures, raw material, selling and
distribution costs. In addition, geographic proximity to our customers is a critical component of managing the high
cost of transporting finished beverages relative to their retail price. The profitability of the bottling and distribution
businesses is also dependent upon our ability to sell our products into higher margin channels. As a result of these
factors, the margins of our bottling and distribution businesses are significantly lower than those of our brand
ownership businesses. In light of the largely fixed cost nature of the bottling and distribution businesses, increases in
costs, for example raw materials tied to commodity prices, could have a significant negative impact on the margins
of our businesses.
Approximately 89% of our 2008 Bottling Group net sales of branded products come from our own brands, with
the remaining from the distribution of third party brands such as Monster energy drink, FIJI mineral water and
Arizona tea. In addition, a small portion of our Bottling Group sales come from bottling beverages and other
products for private label owners or others for a fee.
Integrated Business Model. We believe our brand ownership, bottling and distribution are more integrated
than the United States operations of our principal competitors and that this differentiation provides us with a
competitive advantage. We believe our integrated business model:
• Strengthens our route-to-market by creating a third consolidated bottling system, our Bottling Group, in
addition to the Coca-Cola affiliated and PepsiCo affiliated systems. In addition, by owning a significant
portion of our bottling and distribution network we are able to improve focus on our owned and licensed
brands, especially brands such as 7UP, Sunkist, A&W and Snapple, which do not have a large presence in the
Coca-Cola affiliated and PepsiCo affiliated bottler systems.
• Provides opportunities for net sales and profit growth through the alignment of the economic interests of our
brand ownership and our bottling and distribution businesses. For example, we can focus on maximizing
profitability for our company as a whole rather than focusing on profitability generated from either the sale
of concentrates or the bottling and distribution of our products.
• Enables us to be more flexible and responsive to the changing needs of our large retail customers, including
by coordinating sales, service, distribution, promotions and product launches.
• Allows us to more fully leverage our scale and reduce costs by creating greater geographic manufacturing
and distribution coverage.
Trends Affecting our Business
According to data from Beverage Digest, in 2007, the United States CSD market segment grew by 2.7% in
retail sales, despite a 2.3% decline in total CSD volume. The United States NCB volume and retail sales increased
by 6.4% and 9.6%, respectively, in 2007. In addition, NCBs experienced strong growth over the last five years with
their volume share of the overall U.S. liquid refreshment beverage market increasing from 13.0% in 2002 to 17.0%
in 2007.
We believe the key trends influencing the North American liquid refreshment beverage market include:
•Increased health consciousness. We believe the main beneficiaries of this trend include diet drinks,
ready-to-drink teas and bottled waters.
•Changes in lifestyle. We believe changes in lifestyle will continue to drive increased sales of single-serve
beverages, which typically have higher margins.
•Changes in economic factors. We believe changes in economic factors will impact consumers’ purchasing
power which may result in a decrease in purchases of our premium beverages.
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