Snapple 2010 Annual Report Download - page 43

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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 manufacturing 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 manufacturing and distribution businesses are significantly
lower than those of our brand ownership businesses. In light of the largely fixed cost nature of the manufacturing 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 87% of our 2010 Packaged Beverages net sales of branded products come from our own brands, with the
remaining from the distribution of third party brands such as FIJI mineral water and AriZona tea. In addition, a small portion of
our Packaged Beverages sales come from bottling beverages and other products for private label owners or others for a fee.
Integrated Business Model. We believe our integrated business model:
• Strengthens our route-to-market by creating a third consolidated bottling system. By owning a significant portion of
our manufacturing and distribution network we are able to improve focus on our owned and licensed brands,
especially brands such as 7UP, Sunkist soda, A&W and Snapple, which do not have a large presence in The Coca-Cola
Company ("Coca-Cola") and PepsiCo, Inc. ("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 manufacturing 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
manufacturing 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
We believe the key trends influencing the North American liquid refreshment beverage market include:
•Changes in economic factors. We believe changes in economic factors could impact consumers’ purchasing power
which may result in a decrease in purchases of our premium beverages and single-serve packages.
•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.
•Growing demographic segments in the U.S. We believe marketing and product innovations that target fast growing
population segments, such as the Hispanic community in the U.S., will drive further market growth.
•Product and packaging innovation. We believe brand owners and bottling companies will continue to create new
products and packages such as beverages with new ingredients and new premium flavors, as well as innovative
convenient packaging that address changes in consumer tastes and preferences.
•Changing retailer landscape. As retailers continue to consolidate, we believe retailers will support consumer product
companies that can provide an attractive portfolio of products, a strong value proposition and efficient delivery.
•Volatility in raw material costs. The costs of a substantial portion of the raw materials used in the beverage industry
are dependent on commodity prices for aluminum, natural gas, resins, corn, pulp and other commodities. Commodity
price volatility has exerted pressure on industry margins.
Seasonality
The beverage market is subject to some seasonal variations. Our beverage sales are generally higher during the warmer
months and also can be influenced by the timing of holidays as well as weather fluctuations.
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