Snapple 2011 Annual Report Download - page 43

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23
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 2011 Packaged Beverages net sales of branded products come from our own brands, with the
remaining from the distribution of third party brands such as Big Red, AriZona tea, FIJI mineral water, Neuro beverages, Vita
Coco coconut water and Hydrive energy drinks. In addition, a small portion of our Packaged Beverages sales come from fees
charged for bottling beverages and other products for private label owners or others.
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, Sun Drop and Snapple , which do not have a large presence in Coca-Cola 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 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 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 LRB 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 and low calorie 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 the costs of commodities. The costs of a substantial portion of the commodities used in the beverage industry
are dependent on commodity prices for aluminum, natural gas, fuel, resins, corn, pulp and other commodities. Commodity
price volatility has exerted pressure on industry margins and operating results.