Putting the pieces together

In certain industries, manufacturing and labor takes a large portion of the revenue. In others, a majority of costs are focused on marketing the product and expanding into new markets or developing distribution chains. I will focus on two subsets of the food, beverage, and tobacco industry that I have been in our blogs and those are the soda production industry and the chips, cracker, and pasta production industry. First, I will focus on the soda production industry. In this industry labor costs comprise about 12.2% of revenue, which is near the average for all beverage manufacturing industries. This proportion has fallen over the five years to 2011, from an estimated 13.9% in 2006. This is due to stagnant wages for manufacturing jobs as well as industry layoffs. This trend is expected to continue through 2016. Because of recent purchases of bottling companies, both Pepsi and Coke experienced lower bottling costs and can now focus more of their revenue on advertising and promotions. Labor costs such as wages and salaries are estimated to make up about 10% of revenue, which makes it the second largest cost. Wages comprise a relatively low proportion of costs, as production has become increasingly automated to increase productivity. Major players such as Kellogg and Kraft have consistently increased their capital expenditure to upgrade technology and equipment, also helping to lower labor costs. In 2008, Kellogg spent $681 million, a 13.3% increase from the previous year. Over the same period, Kraft Foods spent $1.4 billion in the modernization of its production facilities. This increase principally occurred because unusually high production cost periods resulted in revenue declines, which negatively skewed the wages to revenue ratio. Branding is also a major cost for companies in this industry. Companies in the industry, especially major players, invest heavily in aggressive advertising, marketing and promotional activities, in order to increase customer loyalty. These strategies include expensive media advertisements, point-of-purchase tasting and displays, and related promotional costs. In 2011, such costs are estimated to account for 8.5% of sales. Overall, we can see that in terms of proportion of total revenue, labor is a relatively small cost compared to things like advertising and purchasing. In this industry, it is not all about the details and intricacy of a product, but instead about developing brand awareness and customer loyalty, something companies such as Coca-Cola, Kraft, and Pepsi have done well.

http://clients.ibisworld.com.proxyau.wrlc.org/industryus/competitivelandscape.aspx?indid=265

http://clients.ibisworld.com.proxyau.wrlc.org/industryus/competitivelandscape.aspx?indid=285