How does Apple make more profit than brands like Coca-Cola when Coca-Cola sells more?
Coca-Cola is more of a commodity and thus has more pricing pressure from competing brands, such as Pepsi. Competition drives prices and margins down.
Apple has fewer strong competitors and has maintained stronger pricing, resulting in higher margins and lower operating expenses as a percentage of revenue. This results in a higher operating income than Coca Cola's, as a percentage of revenue. Absent strong competition, a company can maintain high prices, and therefore high margins.
Look at Apple vs. Coca Cola's margins below:
There are several reasons; it can seem nonsense, because it costs so much more to make an I-whatever versus 12 oz. of diet coke. The first is price, I can buy 12 oz of diet coke for .50 cts. An I-phone for $800, or even more for an I-Mac. When I studied Economics in 1975, the professor said that Pepsi sets soft drink prices, Coca-Cola has to react, as does Dr.Pepper-Snapple. I don't know if that was true then (Professors can have goofy ideas) or is true now. But I see they are comparable. They have sales one week a month. Apple sets their prices and sets them high. There are a lot more Samsungs than I-Phones, and I write this on a Dell; windows machines outsell I-Mac.
Manufacturing and Distribution; Apple products were only available in an Apple Store, and those were only in major markets. You could buy by mail, but couldn't go to Best Buy.(Times change). I lived 80 miles from Chicago, people would drive there to get an I-Mac. If it was shipped, it might cost $8-$25. That is above the fact that you bought from the Apple Warehouse, not the fancy, expensive store. So every mail order, more profit. No way can Coke charge even $8 to deliver a case of Soda. I was having a big party, went to the Coca-Cola distributor with a friend, and got 10 cases, saved about .25 cts. a case. Now that was'70s or early ‘80s, maybe you'd save more today. But you don't see Apple trucks, they don't need them. Coca-cola has a fleet of thousand, they have heavy product. They try and load a truck in 20–30 minutes, and then another and another. They need a fleet at each bottling plant. Fleets of trucks, all over the world, costs money, but is needed if you want to distribute a heavy product, in large quantities to what seems like every block in the populated world! Apple can use UPS, but to Apple stores, and now they do sell in Best buy, or to a phone store, they ship maybe a less than 500 lbs. 500 lbs of Apple products, worth a lot, delivered cheap. 500 lbs of Diet Coke, not a lot of revenue, have to have your own fleet.
Then Manufacturing. Coca-Cola has bottling plants all over, they have to. They have one in the town I was born 250m people, 3 where I live now, 4mm people. They have to pay US wages, taxes, meet sanitary conditions. Apple built a state of the art factory in California. Then didn't use it because they could have contractors in China build them cheaper. Anything Apple makes is more complicated to build than anything Coca-Cola makes, so they can charge more. The raw materials cost more for Apple, semi-conductors, mother boards, manuals, customer service; than for Coke, water concentrate, packaging. Apple adds a little percentage to securing these ingredients, Coke has to face Pepsi and other drinks, most recently bottled water. Apple can make millions i units in China, load them in containers from only a few manufacturers, and send those containers world wide. Coke gets cheap ingredients, and has to have plants all over the world. Admittedly some of those plants have cheap labor, but Coke still needs a plant that will pass inspection, and dependable trucks to deliver.
Branding, Reputation. This is a big deal, we are comparing 2 of the most recognized names, logos, in the world. These companies exude quality. One was built over many decades, the other over primarily the last 2. When Apple started making computers, their competition was IBM, another well known company for quality and integrity. Apple advertised themselves as different from IBM, David vs. Goliath. They also went to lengths that the only place you could get an Apple was from Apple. IBM made their product, architecture, open. You could buy an IBM knock-off from a dozen or more companies. That made IBM-like cheap, and quality varied. Apple made their own stuff, in the US at the time, and controlled quality. Apple gained a good reputation. But Apple had Microsoft manufacture the operating system that they had designed. Microsoft modified it for an IBM and Windows was born. An Apple look a like. Apple sued, but lost, having similar look and feel wasn't enough. Apple became a niche player; schools used Apple heavily to teach students, then we put them out into a Windows world. All your magazines, movies, editing, graphics were done on Apples. But it was a small market. You also had the Apple die-hard. Windows was dominate in most of the business, and personal computing world. Then Apple designed computers that could run both windows and Mac. Then the I-Phone really took off, established the brand as quality, better performance. Good placement, you see movies and TV shows where the people are using I-Macs and I-phones.
Coca-cola meanwhile, has to contend with the Pepsi generation, product placement in media is irrevelant. The advertising is about how you have a good time when drinking Coca-Cola, but you can have a good time drinking beer as well. They fight for big sellers like McDonalds or Burger King, but it is cut throat. Can't overcharge, can't fail to deliver. When you see the Coca-Cola logo, on a menu or poster at McDonalds, out side a 7–11, or gas station; Coca-cola paid for at least part of that advertising. Coke must advertise 24 hours a day worldwide to stay number 1, and they are the number 1 soft drink company. Apple can pick and choose.
So at the bottom line, it costs Coca-cola a lot to sell flavored water. Hence a low profit margin, for a product that most of the people in the world will use AT least once a year. Apple has growing market, a lighter but different product. You go in a restaurant order a Coke, they say we serve Pepsi, you say "OK". You go into Best Buy for an I-Phone, you want it in a particular color, you have a choice. They are sold out of Black, will get some next week, you say "I'll be BACK". Apple loyalty trumps Coke's. It comes down to the fact that Apple can charge way more than 50% profit margin, Coke gets 10–6%. So if I make 50% on 40 billion,(Just grabbing #s, could have looked up)versus 8% on 200 billion, Apple makes more profit on less than 25% of the sales.
You compared different industries. Compare Coke to Pepsi, Dr.Pepper-Snapple, Royal Crown, Nestle. Compare Apple to IBM, Dell, perhaps even a Nordstrom's or Tesla. Another factor, restaurants, including McDonalds, make a lot of their money on beverage sales. A beer can be $3,50–5, costs $.75–1.00. Same with soda, sell for $1.99 costs .$20 cts. The beverage brings in the people, then they can eat. I once worked for Firestone, tire mark up 50%, Jewelry 200%,on a good day for buyer, Apple 2–300%, Coke 8%
Coca-Cola is a commodity product. In fact, the majority of the price of making a Coke is the bottle. When something is a commodity, it will command a very low profit margin. If you go to any grocery story, you can see hundreds of commodity softdrink products competing with Coca-Cola.
Apple designs, manufactures and markets sophisticated computer equipment that can provide amazing productivity benefits to billions of people. Yes, Apple also has competition, but the obstacles to entering the sophisticated cell phone, computer, software, etc. industry are much higher than entering the soft drink industry; and thus allows for a much higher profit margin.
It's the same reason a business consultant will make more money than a fry-cook at McDonalds.
Hope this helps!
Coke sales: $41 Billion - $17B Cost of Goods Sold = $24B Gross Profit
Apple's sales: $214 Billion - $131B Cost of Goods Sold = $83B Gross Profit
It's not volume. (as measured in units sold).
It's not profit margins (as measured in %).
It's about actual profit (as measured in $$$).
They both make about $60 Profit on every $100 worth of goods they sell. But Apple's products are a lot more expensive.
Let's say you own a housewares store.
- You charge $2 for a spoon and make $1 in profit.
- You charge $200 for a set of cooking pots and make a $50 profit on each set
Q: If you sell 50 spoons and 2 sets of pots every day, which product is more profitable?
A: Cooking Pots. The pots make $100 in profit, while the spoons only make $50.
Coke is in the "spoon" business, Apple is in the "Cooking Pot" business.
I haven't done any comparative research on these two companies, however I ca give you a broad list of items which can cause unexpected differences in profit:
- KO may have higher cost per unit than AAPL, leaving AAPL with a higher profit.
- KO may use a different accounting method than AAPL (i.e. FIFO Vs. LIFO)
- The way in which they consolidate their earnings from overseas back into the U.S. may be different
- your thesis may be incorrect: I don't drink any soda; but I use lots of apple products. although I understand the basis of your question, you may benefit from examining your original thesis. Indeed you may find your answer right there.
I hope this is helpful and answers your question.
thanks for the A2A amd enjoy the rest of your day.
Apple being apple. Coke being orange. No point comparing Apple to Oranges.
However, the simple answer is that the value added to a product defines the price and hence the profit margin.
What does Coke sell: sugar and coloring put into water using a century old formula.
What does Apple sell: you get the idea.
Thanks for the A2A
One more word
Coca-Cola has much lower profit margins than Apple does. Also, the cost of distribution for Coca-Cola is enormously more than Apple.