7998342-Cola-Wars

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GIFT University

Final Project

Cola Wars Continue: Coke and Pepsi in 2006

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Cola Wars

Continue

Coke and Pepsi in 2006

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GIFT University

Executive Summary

Prior versions of the case have been used to teach various subjects, including industry

analysis, competitive dynamics, and vertical integration. While this case tries to incorporate some

of the essential elements about the history of competitive dynamics and the historical patterns of

vertical integration the primary teaching purpose of this case is to discuss the economics of the

U.S. soft drink industry. Concentrate producers (CPs) sold syrup and concentrate to franchised of

company owned bottlers, and made gross margins of 83% and a pretax profit margin of 30%. The

best-know CPs were Coke and Pepsi. Historically, Coke and Pepsi were also major bottlers, but in

the mid-to late 1990s, both had divested their bottling operations while maintaining significant

equity ownership and indirect control of bottling networks. CPs invested heavily in advertising

and marketing. One of the key issues for students to understand is why most of the profits in this

industry are earned upstream in the concentrate business.

The bottling business was much less profitable than concentrate, particularly in the mid-

1990s. Bottling profits improved somewhat in recent years, in part because the concentrate

manufacturers could no longer squeeze the bottlers without disrupting their own distribution.

Bottlers invested in bottling and caning lines, trucks, and warehouses and earned gross margins

40% and pretax profit of 9%. Coke and Pepsi bottlers delivered their products directly to the store

which was part of their strategy for differentiation over private label. Private label offered

warehouse-delivered product. Historically, bottling had been a very good business: Franchised

bottling contracts were very generous to the bottler. Coke and Pepsi had given bottles franchises

in perpetuity, allowed bottlers the final say on pricing and gave bottlers significant influence over

whether to participate in local advertising campaigns promotions new packages and product

introductions. In additions bottlers could carry allied brands as long as they did not compete with

Coke or Pepsi brand.

For distributors, soft drinks were a large part of their business. Soft drinks drew customer

traffic, and historically earned gross margins of 15%-20%. The major distributor of soft drinks

was supermarkets, with 32.9% of volume. Mass merchandisers distributor retailers and

warehouse clubs such as Wal-Mart and Sam’s Clubs were also a growing category. It is worth as

king students warehouses are so profitable for CPs. This would appear to be counter-intuitive

since the answer gets to the heart of war

Suppliers, which included packaging and sweetener companies, had virtually no power in

the industry. Part of the reason was that even though the bottlers were purchasing from suppliers,

Coke and Pepsi negotiated with suppliers on behalf of their bottlers, creating much more buying

power than a fragmented bottling network could offer.

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The case then summarizes the history of the Cola Wars, spanning 100 years. Early

History starts with the creation of both drinks in the late 1800s at the fountain counter. Pepsi

managed to become a contender by selling 12 ounces of Pepsi for 5 cents, while Coke was selling

6.5 ounces for 5 cents. Pepsi almost went bankrupt twice but finally emerged as a viable

competitor in the 1930s. Coke entered the overseas market with the advent of World War II giving

the company a huge lead over Pepsi in international markets. Up until the 1970s Coke never

referred to its closest competitor by name signal that it did not believe it had any real competition.

Pepsi was fighting fiercely for share and managed to double its share between 1950 and 1970 by

focusing on supermarket sales. The take-home market was not Coke’s core business, and Coke

tended to focus on vending and fountain.

The Pepsi Challenge deals with Pepsi’s emergence as a serious, head-to-head competitor.

The challenge was a local gimmick introduced in Dallas Texas by a small Pepsi bottler. It was so

successful in conveying the message that Pepsi tasted better than Coke that it was rolled out

nationally. Coke ended up losing market share. In 1979 Pepsi passed Coke in food store sales for

the fist time. This was also the first time that a Pepsi attack made Coke sit up and take notice.

During this period Coke amended its bottling contract so that if could increase the price of

concentrate. Pepsi countered this move by increasing the price of concentrate to its bottlers.

The Cola Wars Heat Up covers the era that began when Roberto Goizueta took over at

Coca-Cola. The company began buying up its bottlers and selling off non-sot-drink businesses.

The Coke brand was extended for the first time to Diet Coke and the formula for Coca-Cola was

changed for the first time. While all this was going on smaller Cps were being bought and sold

numerous times.

Bottler Consolidation and Spin-Off explores the important trends in vertical integration

and disintegration from the mid 1980s to roughly the present. Coke spun off its bottlers and

created anchor bottlers which it controlled but did not own. Pepsi continued to own run and

manage its bottlers until the end of the 1990s when it decided to imitate Coke.

The case gives some of the obvious rationales. The CP wanted more control of its bottling

network in order to increase economies of scale introduce more new packages and products more

frequently change national advertising and promotional campaigns and phase out under

performing local bottlers. However it is not necessarily clear that CP had to buy the bottlers to

achieve these results. In addition these comments in the case are at a high level of abstraction.

Part of the incentive to vertically integrate was to solve a classic transaction cost problem. When

Coke or Pepsi with their bottlers over how best to deal with the other competitor company-owned

bottlers could respond faster and with greater efficiency. In addition to competition was limiting

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price flexibility for the bottler. Prices of soft drinks had been below the CPI for a decade. It was

getting harder and harder for Coke and Pepsi to raise the price of concentrate and appropriate the

profits upstream if the bottler were incapable of passing the costs along of squeezing more costs

out of the system. By buying bottlers and creating greater economies downstream coke and Pepsi

were better able to appropriate profits upstream.

After a decade of squeezing the bottlers however both Coke and Pepsi realized that they

may have extracted too much from their downstream partners. Bottler’s profitability had dropped

precipitously in the 1990s causing under-investment and poor performance. The case highlights

the decisions by Coke and Pepsi in the early 2000s to re-inject some margin into the bottlers

business and to show greater flexibility on concentrate pricing through incidence pricing.

The newest section of the case “Adapting to the Times” which examine recent problems

faced by Pepsi and especially by Coke the rise of non-CSD beverages and the international

dimension of the cola wars. The biggest problem facing Coke and Pepsi is the flattening of CSD

demand for the first time in several decades combined with the growing popularity of tea bottled

water and other non-CSD alternatives. The very end of the case posses the problem clearly. Was

the fundamental nature of the cola wars changing? Or did the changes under way represent

simply another step forward in the evolution of two of the world’s most successful companies?

Can Coke and Pepsi make the transition to the non-CSD segment?

SWOT Analysis

Strength

• Brand Equity

• Wide World Market

• Brand Attachment

• Competitive Advantage

Weakness

• Strong Competition

• Alternative

• Change Failover

Opportunity

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• Introduce New Failover

• Segment

• Encourage their supplier

•Take More Profited

Threat

• Substitution

• Suppliers

• Buyers

Brand Equity

• According to this case Coke and Pepsi both cumulative spending on advertising.

• Coke and Pepsi established brand identity over a long period of time. Now these brand

become culture of almost every countries and in the case of Coke become part of World

Culture

• So this is very strong point of the these brand for establish their identity and their

consumer attachment

Wide World Market

• According to the case Coke and Pepsi capture wide world market. Its impact on

globalization.

• These both brand hold global market, and other brand just capture just their areas market.

Brand Attachment

• Coke and Pepsi both establish almost for more than a century and consumers have

emotional attachment with these two brands.

• Consumers identify these two brands for distance, these all things are the brand

strategies.

•Advertisement create cozy relationship with their consumers they feel relax to use these

brands.

Competitive Advantage

• In these both companies they invests heave amount which other competitor do not

invest in their company.

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Strong Competition

• According to this case the first and biggest week point both brand is strong competition

between Coke and Pepsi.

• Much expansive advertisement for their brand equity

Alternative

• In this case the second important thing is that the alternative of the CSDs. The local brand

in different areas available and these local brands are very low cost and low price.

• Consumers using non-CSDs brand. They are moving non-CSDs brands.

Introduce New Brands

• For Coke and Pepsi have more opportunity to introduce new brands in different taste.

These both brand Coke and Pepsi have very strong brand.

• Consumers have interest in both brands, and each new brand have market value very

strong then other.

• Coke and Pepsi have almost world culture and some new strategy they can easily capture

the market.

Segment

• Coke and Pepsi have focus on customer segmentation, for each segment they can easily

serve.

• They can easily search new segment for their products.

• Franchise system is the best way to search new segmentation, which have very strong

segment? And how can they serve in those segments.

• Segmentation proved very easily approach for their targeted customers.

Problems & Solution

Q: What are the challenges to the stability of the industry structure in the coming decade?

-Globalization

-Demographics or Flattening Demand

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-Non-CSD Beverages

Regarding non-CSD beverage Coke and Pepsi are attacking these categories themselves,

with each trying to become a total beverage company.

Pepsi so far has had more success and has been more aggressive with non-CSDs. From pages 11-

14 we know that the business model for CSDs is somewhat different from the classic CSD model.

The supply chain and bottling requirements add complexity to the value chain, compared with the

relatively simple CSD model. Nonetheless the basic principles of the business remain the same.

Coke and Pepsi own the brand and control product development their dedicated bottlers leverage

economies of scope in distribution. However there are exceptions Gatorade is delivery through

food wholesalers. Meanwhile as niche products non-CSD carried prices and margins that are

higher for everyone in the value chain.

Q: Who has been losing?

Smaller Brands:

Historically they could piggyback on Coke and Pepsi bottler systems.

Historically little head-to-head competition

1990s and after :

Coke and Pepsi profitable product

-Force head-to-head competition.

Coke and Pepsi fill shelf space push small brands off the shelf

Industry is consolidating smaller brands sell to Cadbury.

These all things focus on that Coke and Pepsi are wining and the other local brands and

substitutes.

Q-Can Coke and Pepsi sustain their profits in the wake of flattening demand and the

growing popularity of non-CSDs?

For example water, coffee, fruit juice, and etc

Most of the substitutes are free or much less costly per ounce than CSDs. Americans drink more

soft drinks than any other beverage by a huge margin. Coke and Pepsi did not just inherit this

business they created it. Part of their own going success will be a function of their ability of

structures not only their businesses but the industry as a whole. In other words industry structure

is not always exogenous, it can be endogenous.

Q-Who has been wining the war?

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If we see the exhibit 2, we can easily observed

1950: Coke have 47% and Pepsi have 10%



2000:Coke have 44%Pepsi have31.4% other beverage Cadbury Schweppes 14.7%

2006:Coke have 43.1% Pepsi have 31.7% Cadbury Schweppes 14.5%

Initially through the early 1960s Coke was the winner. The reason was the extensive bottling

franchise. And the second most important is its brand name.

But passage of the time Pepsi creates strong hold on the market. If we see 1950 to 1960 Coke

was the leader but after 1970 to 1990 Pepsi capture the market. Then Pepsi gained significant

share: to selective discounts in distribution outlets, targeted growing take-home market, and

targeted younger consumers like “PEPSI GENERATION “

Motivated its bottlers like bottler size, concentrate pricing etc.

Competed on package size and advertising not price.

Coke was focused on overseas markets, while Pepsi focused on the US grocery channel.

And they are trying to hold on all the market. In other side Coke was the winner in 1970s its share

was down but Coke to sustain their growth and after 1970s Coke have capture their market. Coke

and Pepsi hold almost 75% the whole market and 25% have other local CSDs or non CSDs

brands.

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7998342-Cola-Wars