strategic management

Title – Cola Wars Continue : Coke & Pepsi in the 21st Century

Sumit Thakur

Abstract:
This report is based upon the information provided from the Harvard business school case - “Cola Wars Continue: Coke and Pepsi in the Twenty-First Century”. Both Coca Cola Company and Pepsi Co. are the largest players in the Carbonated Soft Drinks (CSD) industry. Cola war is the term used to describe the campaign of mutually targeted television advertisement & marketing campaigns between Coke & Pepsi. Both Coke & Pepsi have segmented the soft drink industry into two divisions, via – 1. Production of soft drink syrup. 2. Manufacturing & distribution of soft drinks at retail level. Coke & Pepsi have chosen to operate primarily on the production of soft drinks syrup, while leaving independent bottlers with more competitive segment of the industry. The purpose of this report is to gain insight into the possible strategies that can be applied, in order to expand the overall throat share in the future. History revealed that a highly competitive strategy that was utilized in the past by both companies resulted in cannibalization. Because of this, the report is described from the perspective of both Coca-Cola and Pepsi. This report focuses on increasing the overall share and finding new opportunities in the unrevealed markets.

Structure of soft drink industry :

Concentrate Producers

Soft drink Company

Bottlers

Main activities

Developing the Program

Main activities

Focus

Blending new material ingredien ts Packing in plastic containe rs Shipmen t to

• •

Product Planning Marketin g research advertisi ng

• •

Combine carbonat ed water and syrup Bottling/ canning Delivery to customer

• •

Product managem ent Product positioning Continual brand availability maintenan ce

Overview of the case :
➢ Major players of the soft drink industry were –

1. 2. 3. 4.

Concentrate producers Bottlers Retail channels Suppliers

The value chain –

Concentrate producers

Suppliers

Retailers

Bottlers

1. Concentrate producers – • Blended raw material ingredients, packed the mixture and shipped these containers to bottlers. • Key investment in machinery, overhead or labor. • Significant costs were for advertising, promotion and marketing research. • Coca cola & Pepsi Co. claimed a combined 76%of the U.S. CSD market, in sales.

2. Bottlers –

• • • • • • •

Purchasing concentrate. Adding carbonated water & high fructose corn syrup. Bottled or canned the product. Delivery to customer. Capital intensive process. Direct store door delivery. Cooperative merchandizing agreements, key factor of soft drink sales.

3. Retail channels –

• • • •

Super markets Vending machines Convenience stores Gas stations.

4. Suppliers – • Coca cola & Pepsi were among the metal can industry largest customers. • Major can producers were American National Can, Crown Cork & Seal and Reynolds Metals.


➢ The Cola war begins- (Market Campaigns)

Pepsi “Beat Coke” “Pepsi generation” “Young at heart” Concentrate price 20% lower Large bottlers (1970)

Coca Cola “Americans preferred taste” “No wonder Coke refreshes best”

➢ Product Portfolio diversification –

Pepsi Teem (1960) Mountain dew (1964) Diet Pepsi (1964) Non CSD (Merger)

Coca Cola Fanta (1960) Sprite (1961) Low calorie Tab (1963) Non CSD (Purchased)

Frito Lay

Minute Maid Duncan Foods Belmont Springs Water

➢ Pepsi Co. challenge –

Pepsi Co. Blind taste test Eroded Coke’s market share

Coca Cola Rebates Retail price cuts Advertisement questioning test validity Re- negotiation of contract with franchisee bottlers.

About 70% of Coke’s sales & about 80% of its profit came from outside the U.S.; only about 1/3rd of Pepsi leverage sales took place overseas.

➢ Product launch –

Pepsi Teem (1960) Mountain Dew (1964) Diet Pepsi (1964) Lemon Lime Slice (1984) Caffeine free Cola (1987) Sierra Mist (2000)

Coca Cola Fanta (1960) Sprite (1961) Low calorie cola tab (1963) Diet Coke (1982) Caffeine free Coke (1983) Coca Cola Classic (1985)

Mountain Dew Code Red (2001) Pepsi One (2005)

New Coke (1985) Cherry Coke (1985)

➢ Expansions –

Pepsi Acquired Pizza Hut (1978), Taco Bell (1986) Merged with Frito Lay to form Pepsi Co. Purchased Quaker Oats

Coca Cola Exclusive deal with Burger King, Mc Donald. Purchased Minute Maid, Duncan foods, Belmont Spring Water Acquired planet Java coffee drink brand Acquired Mad River juices & Tea

➢ Challenges to soft drink industry –

1. 2. 3. 4.

Flat demand during 1998 – 2004. Contaminations scare at India. Obesity issues. Challenges of internationalization.


➢ Challenges to Coca Cola –

1. Performance and execution – – On providing alternative beverages. – On adjusting key strategic relationships. – On cultivating international market. 2. Currency crisis in Asia & Russia. 3. Series of legal problems.
➢ Reversal of Fortune – (1996 - 2004)

Pepsi Pepsi flourished

Coke Coke struggled

Acquisition of Quakers oat Net income rose by 17.6% per year ROI 29.3% from 9.5% (1996)

Flat growth Annual growth in net income falls to 4.2% from 18% (1990 - 1996) Share holder’s return 26%

➢ Market Share –

Product CSD Diet Soda Bottled Water Non CSD

2000 (yr), % 80 24.6 in (1997) 6.6 12.6

2004 (yr), % 73 29 13 13.7

➢ Evolving structure and strategies –

– – – – –

System profitability Low cost strategy by bottlers Incidence pricing Retailer’s series price increase. Coke’s dysfunctional relation with bottlers.

➢ Internationalization –

– Mexico, Brazil, China n Asia & Eastern Europe are the next big markets. – Coke is dominant in Western Europe and much of Latin America whereas Pepsi is dominant in Middle East & Southern Asia. – Coca Cola became synonym with American culture. Profitability - Concentrate producers earn more profit than bottlers, also cost of sale is more in bottlers.

➢ SWOT Analysis – of (Pepsi Co.)

Strengths •

Weaknesses •

• • • • • • •

High profile global presence World’s 2nd best selling soft drink brand Constant product innovation Aggressive marketing strategy using celebrities Broad product portfolio Increased customer concern regarding drinking water Growth in healthier beverages Growth in Asian beverages Growth in functional drink industry

Carbonated soft drink market is declining Only target young people.

Opportunities

Threats • • • Obesity & health concern Coca Cola increases spending on marketing and innovation Relying only on North America is bad

➢ SWOT Analysis – of (Coca Cola)

Strengths

Weaknesses

• • • •

High profile global presence 4 0f top 5 leading brands Broad based bottling strategy 47% of global volume sales in carbonates

• • •

Carbonated soft drink market is declining Over complexity of relationships with bottlers in North America Execution ability

Opportunities • Soft drink volume in the Asia Pacific region forecast to increase by over 45% Wise & Health concerned positioning of brands like Minute Maid & Minute Light. Use distribution strengths in Eastern Europe & Latin America.

Threats • • • • Obesity & health concern Tropicana & Aquafina from Pepsi Protest in India Negative publicity by Pepsi.

➢ Porter’s Five Forces Analysis –


Barriers to entry Exclusive territories Substantial investment Current market performance

Fear of retaliation

Power of buyers

• Super markets • Mass merchandis er • Fountain
Power of Suppliers • • • Sugar Packaging Weak as only basic commodity ingredients are required

• • • • • • • Rivalry Coca Cola Pepsi Cadbury •

o

Substitutes

• Alliances • Acquisitions • Product

➢ Liquids Gallon/Capita in 2004 -

➢ U.S. Liquid consumption trends -

➢ Issues in the Case & Recommendations –

1. Who has been loosing? Smaller brands are loosing because of entry barriers and duopoly. 2. Who is winning the war? Year Coke (%) 1950 47 1970 35 1990 41 2000 44 2006 43.1

Pepsi (%) 10 29 32 31.4 31.7

3. Could they boost flagging domestic CSD sales?

– Through product innovation – Aggressive marketing and promotion – Packaging innovation – 4. Would newly popular beverages provide them with new and profitable revenue streams? – Yes – Non carbonated & bottled water contributed to total volume growth, approximately 100% for coke & 75% for Pepsi. – Contamination issue & obesity issue. 5. Can Coke & Pepsi sustain their profit in wake of flattening demand & the growing popularity of Non CSD’s? – Coke and Pepsi didn’t just inherit this business; they created it. – By Diversification – Innovation eg. Diet Coke.