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29 PGDM-IB

Q6) What are the major cost drivers for the bottlers?
The cost drivers for the bottlers were as follows:
1. Bottlers had a direct store door arrangement, which increased the
cost of transportation and labour because their own personnel did the
driving, unloading and stacking.
2. Retail stores were paid by bottlers for promotional activities and
discount levels.
3. The bottling process in itself was highly capital intensive requiring high
speed production lines etc.
4. The other main costs were the concentrate and syrup. This cost was
dependent on CSD suppliers and market price for sugar/corn syrup.
5. The bottlers heavily invested in trucks and distribution networks apart
from routine expenses like packaging, labour and other overheads.
Q4) How have Coke and Pepsi managed the rivalry in the CSD
industry in terms of concentrate suppliers?
Coke and Pepsi managed the rivalry in the CSD industry by following some of
the below mentioned tactics over a couple of decades:
1. Pepsi started focusing more on take-home sales to target family
consumption. For this they introduced the 26-oz bottles.
2. Pepsi started with an aggressive marketing campaign called Pepsi
Generation to promote and increase sales among the youth.
3. Pepsi also worked to modernize plants and improve store delivery.
4. Pepsis bottlers were concentrated and were larger than Cokes. This
gave them an advantage over Coke.
5. Pepsi used to sell concentrate at 20% lower than Coke, promising to
spend the extra income on promotion after equaling Cokes prices.
6. Both Coke and Pepsi experimented with cola and non cola flavours and
new packaging options. Non returnable glass bottles were introduced
along with metal cans.
7. In the 1970s Pepsi came up blind taste tests called Pepsi Challenge
and Coke countered it with rebates and retail price cuts.
8. During this period, Coke renegotiated with its bottlers to bring in more
flexibility in pricing of syrup and concentrates.
9. Coke also switched to lower priced high-fructose corn syrup later on.
Pepsi followed suit.
10.
Coke started with Diet Coke and in a couple of years Pepsi
came out with a similar product.
Q5) How should Coke and Pepsi face this challenge? Recommend.

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Coca Cola and Pepsi should focus on growth related strategies rather than
devising tactics to outdo each other for shorter periods of time. The long
term focus would not only be profitable in the future but also be highly
sustainable. Some of the ways this can be done is as follows:
1. Continue expansion into emerging markets. As the buying power of
consumer increases, so would the sales of these brands.
2. Both of them should start using healthy sweeteners in order to counter
the claim of aerated drinks leading to obesity and other health
problems. This would not take much investment and as the trend for
healthy living grows consumers will be relatively insensitive towards
price.
3. Have a green strategy (like environmentally friendly factories, recycle
of the bottles, water cleaning systems). This will have a positive effect
on customer loyalty and will help in the brand building process.
4. Continue to churn out newer products and bring about innovation in
these products. Innovation to be based on geography, occasion, target
demographic group and ingredients.
5. For retailing strategies, increase shelf space, install more and better
equipments in the market and also expand availability into new outlets
and channels.
Q2) Analyze the industry attractiveness of concentrate suppliers
and independent bottlers. Comment on vertical integration of CSD,
bottlers and suppliers. Give a strategic rationale.
Industry attractiveness for the concentrate suppliers is as follows:
1. Bargaining power of suppliers: The powers of suppliers are low for
the CSD as the suppliers are fragmented. Materials like colouring, citric
acid and caffeine have no differentiation. Also the switching costs to
these are really low and these commodities are easily available in the
market. Also there is minimalistic threat of forward integration.
2. Bargaining power of Buyers: Bottlers have very low bargaining
power as both Coke and Pepsi determine the terms of the contract for
pricing and other conditions. Also they have retained exclusive deals
with food outlets. As a matter of fact, most voluminous bottling
accounts were owned by these companies which gave them large
negotiating powers.
3. Threat of substitutes: Threat of substitution is very high as there are
numerous alternates to CSDs. There is a change in consumer

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behaviour and people are switching to healthier drinks. The switching

cost for the consumer is also really low.
4. Threat of new entry: There are high entry barriers as the investment
for research, branding, advertising is very high. Also it is difficult to
gain distributor access. And naturally there will be retaliation from
existing dominant players in the strategic group. Therefore threat to
new entry is low.
5. Threat of rivals: There is high intensity of rivalry due to slow industry
growth and changing consumer tastes. Two equal sized companies
competing for leadership makes the rivalry very high. Dimension of
rivalry is based on price premium but more on branding.
Industry attractiveness for the bottlers is as follows:
1. Bargaining power of suppliers: The strength of the suppliers is
medium because CSD have consolidated small bottlers. CSD also
maintain relations with multiple bottlers and vice versa. It is also true
that CSD producers sales depend on the bottlers competitiveness in
the market.
2. Bargaining power of buyers: The strength of buyers is high as there
are substitutes available. The switching costs are very low. Also that
the markets in the developed nations are saturated.
3. Threat of substitutes: This threat is relatively low, as bottlers cannot
be easily replaced by other marketing channels. Also fountains cannot
be made available everywhere. Bottling component of sales is very
high.
4. Threat of new entry: Barriers to entry are high because bottling is
not really a profitable industry. Markets are saturated; its hard to gain
distribution share/shelf space. Bottling is a very capital intensive
industry. Also Coke and Pepsi have exclusive share of territories.
5. Threat of rivals: There is rivalry among bottlers of different brands
rather than same brands because the territory has been exclusively
divided by Coke and Pepsi. Also the exit barriers are high, which makes
the rivalry intense.
Non marketing forces for CSD industry:
1. Media Big brands like Coke and Pepsi heavily depend on media to
cover them positively as media is a major influencer. Any negative
publicity by the media can lead to public outrage like it happened in
India some years back. Therefore media is a major force.

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2. NGOs/Activist Groups Many of these activists group question the

sustainability practices of major MNEs who only seek profits and do not
bother about natural resources and the environment. In India, Coke
was accused of using too much water for their production. Therefore,
NGOs also play a major role in the CSD industry.
3. Public There is a widespread public opinion that cola drinks lead to
obesity and diet colas are carcinogenic in nature. This may have an
adverse effect on the sales of these products.
4. Government The US govt. has banned the selling of cola drinks in
school premises due to health concerns. Also governments of other
countries might object on similar grounds, making entry difficult for the
CSD industry. Therefore, the role of the government is also an
important force for cola companies.

Degree of Vertical Integration:

Many of their functions overlap in the industry for instance, Concentrate
Producers do some bottling, and bottlers conduct many promotional
activities. The industry is already vertically integrated to some extent. They
also deal with similar suppliers and buyers. The vertical integration of
franchise bottling networks of Coca-Cola and PepsiCo, began in 1980s. The
fact that most of the of the family-owned bottlers that Coca-Cola used, did
not have the resources to remain competitive in the industry and it began
buying up the poorly-managed bottlers, giving them new life with capital,
and selling them to better-performing bottlers. By 2009 Coca-Cola
Enterprises handled about 75% of Coca-Colas North American bottle and can
volume and Pepsi Bottling Group produced 56% of PepsiCos total volume.
Q1) Analyze the CSD industry for its key economic dominant
features, industry driving factors, critical success factors for the
concentrate suppliers and bottlers success.
Economic dominant features of the concentrate suppliers are as follows:
1. Market size and growth rate In recent times even though the
market sizes of the two concentrate suppliers was 55% in 2009. This is
a fairly dominant market share but the growth has been thwarted due
to reasons such as healthy lifestyle and other substitutes.
2. Number of rivals The CSD industry is fairly consolidated with two
major players, Coca Cola and Pepsi dominating the market. Others are

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smaller brands and private labels of large retail stores which sell on
cost advantage.
3. Scope of competitive rivalry The CSD faces more challenges from
non cola products rather CSD players themselves. So the future rivalry
will be a battle between non cola and cola drinks.
4. Buyer needs and requirements The current consumers are health
conscious and do not mind shelling extra for healthier products
including drinks. CSD needs to watch out for that.
5. Product innovation/differentiation Coca cola and Pepsi have both
tried to innovate and differentiate themselves on the basis of the
product offerings, but havent been successful.
Economic dominant features of the bottlers are as follows:
1. Market size and growth rate Bottlers have been consolidated by
Coke and Pepsi either by contractual agreements or franchise. This has
led to the reduction of no. of bottlers to 300 in 2009. There are
exclusive territory rights for bottlers and most terms are dictated by
the CSD players. Therefore growth is limited.
2. Number of rivals: The number of rivals is more in terms of different
brands of bottlers rather than within the same company bottlers. This
is to do with exclusive territorial rights.
3. Scope of competitive rivalry There is not much to the rivalry in
bottling industry in the future unless some major innovation takes
place.
4. Buyer needs and requirements This factor is aligned with the
consumption of soft drinks. So as long as there is a requirement for soft
drinks, the bottlers will be needed.
5. Product innovation/differentiation The bottlers have innovated
for the last couple of decades, experimenting with different raw
materials etc. More innovation would depend on R&D of these firms.
Industry driving forces for the CSD industry are as follows:
1. Globalization: Increased globalization has been highly
advantageous to the CSD industry as the markets in the US were
reaching a saturation point. Market growth was slowing down as
people were switching to substitutes. Globalization helped CSDs and
bottlers alike to expand in emerging economies and be dominant
players in these countries.
2. Product/Marketing Innovation: It will be important for the CSD
industry to continuously innovate themselves in terms of products

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and image. In this industry, branding of the company becomes a

game changer.
3. Changing societal concerns, attitudes and lifestyles: There
has been a tremendous change in the consumer behaviour patterns.
People are shifting to healthier drinks and avoiding high calorie
unhealthy soft drinks. This has led to players like Pepsi and Coke to
move into diet cola and non cola categories in order to cater to the
changing demands of the consumer.

Key Success Factors of the CSD industry are as follows:

1. Manufacturing KSF High utilization of fixed assets due to
standardization of the products sold by CSD industry. Low-cost
production efficiency which helped achieve economies of scale.
2. Distribution KSF A strong network of wholesale distributors and
dealers. Also they managed to gain ample shelf space in the retailers
outlets.
3. Marketing SKF Breadth of product line and product selection after
both Coke and Pepsi entered into the snacks and water bottling
segments too. Also clever advertising and branding helped both of
them attain market share.

Q3) Explain the rationale for different strategies adopted by Coke

and Pepsi since inception.
The major players in the CSD industry, i.e. Coke and Pepsi had intense rivalry
between themselves and the relationship of move and counter move
cultivated the strategies of both the companies. Both the companies took
revolting steps in order to gain the market shares, which in turn increased
their profits. Path dependence was seen in this case as both the companies
took different paths to utilize the same resources and these resources gave
them barriers to imitation. To remain competitive, the companies took
strategic steps like:

Pepsi entered the fast food restaurant business by acquiring Pizza Hut in
1978, Taco Bell in 1986 and KFC in 1986. Cokes counter move in this aspect
was to persuade the competing chains like Wendys and Burger King to
switch to Coke. The rationale behind taking this step was that each of these

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chains had tremendous sales account. Also, direct control over these retail
channels directly added to the profit margins in the bottling industry, giving
the CSD players more opportunity to expand and retain market share.

Greater degree of innovation and practices like mass advertising by both

the companies was done mainly to have a competitive edge over each other.
This also helped in lowered prices for both consumers and bottlers as well as
better and attractive packaging, which would again help in luring the
consumers.

The two companies, in 1960s started experimenting with new cola, noncola flavors and new packaging. Coke launched Fanta (1960), Sprite (1961)
and low-calorie Tab (1963). To this, Pepsi came up with Teem (1960),
Mountain Dew (1964) and Diet Pepsi. Diet Coke (1982) became nations third
largest CSD. This was done primarily to capture larger markets as well as
shelf space in stores and to make the competitors entry difficult.

Both companies introduced non-returnable glass bottles and 12-oz metal

cans in various configurations. The rationale behind this being convenience
for the consumers.

Both diversified into non-CSD industries. Coke purchased Minute Maid,

whereas Pepsi merged with Frito-Lay to form PepsiCo. The rationale behind
this was to achieve synergies based on similar customer targets, delivery
systems and marketing orientations.

In 1980, Coke switched from using sugar to a lower priced substitutehigh fructose corn syrup. This move was emulated by Pepsi three years later.
This benefitted both the companies as the same cost could then be used in
advertising their products.

In 1986, Coke created an independent bottling subsidiary, Coca-Cola

Enterprises (CCE) whereas, Pepsi created Pepsi Bottling Group (PBG) in 1999.
This bottler consolidation was done to make the smaller concentrate
producers increasingly dependent on Pepsi and Coke bottling networks for
distribution of their products.

Q7) What additional information did you get from HBR Interview of
M. Kent, CEO Coca Cola?
These are the following additional information obtained from the interview:
1. Coca Cola plans to double its revenue by 2020 in the saturated US
market.

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2. The corporate culture of Coca Cola has been rejuvenated to suit the
current times.
3. Numerous sustainability initiatives have been taken by Coca Cola to
improve their brand image.
4. They believe in contemporary advertising i.e. it should be a two way
process.
5. Their future focus will continue to be on nonalcoholic ready-to-drink
beverages.
6. Coca colas succession planning strategy is to look two layers below
and make sure they come out with best results.
7. They see their rivalry with Pepsi as something healthy and essential for
the success of their own business.