Cola Wars Continue Case Study Analysis

Presented byDhirendra Singh Erwin Saurabh Tigga Debabrata Swain Dilip Kumar Ganesan.M

War over $66bn industry lasted between 1950-1990s

New Challenges
Cola wars continued into the 21st century with new challenges
Was their era of sustained growth and profitability coming to a close? Could they boost flagging domestic CSD sales? Would newly popular beverages provide them with new (and profitable) revenue streams?

Production & distribution of CSD

concentrate producers Bottlers Retail channels suppliers

Concentrate Producer
Blended raw material ingredients,packaged the mixture, shipped those container to the bottler. Key production investment areas - machinery, overhead and labor. A typical manufacturing plant cost - $25 million to $50 million

Concentrate Producer
Significant costs were for advertising, promotion, market research. Coca-Cola and PepsiCola claimed a combined 74.8% of the U.S. CSD market in sales volume in 2004

Bottlers
Bottlers purchased concentrate Added carbonated water and high-fructose corn syrup Bottled or canned the resulting CSD product Delivered it to customer account

Bottlers
Bottling process is capital intensive. Packaging accounted for 40% to 45% of sales, same for concentrate and sweeteners for 5% to 10%. Coke and Pepsi bottlers offered direct store door delivery. Cooperative merchandizing agreements is a key ingredient of soft drink sales.

Profitability
Concentrate producer earn more profit than bottler. Cost of sale is more in bottler.

Retail channel
Super markets Vending machines Convenience stores Gas stations

Suppliers to Bottlers
Coke and Pepsi were among the metal can industrys largest customers. Major can producers- Ball, Rexam, Crown Cork & Seal

Cola War begins

Beat Coke Pepsi Generation young at heart. Concentrate Price 20% lower 1970 larger bottlers Americans preferred taste No wonder Coke refreshes best

Year 1960s the Armageddon

Teem (1960)
Mountain Dew (1964) Diet Pepsi (1964)

Fanta (1960)
Sprite (1961) Low calorie cola Tab (1963)

Non-CSD (Merged)
Frito Lays

Non-CSD (Purchased) Minute Maid (fruit juice)

Duncan foods (coffee, tea, hot chocolate) Belmont Springs water

Pepsis Challenge
Blind taste test Eroded Cokes Market share Part of Pepsis promotional strategy not a part of marketing research. Rebates Retail price cuts Advertisements that questions tests validity 1978 Re-negotiation of contract with franchisee bottlers

Leadership
2001: Steve Reinemund Grow the core add some more Launched new CSD products (Sierra Mist, Mountain Dew code red) Acquisition of Quaker Oats Net income raised by 17.6% per year ROI capital 29.3 (2003) from 9.5 (1996)

1980 Roberto Goizueta

Share price rose by 3500% Most valuable Brand Use of lower priced corn syrup against sugar Double spending on ads 1981-84 Sold non-CSD business Diet Coke (1982)

Product Launch
Teem (1960) Mountain Dew (1964) Diet Pepsi (1964) Lemon Lime Slice (1984) Caffeine free Pepsi Cola (1987) Sierra Mist (2000) Mountain Dew Code Red (2001) Pepsi One (2005) Diet Coke with Splenda (2005)

Fanta (1960) Sprite (1961) Low calorie cola Tab (1963) Diet Coke (1982) Caffeine free coke (1983) Coca-Cola Classic (1985) New Coke (1985) Cherry Coke (1985) Sierra Mist Free (2004) Coca-Cola Zero (2005)

Expansions
Acquired Pizza hut
(1978), Toco Bell (1986), KFC (1986) Merged with Frito Lay to form PepsiCo Pepsi purchased Quaker Oats

Exclusive deals with Burger king, McDonalds Purchased Minute Maid, Duncan Foods, Belmont Springs water Acquired Planet Java coffee drink brand Acquired - Mad River juices and tea

Marketing Campaigns
Pepsi generation Young at heart Pepsi challenge Smart Spot good for you Americans Preferred Taste No wonder Coke refreshes best

Challenges
Flat demand during 1998 to 2004. Contamination scare at India Obesity Issue Challenges of Internationalization

Challenges to Coca-Cola
Performance & execution: on providing alternative beverages on adjusting key strategic relationships, on cultivating international markets Currency crisis in Asia and Russia Recall in Belgium (public relations disaster) Series of legal problems

1996-2004:reversal of fortune
Pepsi flourished Acquisition of Quaker oats 3% growth 2004 Net income rose by 17.6% per year ROI 29.3% from 9.5%(1996) Shareholders return 46% Coke struggled Flat growth Annual growth in net income falls to 4.2% from 18%(1990-96) Shareholders return -26%

Market share: CSD- 80%(2000) to 73.1%(2004) Diet soda- 24.6%(1997) to 29.1%(2004) Bottled water 6.6%(2000) to 13.2%(2004) Non-carbs 12.6%(2000) to 13.7%(2004) Non-carbs & bottled water contribution to volume growth coke 100% & Pepsi 75%

Quest for alternatives

Quest for alternatives

No longer designing of marketing course Diet Pepsi, Pepsi One, Diet Coke with slpenda Diet Pepsi as flagship brand Non-CSD: total beverage company Reluctant to diversify

Evolving stuctures and stratgies

System profitability Price war low -cost strategy by the bottlers Incidence pricing Retailers resist price increases(Wal-Mart)

Cokes relationship with bottlers : Dysfunctional,

Internationalisation
Next largest market: Mexico, Brazil, Germany, China, and the United Kingdom Asia and Eastern Europe 837 eight ounce cans: 21 eight ounce cans Cokes dominance : Western Europe, much of Latin America, while Pepsi :Middle East and Southeast Asia. Coca-Cola became synonymous with American culture. About 70% of Cokes sales and about 80% of its profits came from outside the United States; only about onethird of Pepsis beverage sales took place overseas. Arab and Soviet exclusion of Coke

Venezuela crisis
Before
After

SWOT : Strengths
PepsiCo Brands Enjoy a High-Profile Global Presence

Pepsi Owns the Worlds 2nd Best-Selling Soft Drinks Brand Constant Product Innovation

Aggressive Marketing Strategies Using Famous Celebrities

A Broad Portfolio of Products

Coke Brands Enjoy a High-Profile Global Presence Four of the top five leading brands Broad-based bottling strategy 47% of global volume sales in carbonates

SWOT : Weaknesses
Carbonates Market is in Decline Pepsi is Strongest in North America They Only Target Young People Carbonates Market is in Decline Over-complexity of relationship with bottlers in North America Execution ability

SWOT :: Opportunities
Increased Consumer Concerns with Regard to Drinking Water

Growth in Healthier Beverages

Growth in RTD Tea and Asian Beverages Growth in the Functional Drinks Industry

Soft drinks volumes in the Asia-Pacific region forecast to increase by over 45% Brands like Minute Maid Light and Minute Maid Premium Heart Wise are positioned well with the Health-concerned market Use distribution strengths in Eastern Europe and Latin America

SWOT : Threats
Obesity and Health Concerns Coca-Cola Increases Marketing and Innovation Spending to $400M Globally Relying on North America only is Bad

Growing "healthconscience" society PepsiCos Gatorade, Tropicana and Aquafina are stronger brands Boycott in the Middle East Protest against Coke in India Negative publicity in WesternEurope

Profit Margins of Industry Concentrate Producers and Bottlers

US Liquid consumption trends (gallons/capita)

Source- US Beverage industry Consumption Statistics

Promising Segment
US Liquid consumption trends (gallons/capita)

Source- US Beverage industry Consumption Statistics

Market Share by case volume(percent)

Coca cola 1966-04 : 29.04% Gain PepsiCo 1966-04 : 55.14% Gain Others 1966-04- 82.55 % loss

Q:Who has been losing? Smaller Brands: Because-Entry Barrier, Duopoly

Q: Who has been wining the war? 1950: Coke have 47% and Pepsi have 10% 1970: Coke have 35% and Pepsi have 29% 1990: Coke have 41% and Pepsi have 32% 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%

Key questions
Q: Could they boost flagging domestic CSD sales? Through Product innovation Aggressive marketing and promotion Packaging innovations

 Would newly popular beverages provide them with new (and profitable) revenue streams?

Yes Non carb and Bottled water contribution to Total volume growth: Coke-100%, Pepsi-75 Contamination issue, Obesity issue

Q-Can Coke and Pepsi sustain their profits in the wake of flattening demand and the growing popularity of non-CSDs?

Coke and Pepsi did not just inherit this business they created it. By diversification. Innovation : e.g diet coke

Thank you