GIFT University

Final Project

Cola Wars Continue

Coke and Pepsi in 2006

Soft Drink Industry

Cola Wars Continue: Coke and Pepsi in 2006

-1-

A CULTURAL PROFILE

A Project of Coke vs. Pepsi

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 mid1990s. 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 Sams 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.

-2-

GIFT University
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 Cokes core business, and Coke tended to focus on vending and fountain. The Pepsi Challenge deals with Pepsis 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

-3-

GIFT University
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. Bottlers 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 worlds 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
Introduce New Failover

-4-

GIFT University
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.

-5-

GIFT University
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 -Non-CSD Beverages

-6-

GIFT University
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 1114 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? If we see the exhibit 2, we can easily observed

-7-

GIFT University
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% 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.

-8-