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Project forBatch Accounting for IBS A Executive 2009-10 Decision Making

Pricing Strategy for Soft Drink Industry


Submitted to:

Submitted By: Amit Kumar (09ESHYD003) Ashwin Bhadviya (09ESHYD008) Deepa Patnaik (09ESHYD012) Jinson Rajgopalan (09ESHYD016)

Table of Contents
Introduction...................................................................................................................3 Entry Barriers in Soft Drink Market...................................................................................3 SWOT Analysis:............................................................................................................4 Various Cola Brands Products Available:..........................................................................5 Pricing Strategy.............................................................................................................6 Coke Price..............................................................................................................6 Pepsi Price.............................................................................................................6 Pricing strategy for Buyer and Suppliers..................................................................................6 Effect of Competition and Price War on Industry Profits:..........................................................7 Pricing Strategy Used for Market Capitalization:......................................................................7 Penetration Pricing:..................................................................................................................8 Conclusion:...................................................................................................................9 Conclusion:

Soft drink Industry


Introduction
The soft-drink industry comprises companies that manufacture nonalcoholic beverages and carbonated mineral waters or concentrates and syrups for the manufacture of carbonated beverages. Soft drinks are available in glass bottles, aluminum cans and PET bottles for home consumption. Non-alcoholic soft drink beverage market can be divided into fruit drinks and soft drinks. Soft drinks can be further divided into carbonated and non-carbonated drinks. Cola, lemon and oranges are carbonated drinks while mango drinks come under non carbonated category. Cola products account for over 60% of the total soft drink market and include popular brands such as Coca-Cola, Pepsi, and Thumps up etc. Non-cola segment constitutes for over 35% of the market. Until 1990s, domestic players like Parle Group (Thumps Up, Limca, Goldspot) dominated the soft drink market in India. However, with the advent of the MNC players like Pepsi (1991) and Coke (re-entered in 1993 after it was banned in 1977) in the early 1990s, the market control shifted towards them by the late 1990s. The per capita consumption of soft drinks in India is among the lowest in the world - 5 bottles per annum compared to the 800 bottles per annum in the USA. Delhi reports the highest per capita consumption in the country 50 bottles per annum. The consumption of PET bottles is more in the urban areas [75% of total PET bottle (plastic bottles) consumption] whereas the sales of 200ml bottles were higher in the rural areas. According to a survey, 91% of the soft drink consumption in India is in the lower, lower middle and upper middle class section. Last one century witnessed the entry of various soft drink companies but only few of them were able to survive. The major among them are COKE and PEPSI. These are the only two companies that has shared the whole market between them and left a very small share for the remaining ones. This made the word cola drink synonymous to the word soft drink. We will basically focus on the pricing strategies adopted by these two affluence companies, how the change in the strategy of one of them reflects in the strategy of the other.

Entry Barriers in Soft Drink Market


Before coming on to the core topic of price strategy, we will discuss what are the factors that made the soft drink market a duopoly market.

The several factors that make it very difficult for the competition to enter the soft drink market include:

The factors that made the duopoly soft drink market and that make it very difficult for the competition to enter the soft drink market include:

Network Bottling:
Both Coke and PepsiCo have franchisee agreements with their existing bottlers who have rights in a certain geographic area in perpetuity. These agreements prohibit bottlers from taking on new competing brands for similar products. Also, with the recent consolidation among the bottlers and the backward integration with both Coke and Pepsi buying significant percent of bottling companies, it is very difficult for a firm entering to find bottlers willing to distribute their product. The other approach to try and build their bottling plants would be very capital-intensive effort with new efficient plant capital requirements in 2009 being more than $500 million.

Advertising Spend:
The advertising and marketing spend in the industry is very high by Coke, Pepsi and their bottlers. This makes it extremely difficult for an entrant to compete with the incumbents and gain any visibility.

Brand Image / Loyalty:


Coke and Pepsi have a long history of heavy advertising and this has earned them huge amount of brand equity and loyal customers all over the world. This makes it virtually impossible for a new entrant to match this scale in this market place.

Retailer Shelf Space (Retail Distribution):


Retailers enjoy significant margins of 15-20% on these soft drinks for the shelf space they offer. These margins are quite significant for their bottom-line. This makes it tough for the new entrants to convince retailers to carry/substitute their new products for Coke and Pepsi.

Fear of Retaliation:
To enter into a market with entrenched rival behemoths like Pepsi and Coke is not easy as it could lead to price wars which would affect the new comer.

SWOT Analysis:
Strength:
Pepsi Coke

PepsiCo brands enjoy a high-profile global presence

Coke 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

Four of the top five leading brand Broad-based bottling strategy 47% of global volume sales in carbonates

Weakness:
Pepsi
Carbonates market is in decline Pepsi is the strongest in North America They only the target young crowd

Coke
Carbonates market is in decline Over-complexity of relationship with bottlers in North America Execution ability

Opportunities:
Pepsi
Increased consumer concerns with regard to drinking water Growth in the functional drinks industry

Coke
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

Growth in RTD Tea , Asian Beverages and Healthier Beverages

Threats: Pepsi
Obesity and health concerns Coca-Cola increases marketing and innovation spending to $400M globally Relying only on North America.

Coke
Growing "health-conscience" society PepsiCos Gatorade, Tropicana and Aquafina are stronger brands Boycott in the Middle East. Protest against coke in India.

Various Cola Brands Products Available:


Coca Cola
Limca (1971) Sprite (1999) Low calorie cola Tab (1963) Diet Coke (1982) Caffeine free coke (1983) Coca-Cola classic (1985) New Coke (1985) Cherry Coke (1985) Thums Up (1977) Kinley (2001) Fanta (1993) Maaza (1993) Minute Maid Pulpy Orange (2008)

Pepsi
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) 7 up (1984) Aquafina (2001) Mirinda (1993) Slice (1993) Mountain Dew MDX (2005)

Pricing Strategy
In economics and business, the price is the assigned numerical monetary value of a good, service or asset .Price is also central to marketing where it is one of the four variables (4 Ps namely Product, Price, promotion, Place) in the marketing mix that business people use to develop a marketing plan. Pricing is a big part of the marketing mix. Choosing the right price and the right pricing strategy is crucial to the marketing process. The price of the product is not something that is fixed .On the other hand the price of the product depends on many other factors .Sometimes the price of the product has got nothing to do with the actual product itself .The price may act as a way to attract target customers. The price of the product is decided keeping many things in mind. These things include factors like cost incurred on the product, target market, competitors, consumer buying capacity etc.

Coke Price
Coke was a company ruling the markets before Pepsi entered. Earlier the price of coke was cost based i.e. it was decided on the cost which was spent on making the product plus the profit and other expenses. But after the emergence of other companies especially the likes of Pepsi, Coca-cola started with a pricing strategy based on the basis of competition .Nowadays more expenses are spent on advertising by soft -drink companies rather than on manufacturing .Coke has brought in a revolution especially in Indian markets with the Rs.5 pricing strategy which was very famous. It was the first company to introduce the small bottle of Coke for just Re.5 .This

campaign was very successful especially with the price conscious Indian consumers. Even today most prices of Coke are decided on the basis of the competition in the market.

Pepsi Price
Pepsi again decides its price on the basis of competition .The best think about the company Pepsi is that it is very flexible and it can come down with the price very quickly. The company is renowned to bring the price down even up to half if needed. But this risk taking attitude has also earned Pepsi losses. Though lowering the price would attract the customers but it would not help them cover up the cost incurred in production hence causing them losses. This was the situation earlier but now Pepsi is a full-fledged and growing company. It has covered all its losses and is now growing at a rapid rate.

Pricing strategy for Buyer and Suppliers


Suppliers:
The soft drink industry have a negotiating advantage from its suppliers as most of the raw materials needed to produce concentrate are basic commodities like Color, flavor, caffeine or additives, sugar, packaging. The producers of these products have no power over the pricing hence the suppliers in this industry are weak. This makes the soft drink industry a cheap input industry which helps in increasing their gross margin.

Buyers:
The major channels for the Soft Drink industry are food stores, Fast food fountain, vending, convenience stores and others in the order of market share. The profitability in each of these segments clearly illustrate the buyer power and how different buyers pay different prices based on their power to negotiate.

Food Stores:
These buyers in this segment are somewhat consolidated with several chain stores and few local supermarkets, since they offer premium shelf space they command lower prices, the net operating profit before tax (NOPBT) for concentrate producers is high.

Convenience Stores:
This segment of buyers is extremely fragmented and hence has to pay higher prices.

Fountain:
This segment of buyers are the least profitable because of their large amount of purchases they make, it allows them to have freedom to negotiate. Coke and Pepsi primarily consider this segment Paid Sampling with low margins. NOPBT in this segment is very low.

Vending:

This channel serves the customers directly with absolutely no power with the buyer.

Effect of Competition and Price War on Industry Profits:


During 1960s and 70s coke and Pepsi adopted differentiation and advertising strategy. Pepsi came with Pepsi challenge strategy where blind taste test were hosted by Pepsi in order to differentiate itself as a better tasting product compare to coke. In the early 1990s Coke and Pepsi employed low price strategy in the supermarket channel in order to compete with store brands. Coke and Pepsi however in the late 90s decided to abandon the price war, which was not doing industry any good by raising the prices. Coke was more successful internationally compared to Pepsi due to its early lead as Pepsi had failed to concentrate on its international business after the world war and prior to the 70s. Pepsi however sought to correct this mistake by entering emerging markets where it was not at a competitive disadvantage with respect to Coke as it failed to make any heady way in the European market.

Pricing Strategy Used for Market Capitalization:


Price is a very important part of the marketing mix as it can affect both the supply and demand for soft drinks. The price of soft drinks products is one of the most important factors in a customers decision to buy. Price will often be the difference that will push a customer to buy our product over another, as long as most things are fairly similar. For this reason pricing policies need to be designed with consumers and external influences in mind, in order to effectively achieve a stable balance between sales and covering the production costs. Till the late 1980s, the standard SKU (Stock Keeping Unit) for a soft drink was 200 ml. In 1989, when Indian government opened the market to multinationals, Pepsi was the first to come in. Thums Up (a product of Parle) went up against the international giant for an intense onslaught with neither side giving any quarter. Around 1989, Pepsi launched 250 ml bottles and the market also moved on to the new standard size. When Coke re-entered India in 1993, it introduced 300 ml as the smallest bottle size. Soon, Pepsi followed and 300 ml became the standard. With large population and low consumption the rural market represented a significant opportunity for penetration and market dominance. Competitive pricing was the key. Then the capacity went from 250ml to 300ml, aptly named MahaCola. This nickname gained popularity in smaller towns where people would ask for "Maha Cola" instead of Thumps Up. The consumers were divided where some felt the Pepsis mild taste was rather bland. In 1993 Coca-Cola re-entered India after prolonged absences from 1977 to 1993. But CocaColas entry made things even more complicated and the fight became a three-way battle. That same year, in a move that baffled many, Parle sold out to Coke for a meager US$ 60 million (considering the market share it had). Further, as the demand changed, both Pepsi and Coke introduced 1 liter returnable glass bottles. Available Type
RGB RGB RGB RGB

Measure
250ml 300ml 300ml 300ml

Year
1989 1993 1994 1996

Price (Rs)
Rs 8 Rs 9 Rs 9 Rs 11

Pet bottles RGB Pet bottles RGB Pet bottles Can RGB Pet bottles Fountain Can

1lt, 2lt 300ml 1 lt, 2 lt 200ml, 300ml (negligible) 500ml, 1 lt, 1.5 lt, 2 lt 330ml 200ml, 300ml (negligible) 500ml, 1 lt, 1.5 lt, 2 lt Various 330ml

1996 1997 1997 2002-03 2002-03 2002-03 2009 2009 2009 2009

Rs 25, Rs 42 Rs 7 Rs 20, Rs 38 Rs 5, Rs 11 Rs 18, Rs 25 Rs 35 Rs 8, Rs 12 Rs 20, Rs 35, Rs 45,Rs 52 Variable Rs 30

Penetration Pricing:
Coke launched smaller bottle priced almost 50% of the traditional package. The accessibility campaign introduced a new 200ml bottle, smaller than the traditional 300ml bottle found in urban market, concurrently cutting the price to half to Rs 5. This closed the gap between coke and basic refreshments like lemonade, sugarcane juice and tea, making soft drinks really accessible for the first time. In the past (in 2002-03), Coke had already targeted rural consumers by bringing down the entry price (Rs 5 a bottle) for its product. Now, it has stepped up distribution of its 200-ml (priced at Rs 7 and Rs 8) returnable-glass-bottles. To surmount the penetration policy of Coke, Pepsi too came up with the same Price penetration policy by launching products like Chota Pepsi with the price of Rs 5 to challenge the coke product. The small size was basically used to target rural market to make new customer habitual to it.

Conclusion:
By studying the pricing strategy of Coke and Pepsi, we found that there is not much variation in there price. Being most of the soft drink market is covered by these two major brands, its a duopoly market. The price data of last few years of various brands of these two giants shows that instead of moving into the price war by reducing the price, they try to launch the parallel product to compete with the others product. In several pockets of the country, the bruising cola wars between Coca-Cola India and Pepsi has seen a rollback in prices of colas and other flavored drinks. According to industry analysts, the current prices of these soft drinks in select markets are the same as what it was way back in 1997. Thus giving the customers the best value.