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Pepsi and Coca-cola

Final project

Submitted To: Mr. Muhammad Imran

Submitted By : Amal Hameed 103142 Maryam Mukhtar 103115

Due Date: 29/07/2011

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Contents
Executive summary......................................................................................................................... 4 Executive summary......................................................................................................................... 4 Introduction of Pepsi ....................................................................................................................... 5 Ingredients of Pepsi......................................................................................................................... 6 Introduction of Coca-Cola .............................................................................................................. 7 Rivalry of Pepsi and Coca-Cola .................................................................................................... 10 Market condition ........................................................................................................................... 12 List of prices of pespi and coca-cola............................................................................................. 13 Peak market season of Pepsi and coca cola .................................................................................. 15 Sales volume of pepsi every year.................................................................................................. 16 Cost to maintain the equipment and labor .................................................................................... 16 Profit Maximization ...................................................................................................................... 17 Affect of cost of coca-cola ............................................................................................................ 19 Snow strom ................................................................................................................................... 20 Entry of other firms ....................................................................................................................... 21 References ..................................................................................................................................... 22

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Executive summary

Pepsi was first introduced as "Brad's Drink" in New Bern, North Carolina, United States, in 1898 by Caleb Bradham, who made it at his home where the drink was sold. It was later named Pepsi Cola, possibly due to the digestive enzyme pepsin and kola nuts used in the recipe. Bradham sought to create a fountain drink that was delicious and would aid in digestion and boost energy.

In this project we are working on economic factors like demand and supply the effect of substitutes on the demand of Pepsi and the factors that causes an increase in the cost of production

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Introduction of Pepsi

Pepsi was first introduced as "Brad's Drink" in New Bern, North Carolina, United States, in 1898 by Caleb Bradham, who made it at his home where the drink was sold. It was later named Pepsi Cola, possibly due to the digestive enzyme pepsin and kola nuts used in the recipe. Bradham sought to create a fountain drink that was delicious and would aid in digestion and boost energy. In 1903, Bradham moved the bottling of Pepsi-Cola from his drugstore to a rented warehouse. That year, Bradham sold 7,968 gallons of syrup. The next year, Pepsi was sold in six-ounce bottles, and sales increased to 19,848 gallons. In 1909, automobile race pioneer Barney Oldfield was the first celebrity to endorse Pepsi-Cola, describing it as "A bully drink...refreshing, invigorating, a fine bracer before a race." The advertising theme "Delicious and Healthful" was then used over the next two decades. In 1926, Pepsi received its first logo redesign since the original design of 1905. In 1929, the logo was changed again. In 1931, at the depth of the Great Depression, the Pepsi-Cola Company entered bankruptcy - in large part due to financial losses incurred by speculating on wildly fluctuating sugar prices as a result of World War I. Assets were sold and Roy C. Megargel bought the Pepsi trademark. Eight years later, the company went bankrupt again. Pepsi's assets were then purchased by Charles Guth, the President of Loft Inc. Loft was a candy manufacturer with retail stores that contained soda fountains. He sought to replace Coca-Cola at his stores' fountains after Coke refused to give him a discount on syrup. Guth then had Loft's chemists reformulate the Pepsi-Cola syrup formula. On three separate occasions between 1922 and 1933, the Coca-Cola Company was offered the opportunity to purchase the Pepsi-Cola company and it declined on each occasion.

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Ingredients of Pepsi
In the United States, Pepsi is made with carbonated water, high fructose corn syrup, caramel color, sugar, Phosphoric acid, caffeine, citric acid and natural flavors. A can of Pepsi (12 fl ounces) has 41 grams of carbohydrates (all from sugar), 30 mg of sodium, 0 grams of fat, 0 grams of protein, 38 mg of caffeine and 150 calories. The caffeine-free Pepsi-Cola contains the same ingredients but without the caffeine. The original Pepsi-Cola recipe was available from documents filed with the court at the time that the Pepsi-Cola Company went bankrupt in 1929. The original formula contained neither cola nor caffeine

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Introduction of Coca-Cola
The prototype Coca-Cola recipe was formulated at the Eagle Drug and Chemical Company, a drugstore in Columbus, Georgia by John Pemberton, originally as a coca wine called Pemberton's French Wine Coca. He may have been inspired by the formidable success of Vin Mariani, a European coca wine. In 1886, when Atlanta and Fulton County passed prohibition legislation, Pemberton responded by developing Coca-Cola, essentially a non-alcoholic version of French Wine Coca. The first sales were at Jacob's Pharmacy in Atlanta, Georgia, on May 8, 1886. It was initially sold as a patent medicine for five cents a glass at soda fountains, which were popular in the United States at the time due to the belief that carbonated water was good for the health. Pemberton claimed Coca-Cola cured many diseases, including morphine addiction, dyspepsia, neurasthenia, headache, and impotence. Pemberton ran the first advertisement for the beverage on May 29 of the same year in the Atlanta Journal. By 1888, three versions of Coca-Cola sold by three separate businesses were on the market. Asa Griggs Candler acquired a stake in Pemberton's company in 1887 and incorporated it as the Coca Cola Company in 1888. The same year, Pemberton sold the rights a second time to four more businessmen: J.C. Mayfield, A.O. Murphey, C.O. Mullahy and E.H. Bloodworth. Meanwhile, Pemberton's son Charley Pemberton began selling his own version of the product. John Pemberton declared that the name "Coca-Cola" belonged to Charley, but the other two manufacturers could continue to use the formula. So, in the summer of 1888, Candler sold his beverage under the names Yum Yum and Koke. After both failed to catch on, Candler set out to establish a legal claim to Coca-Cola in late 1888, in order to force his two competitors out of the business. Candler purchased exclusive rights to the formula from John Pemberton, Margaret Dozier and Woolfolk Walker. However, in 1914, Dozier came forward to claim her signature on the bill of sale had been forged, and subsequent analysis has indicated John Pemberton's signature was most likely a forgery as well. In 1892 Candler incorporated a second company, The Coca-Cola Company (the current corporation), and in 1910 Candler had the earliest records of the company burned, further obscuring its legal origins. By the time of its 50th anniversary, the drink had reached the status of 7|Page

a national icon in the USA. In 1935, it was certified kosher by Rabbi Tobias Geffen, after the company made minor changes in the sourcing of some ingredients. Coca-Cola was sold in bottles for the first time on March 12, 1894. The first outdoor wall advertisement was painted in the same year as well in Cartersville, Georgia. Cans of Coke first appeared in 1955. The first bottling of Coca-Cola occurred in Vicksburg, Mi ssissippi, at the Biedenharn Candy Company in 1891. Its proprietor was Joseph A. Biedenharn. The original bottles were Biedenharn bottles, very different from the much later hobble-skirt design that is now so familiar. Asa Candler was tentative about bottling the drink, but two entrepreneurs from Chattanooga, Tennessee, Benjamin F. Thomas and Joseph B. Whitehead, proposed the idea and were so persuasive that Candler signed a contract giving them control of the procedure for only one dollar. Candler never collected his dollar, but in 1899 Chattanooga became the site of the first Coca-Cola bottling company. The loosely termed contract proved to be problematic for the company for decades to come. Legal matters were not helped by the decision of the bottlers to subcontract to other companies, effectively becoming parent bottlers. Coke concentrate, or Coke syrup, was and is sold separately at pharmacies in small quantities, as an over-the-counter remedy for nausea or mildly upset stomach. New Coke Advertising promoting flavor change On April 23, 1985, Coca-Cola, amid much publicity, attempted to change the formula of the drink with "New Coke". Follow-up taste tests revealed that most consumers preferred the taste of New Coke to both Coke and Pepsi, but Coca-Cola management was unprepared for the public's nostalgia for the old drink, leading to a backlash. The company gave in to protests and returned to a variation of the old formula, under the name Coca-Cola Classic on July 10, 1985. 21st century On February 7, 2005, the Coca-Cola Company announced that in the second quarter of 2005 they planned to launch a Diet Coke product sweetened with the artificial sweetener sucralose, the same sweetener currently used in Pepsi One. On March 21, 2005, it announced another diet product, Coca-Cola Zero, sweetened partly with a blend of aspartame and acesulfame potassium. 8|Page

In 2007, Coca-Cola began to sell a new "healthy soda": Diet Coke with vitamins B6, B12, magnesium, niacin, and zinc, marketed as "Diet Coke Plus." On July 5, 2005, it was revealed that Coca-Cola would resume operations in Iraq for the first time since the Arab League boycotted the company in 1968. In April 2007, in Canada, the name "Coca-Cola Classic" was changed back to "Coca-Cola." The word "Classic" was truncated because "New Coke" was no longer in production, eliminating the need to differentiate between the two. The formula remained unchanged. In January 2009, Coca-Cola stopped printing the word "Classic" on the labels of 16-US-fluidounce (470 ml) bottles sold in parts of the southeastern United States. The change is part of a larger strategy to rejuvenate the product's image. In November 2009, due to a dispute over wholesale prices of Coca-Cola products, Costco stopped restocking its shelves with Coke and Diet Coke, However, some Costco locations (like the ones in Tucson, Arizona sell imported Coca Cola from Mexico.

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Rivalry of Pepsi and Coca-Cola

According to Consumer Reports, in the 1970s, the rivalry continued to heat up the market. Pepsi conducted blind taste tests in stores, in what was called the "Pepsi Challenge". These tests suggested that more consumers preferred the taste of Pepsi (which is believed to have more lemon oil, and less orange oil, and uses vanillin rather than vanilla) to Coke. The sales of Pepsi started to climb, and Pepsi kicked off the "Challenge" across the nation. This became known as the "Cola Wars". In 1985,The Coca-Cola Company, amid much publicity, changed its formula. The theory has been advanced that New Coke, as the reformulated drink came to be known, was invented specifically in response to the Pepsi Challenge. However, a consumer backlash led to Coca-Cola quickly reintroducing the original formula as Coke "Classic". According to Beverage Digest's 2008 report on carbonated soft drinks, PepsiCo's U.S. market share is 30.8 percent, while The Coca-Cola Company's is 42.7 percent. Coca-Cola outsells Pepsi in most parts of the U.S., notable exceptions being central Appalachia, North Dakota, and Utah. In the city of Buffalo, New York, Pepsi outsells Coca-Cola by a two-to-one margin. Overall, Coca-Cola continues to outsell Pepsi in almost all areas of the world. However, exceptions include India; Saudi Arabia; Pakistan (Pepsi has been a dominant sponsor of the Pakistan cricket team since the 1990s); the Dominican Republic; Guatemala the Canadian provinces of Quebec, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island; and Northern Ontario. 10 | P a g e

Pepsi had long been the drink of Canadian Francophones and it continues to hold its dominance by relying on local Qubcois celebrities (especially Claude Meunier, of La Petite Vie fame) to sell its product. PepsiCo used the slogan "here, it's Pepsi" (Ici, c'est Pepsi) to answer to Cocacola publicity "Everywhere in the world, it's Coke" (Partout dans le monde, c'est Coke). By most accounts, Coca-Cola was India's leading soft drink until 1977 when it left India after a new government ordered The Coca-Cola Company to turn over its secret formula for Coke and dilute its stake in its Indian unit as required by the Foreign Exchange Regulation Act (FERA). In 1988, PepsiCo gained entry to India by creating a joint venture with the Punjab governmentowned Punjab Agro Industrial Corporation (PAIC) and Voltas India Limited. This joint venture marketed and sold Lehar Pepsi until 1991 when the use of foreign brands was allowed; PepsiCo bought out its partners and ended the joint venture in 1994. In 1993, The Coca-Cola Company returned in pursuance of India's Liberalization policy. In 2005, The Coca-Cola Company and PepsiCo together held 95% market share of soft-drink sales in India. Coca-Cola India's market share was 52.5%. In Russia, Pepsi initially had a larger market share than Coke but it was undercut once the Cold War ended. In 1972, PepsiCo company struck a barter agreement with the then government of the Soviet Union, in which PepsiCo was granted exportation and Western marketing rights to Stolichnaya vodka in exchange for importation and Soviet marketing of Pepsi-Cola. This exchange led to Pepsi-Cola being the first foreign product sanctioned for sale in the U.S.S.R. Reminiscent of the way that Coca-Cola became a cultural icon and its global spread spawned words like "coca colonization", Pepsi-Cola and its relation to the Soviet system turned it into an icon. In the early 1990s, the term "Pepsi-stroika" began appearing as a pun on "perestroika", the reform policy of the Soviet Union under Mikhail Gorbachev. Critics viewed the policy as a lot of fizz without substance and as an attempt to usher in Western products in deals there with the old elites. Pepsi, as one of the first American products in the Soviet Union, became a symbol of that relationship and the Soviet policy. This was reflected in Russian author Victor Pelevin's book "Generation P".

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Market condition

Pepsi and coca-cola are differentiated products. There are many buyers and sellers of Pepsi and coca-cola. Pepsi and coca cola are involved in monopolistic competition. Although Pepsi and Coca-Cola are substitutes but the market structure of the two products is not perfect competition because there is a slight difference in the taste which makes them monopolistic competitors. The demand curve of the two firms will be down ward sloping as there are other firms in the industry selling similar products.

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List of prices of pespi and coca-cola

Rs. 15/-

250 ml

Rs. 35/-

500 ml

Rs. 70/-

1.5 liter

Rs. 90/-

2.25 liter

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Rs. 15/-

250 ml

Rs. 35/-

500 ml

Rs. 70/-

1.5 liter

Rs. 90/-

2.25 liter

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Peak market season of Pepsi and coca cola

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Sales volume of pepsi every year

70000 60000 50000 40000 30000 20000 10000 0 2007 2008 2009 2010

Cost to maintain the equipment and labor


PepsiCo is a world leader in convenient snacks, foods and beverages with revenues of more than $60 billion and over 285,000 employees. The cost required to maintaining the Pepsi plant is approximately 1.5 million.

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Profit Maximization

At what price should pepsi be sold to maximize profits ? Organizations achieve maximum profits when marginal revenue (MR) to the revenue derived from selling one extra unit is equal to marginal cost (MC) the cost of producing one more unit of a good or service. That is MR=MC as shown in graph below

Suppose inverse demad function and cost function P = 40 Q , C(Q) = 50 + Q2

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Calculating Marginal Revenue Revenue = price * quantity R=(40 Q)Q R=40Q Q 2 MR=dr/ dQ =40- 2Q Calculating marginal cost MC= dC(Q)/ dQ = 2Q MR = MC 40 2Q = 2Q QM = 40/4 = 10 units Putting value of Q into P = 40 10 = Rs.30. Calculate profit Profit = Total Revenue Total Cost Profit = P* Q TC = $30*10 [50 + (10)2] = $300 - $150 = Rs.150

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Affect of cost of coca-cola

How does the cost of coca-cola affect the sales of Pepsi?


When considering the purchase of a cola, Coca-cola and Pepsi may be substitutes. If the price of Coca-cola would increase while the price of Pepsi remains constant, the demand curve for Pepsi would move to the right. If the price of Coca-cola would decrease while the price of Pepsi remains constant, the demand curve for Pepsi would move to the left. The substitution effect is a non-price determinant, the price of Pepsi was held constant in both cases. The graphs below shows the demand curve shift in case of increase in the price of coca-cola

The graph below shows the demand cruve shift to left due to decrese in the price of coca-cola

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Snow strom

If a severe snowstorm rises the price of Pepsi main ingredient, should the company sell Pepsi and if so at what price? If the price of ingredients rises the input prices increases when input price rises it shifts the supply curve towards left the cost of production rises and suppliers wishes to produce less. Suppose that rise in price changes the cost function to C(Q) = 50 + 3 Q2 Inverse demand function remaines the same that is P = 40 - Q Calculating profit maximization price Calculating Marginal Revenue Revenue = price * quantity R=(40 Q)Q R=40Q Q 2 MR=dr/ dQ =40- 2Q Calculating Marginal Cost MC= dC(Q)/ dQ = 6Q MR = MC 40 2Q = 6Q QM = 40/6 = 4 units Putting value of Q into P = 40 4 = Rs.36 20 | P a g e

Calculate profit Profit = Total Revenue Total Cost Profit = P* Q TC = rs.36*4 [50 + 3(4)2] = 144 - 98 = Rs. 46 Variable cost = total cost fixed cost V.C =(50 + 3 Q2 ) 50 V.C = (50 + 3 (4) 2) 50 V.C = 98 50 V.C = 48 Average variable cost = V.C / Q AVC= 48 / 4 = 12 Since P> AVC the firm should continue selling its product at the price of Rs. 36

Entry of other firms

Can the company remain competitive if an overseas soft drink producer 30% more for ingredients and 20% less for labor ? The new firm enters the market it decreases the market share of the existing firms and the quantity supplied of the products. If the new oversees company pays 30% more for the ingredients the suppliers will be willing to sell the goods to new firm this factor can create the monopoly o f new firm as more and more suppliers will sell the products to new firm. If the firm pays 20% less to the labor but has advanced technology the monopoly of new firm can be created but if the firm doesn't have advanced technology the firm remains in competitive with existing firms 21 | P a g e

References
1. http://en.wikipedia.org/wiki/Pepsi 2. http://en.wikipedia.org/wiki/Coca-Cola 3. http://www.pepsico.com/Investors/Annual-Reports.html 4. http://www.amosweb.com/cgibin/awb_nav.pl?s=wpd&c=dsp&k=monopolistic+competition,+loss+minimization

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