Introduction

Coca-Cola and Pepsi dominated the carbonated soft drink (CSD) industry for over a
century but are now experiencing significant and continuing drops in sales due to changes in
their external environments. The CSD industry achieves annual growth of up to 10% on
average in the US and dominated by the cola segment. In early 2000, per capita CSD
consumption began to decline from 53 gallons in 2000 (71% market) to 46 gallons (55%
market) in 2009. The decline was caused by an increase in demand for consumption of non-
CSD beverages. Government regulations combined with the push towards healthy diets to
fight obesity have threatened the American CSD sales. With the shifting trend towards non-
carbonated drinks (non-CSD’s), Coca-Cola and Pepsi need plan, organize and execute
strategies to compete for market share in the non-CSD industry while also maintaining sales
in their CSD lines.

Economics of the US CSD Industry

The production and distribution of CSD involved four major participants, consist of:

1. Concentrate Producer
The concentrate produces the concentrate of cola, they blended raw material
ingredients, packaged the mixture in plastic canisters, and shipped those containers to
the bottlers.
2. Bottlers
Bottlers purchased concentrated, added carbonated water and high-fructose corn
syrup, bottled or canned the resulting CSD product, and delivered it to customer
accounts.
3. Retail Channels
Retail channels is the distribution channel for CSD such as supermarket, mass
merchandiser (Wal-Mart), fountain outlet (resto, café), vending machine,
convenience, and other outlets.
4. Suppliers to Concentrate Producers and Bottlers
Supplies raw materials for concentrate producers and bottlers. For concentrate
producers most regular colas consisted of caramel coloring, phosphoric or citric acid,
etc. and bottlers consisted of metal cans, plastic bottles, and glass bottles.
Porter 5 Forces Analysis

1. Threat of new Entrants

1. Companies have a door to door distribution channel in place, which is a costly logistic
policy
2. Switching cost are low for consumer who risk very little by trying new brands or
beverages.
3. Although manufacturing cost for Concentrate producers (CPs) are relatively low,
barriers to entry are relatively high because large advertising budgets and competitive
brand loyalty to big players like Coca-Cola and Pepsi.

2. The Bargaining Power of Suppliers

1. Concentrate producers (CPs) negotiate directly to bottlers’ major suppliers such as

sweetener and packaging suppliers to encourage reliable supply, faster delivery and
lower prices.
2. Metal cans make up the majority of the bottlers’ packaged product (60%) followed by
plastic bottles (38%) and glass bottle (2%). Both Coca-Cola and Pepsi are among the
metal can industry’s largest customers and maintain relationships with more than one
supplier. This giving these suppliers less bargaining power due to the availability of
alternative suppliers.

3. The Bargaining Power of Buyers

1. Bottlers own a manufacturing and sales operation in an exclusive geographic territory

with rights granted by the franchiser, which could be terminated only in the event of
default by the bottlers.
2. The ‘1980 Soft Drink Interbrand Competition Act’ preserved the right of CPs to grant
exclusive territories to their bottlers, giving less bargaining power to bottler’s buyers
because there will be no alternative supplier in that area anymore.
3. Bottlers are allowed to handle the non-cola brands of other brands of other CPs. If CP
sees the other not as direct competitor.
4. Bottlers have to accept into contracts that grant CPs the right to set prices and other
terms of sale.
 5. Competition for brand shelf space in retail channels gives some bargaining power
back to buyers.

4. Threat of Substitutes Products

1. Consumers have propensity to substitute to non CSD products due to health issues,
2. Most of the substitutes are free, or much less costly per ml than CSDs.

5. Rivalry among Established Companies

1. Industry is largely consolidated with two major players and a few smaller competitors
such as Cadbury Schweppes, this lead the companies interdependent.
2. International demand for carbonated soft drink is growing, but domestic demand is
slowing down.
3. Exit barriers are high for bottlers with expansive equipment, moderate for concentrate
producers.
4. Advertising budgets are high, customers are influenced by brand perceptions.

Force Level
Rivalry among Established Companies Very High
Bargaining Power of Buyers Low
Threat of New Entrants Low
Threat of Substitute Products Moderate
Bargaining Power of Suppliers Moderate

History of Coca-Cola and Pepsi

Coca-cola was formulated in 1886 by pharmacist John Pemberton in Atlanta, Georgia.

It was sold firstly as drug as a ‘potion for mental and physical disorders. In 1891, Asa
Candler acquired the formula, establish sales force team, and began brand advertising of
Coca-Cola. The formula of Coca-Cola syrup known as ‘Merchandise 7X’ remained a well-
protected secret that the company kept under guard in Atlanta Bank vault. Coca-Cola first
bottling franchise was in 1899 for a nominal one dollar. The company network grew quickly,
by 1910 the franchises reaching 370. This rapid growing has some consequences, one of the
most important issue is imitations and counterfeit product. In 1916 alone there were 153
imitations of Coca-Cola. In response imitation Coke introduced and patented a 6,5-oz bottle
whose unique ‘skirt’ design subsequently became an American icon.
 In 1919, Candler sold the company to a group of investors and went it public that
year. Four years later in 1923, Robert Woodruff began his long tenure as leader of the
company. Woodruff pushed franchise bottlers to place in ‘arm’s reach of desire’ by any all
means. As a result of Woodruff policy, during 1920s and 1930s coke pioneered open-top
coolers for use in grocery stores and other channels, developed automatic fountain dispensers,
and introduced vending machines. Woodruff also initiated ‘lifestyle’ advertising for Coca-
Cola, emphasizing the role that Coke played in a consumer’s life.

International business was developed by Woodruff well, during the WW II, at the
request General Eisenhower, Coca-Cola was sold for only five cents for every man in
uniform and whatever company cost, government would pay. As a result, Eisenhower
request, in 1942 Coke won exemptions from wartime sugar rationing for production
beverages.

Pepsi-Cola was invented in 1893 in New Bern, North Carolina, by pharmacist Caleb
Bradham. Pepsi also adopted a franchise bottling system, and by 2010 it had built a network
of 270 bottlers. Pepsi has experience bankruptcy twice in 1923 and 1932, but Pepsi struggled.
During great depression, Pepsi lowered the price of its 12-oz bottle to a nickel (the price was
same with Coke’s 6,5-oz price). In the years followed, Pepsi built a marketing strategy
around the theme of its famous radio jingle ‘twice as much for a nickel too’

Cola Wars: Coca-Cola vs Pepsi

The wars were started since the presence these two giant’s business escalations. In
1938, coke filed suit against Pepsi, claiming that the Pepsi-Cola brand was infringement on
the Coca-Cola trademark, but in 1941 a court ruling in Pepsi’s favor ended a series of suits
and countersuits between the two companies. During this period, Pepsi expand its bottling
network, it had relied on small local bottlers that competed with wealthy, established coke
franchisees.

In 1950’s Alfred Steele became CEO of Pepsi. Steele was a former coke marketing
executive then he made ‘Beat Coke’ as his motto and encouraged bottlers to focus on take-
home sales through supermarkets.

In 1960’s era (1960-1973) under leadership of CEO Donald Kendall, Pepsi launched
its ‘Pepsi Generation’ marketing campaign which targeted the young at heart. At the same
decade Coke diversifies offering to market, Coke launched Fanta (1960), Sprite (1961), and
low-calorie cola Tab (1963), meanwhile Pepsi launch Teem (1960), Mountain Dew (1964),
and Diet Pepsi (1964). Both companies introduce non-returnable bottles and 12-oz metal
cans. They also diversified into non-CSD industries, Coke purchased Minute Maid (fruit
juice), Duncan Foods (coffee, tea, and hot chocolate), and Belmont Springs Water. Pepsi in
1965 merged with snack-food giant Frito-Lay to form PepsiCo.

The wars really began in 1974, when Pepsi launched ‘Pepsi Challenge’ in Dallas,
Texas where Coke was the dominant brand in the city. Pepsi conducted blind test to
demonstrated the customer actually preferred to coke. The challenge was successful and
Pepsi rolled out the campaign nationwide.

As a response to Pepsi attack, coke countered with rebates, retail price cuts, and series
of advertisement. Coke also renegotiated bottling contract to obtain greater flexibility in
pricing concentrate and syrups. Nonetheless, Pepsi challenge successfully eroded coke
market share, in 1979 Pepsi opening up 1,4 share-point lead.

In 1980, Coke switched from using sugar to using high-fructose corn syrup, a lower-
price alternative the followed by Pepsi three years later. Coke also intensified its marketing
effort by doubling its advertising spending between 1981-1984. Pepsi response Coke strategy
by doubling its advertising spending.

Diet Coke introduced in 1982 make coke break the tradition and make it as the most
successful consumer product launch in the eighties. Attack to Pepsi continued to April 1985,
coke announced that it had change the-99 years-old Coca Cola formula, unfortunately it made
depreciation value of the Coca-Cola trademark, new coke mimicked Pepsi in taste. Six-month
later Coca-Cola classic marketed back.

During 1980, new CSD brands proliferated. Coke introduce 11 new products and
Pepsi introduce 13 products. The number of packaging types and sizes also increased
dramatically, and battle in retail channels became fierce.

In the late 1990s, soft drink industry encountered new challenges that suggested a
possible long-term shift in the marketplace. In 2005, New Federal Nutrition guidelines
identified regular CSDs as the largest source obesity-causing in the American diets. There
was shift in consumption pattern evolved around the growing linkage between CSDs and
health issues such as obesity and nutrition. Coke and Pepsi response this issue by promoting
their low-calorie beverages. Wars in retail channel began more significant in this decade,
Coke wins Subway account, retains exclusive deals with Burger King and McDonalds.
Meanwhile Pepsi supplies all Taco Bell, KFC and most Pizza Hut.

Market Declining in 21 Century

In the 1990s, the market began to saturate with CSD besides the spread of health
issues also reduced interest in CSD. And the rules to ban the sale of Cola in schools and
several countries have begun to apply soda tax. As a result, both Coke and Pepsi started using
Stevia as a natural sweetener with zero calorie content in 2005. Both are also aggressive in
non-CSD products.

After the health issue, an environmental issue arose regarding the use of plastic bottles
which has an impact on the decline in sales of all plastic beverage packaging products in the
US. This led Coke to finally focus on the international market (especially in China and India)
and achieve success by achieving sales 80%. Pepsi also followed this step to enter the
international market but the scale is still small.

Coke and Pepsi Response to Declining CSDs Consumption

In face of dwindling CSD sales, coke and Pepsi tried to stem by enticing consumers
with stepped-up innovation and marketing. Coke placed a greater emphasis on promoting its
brands, such as spending $230 million in advertising for its flagship Coca-Cola drink,
spending on sponsorships and global marketing, including $600 million for the World Cup in
2010. Meanwhile, Pepsi redesigned its logo in 2008 with a three-year rebranding plan that
cost over $1 billion. Pepsi focused on promoting the company’s overall portfolio as a snack
and beverages company.

Operating Income: Concentrates vs Bottlers

The development of non CSD is not followed by developments in the bottler unit,
because the concentrate company can directly send it to retailers. Retail companies and clubs
develop into the threat of pricing. Non CSD is sold in a relatively low volume, which leads to
an increase in the use of split pallets, which then raises protests.

Why do Coke and Pepsi buy their bottlers?

 Both coke and Pepsi bought their bottlers due to consolidate their operations under
one roof, furthermore by owning bottlers company this may lead to more efficient and
controlled production.