Introduction

Coca-cola was formulated in year 1886 by John Pemberton, a pharmacist in Atlanta, Georgia. He
first sold it at drug store soda fountains as a “portion for mental and physical disorder”.

Pepsi-Cola was formulated in year 1893 by pharmacist Caleb Bradham in New Bern, North
Carolina.

The main production and distribution for carbonated soft drink (CSD) involve four major
participants, concentrated producer, bottler, retail channel and supplier.

From the microeconomics theories, both industries of CSD, Coca-cola and pepsi act like the
dominant firm market. Besides Coca-cola and pepsi, there are other much smaller CSD
companies. For instance, Red Bull, National Beverage and much more.

http://softdrinkcolawar.blogspot.my/2012/12/csd-brand-ranking.html

Coke and Pepsi are two leading companies in the soft drink industry. They contend with each
other during decades. The Cola Wars are a campaign of mutually-targeted television
advertisements and marketing campaigns since the 1980s between soft drink manufacturers The
Coca-Cola Company and PepsiCo.

Historically, the soft drink industry has been so profitable. In this industry, competition is quite
cruel between rivalries since Coca-Cola and Pepsi are already powerful leaders in the industry. It
is basically a duopoly situation in soft drink field. The two companies share the whole market,
making them earn a huge profit even the industry itself is flattening.

QUESTION FOR CASE STUDY: The COLA War

1. How do the soft drink companies get away with charging as much as RM2 – RM3 per
serving for a product when the ‘healthy’ substitute (tap water) is often free?

Americans consumed 23 gallons of Carbonate Soft Drink (CSD) annually in 1970

and consumption grew by an average of 3% per year over the next 30 years. This growth
was fueled by increasing availability as well as by the introduction and popularity of diet
and flavored CSDs. Through the mid 1990s, the alternatives to CSDs existed, including
beer, milk, coffee, bottled water, juices, tea, powdered drinks, wine, sport drinks, distilled
spirits and tap water.

Americans still drank more soda than any other beverage. At 60% - 70% market
share, the cola segment of the CSD industry maintained its dominance throughout the
1990s, followed by lemon/lime, citrus, pepper, root beer, orange and other flavors.

Many substitutes such as Water, Coffee, and Fruit juice. Most of the substitutes
are free, or much less costly per ml than CSDs. Not always conveniently available. In
many cases, soft drinks are an impulse buy. Lifestyle choices such as Coke and Pepsi
have made their drinks represent a choice about how you live, not just how you quench
your thirst. “Addiction” (especially to Coke). Half the consumption of Coke is reportedly
consumed by people that drink an average of 8 cans per day. Americans drink more soft
drinks than any other beverage by a huge margin (Exhibit 1); and in some foreign
countries, drinking Coke or Pepsi is a status symbol
2. How can companies make so much money in the middle of a “war” What have been the
“the weapon of war”? How do Coke and Pepsi compete?

Two players, with a long history of interaction, dominate almost 75% of the
market. The terms are clear and well defined; both have carefully avoided downward
spiral seen in other competitive contexts. High degree of perceived differentiation.

“War” is measured one from the beginning: Prices on concentrate have not been
affected since the early 1970s (Exhibit 5). Competition is focused largely on Shelf space,
Lifestyle-based advertising and brand name, and Selective discounting on the
downstream products (not on the upstream product).

Opportunity for gaining advantage is very short-term. Both are capable of quickly
imitating each other on almost every dimension. Efforts to escalate are simply met by
imitation. ‘War’ is just to keep fizz and froth alive rather than to fight it out.

When diet coke surpassed pepsi to become the number 2 soda in America, it was
as if the cola wars had finally declared a winner. Coke was the Winner in extensive
bottling franchise and Brand name and then the pepsi had lost the cola war. It debatable
whether the brand was defeated or unwittingly surrendered by abandoning tried and true
advertising for generation. Next, the marketing tactics and its also unclear whether it will
stay down for long. But this much seems certain Pepsi clinked. Its flagship, the perennial
number 2 to brand coke, dropped to the number 3 slot as it was surpassed by diet coke.
As the result for the first time in two decades, pepsi coded the soft drink category’s two
leading share position to its legendary rival.

Competition between Coke and Pepsi has had the greatest affect on reducing
industry profits. This competition was base on different elements: price war (pricing
strategy), cost management, advertising and promotions. The cost management (vertical
integrations, consolidations and synergies), product differentiation and marketing have
become more important as growth slows and market share becomes the key determinant
of profitability. In foreign markets the product life cycle is in more of a growth trend
them advantage in this area is mainly due to its establishment strong branding and it is
now able to use this area of stable profitability.

They compete in CSD market. They use the company image with additional the
“healthy” choices. Beside that, they also focus on core products such as US Market with
Zero/Diet and Lite while in Global market with leverage Classic brand and access to
distribution overseas. Implementation in CSD market is the cost control measures in the
plants, process management, and consolidation. Ads aimed at re-capturing gender or
generational market share. Diet/Zero and other lower-calorie CSD products in EU and
Asia. They also to remove questionable ingredients from products sold in the US and
pursue high visibility sponsorships.

In non CSD market, they focus on sports and energy drinks, re-ignite/innovate
bottled water, engage the “green” consumer, control of production and distribution, and
healthy with convenient choices for busy lifestyles. Implementation in non CSD market
is health education campaign on non-CSD products, improve image with environmental-
friendly packaging, CSR reports and CSR transparency, market research in innovation on
product development opportunities, and access to distribution.

Once of the strongest weapons in Pepsi’s armory is the flexibility it has

empowered its people with. Every manager and salesperson has the authority to take
whatever step the pepsi feels will make consumer aware of the brand and increase its
consumption.

Flexibility is the weapon that cola fettered as it is by the need for approvals from
Atlanta for almost everything. In the past, this has shown up in its stubborn insistence on
junking the franchisee network it had acquired from Parle. In its dependence on its own
feedback mechanism over that of its bottlers and on its headquarters led approach.
3. Let’s look at four channels for the bottlers: super markets, convenience stores, vending
and fountain. Rank from one two four –from most profitable to least profitable.

Vending was the most profitable channel for the soft drink industry. Essentially
there were no buyers to bargain with at these locations, where Coke and Pepsi bottlers
could sell directly to consumers through machines owned by bottlers. Property owners
were paid a sales commission on Coke and Pepsi products sold through machines on their
property, so their incentives were properly aligned with those of the soft drink makers,
and prices remained high. The customer in this case was the consumer, who was
generally limited on thirst quenching alternatives.

The second profitable channel for soft drinks, however, was fountain sales.
Profitability at these locations was so abysmal for Coke and Pepsi that they considered
this channel “paid sampling.” This was because buyers at major fast food chains only
needed to stock the products of one manufacturer. So they could negotiate for optimal
pricing. Coke and pepsi are strongly motivated to get fountain account. In order to build
brand awareness. They don’t lower the price of concentrate. They simply give back
money to the fountain in the form of promotions. Coke and Pepsi found these channels
important, however, as an avenue to build brand recognition and loyalty, so they invested
in the fountain equipment and cups that were used to serve their products at these outlets.
As a result, while Coke and Pepsi gained only 5% margins, fast food chains made 75%
gross margin on fountain drinks.

The 3rd profitability is convenience stores and gas stations. If Mobil or Seven-
Eleven were to negotiate on behalf of its stations, it would be able to exert significant
buyer power in transactions with pepsi and coke. Apparently, though, this was not the
nature of the relationship between soft drink producers and this channel, where bottlers’
profits were relatively high, at $0.40 per case, in 1993. With this high profitability, it
seems likely that Coke and Pepsi bottlers negotiated directly with convenience store and
gas station owners.

Supermarkets, the principal customer for soft drink makers, were a highly
fragmented industry. The stores counted on soft drinks to generate consumer traffic, so
they needed Coke and Pepsi products. But due to their tremendous degree of
fragmentation (the biggest chain made up 6% of food retail sales, and the largest chains
controlled up to 25% of a region), these stores did not have much bargaining power.
Their only power was control over premium shelf space, which could be allocated to
Coke or Pepsi products. This power did give them some control over soft drink
profitability. Furthermore, consumers expected to pay less through this channel, so prices
were lower, resulting in somewhat lower profitability.

So the only buyers with dominant power were fast food outlets. Although these
outlets captured most of the soft drink profitability in their channel, they accounted for
less than 20% of total soft drink sales. Through other markets, however, the industry
enjoyed substantial profitability because of limited buyer power. New CPs would need to
overcome the tremendous marketing muscle and market presence of Coke, Pepsi, and a
few others, who had established brand names that were as much as a century old.
Through their DSD practices, these companies had intimate relationships with their retail
channels and would be able to defend their positions effectively through discounting or
other tactics. So, although the CP industry is not very capital intensive, other barriers
would prevent entry. Entering bottling, meanwhile, would require substantial capital
investment, which would deter entry. Further complicating entry into this market,
existing bottlers had exclusive territories in which to distribute their products. In
conclusion, an industry analysis by Porter’s Five Forces reveals that the soft drink
industry in 1994 was favorable for positive economic profitability, as evidenced in
companies’ financial outcomes.