ECONOMIC ANALYSIS FOR

BUSINESS DECISIONS

Topic- Case Analysis on “Cola Wars Continue: Coke &

Pepsi in 2010

Individual Assignment-2
Submitted To
PROF. SAMIK SHOME

SUBMITED BY- APURV KOTHARI

ROLL NO- 201408
SECTION- D
INSTITUTE OF MANAGEMENT, NIRMA UNIVERSITY
DATE OF SUBMISSION – 15TH OCTOBER, 2020
 Executive Summary
The carbonated soft drinks Industry is a very popular beverage industry around the globe. Completion
between two major brand Coke and Pepsi have raised a situation of war without blood in a long
history affecting the profitability of everyone but most affected are bottlers. This industry was also
got affected by the increasing popularity of non-CSD product and concerning health issues. Here in
the report I have tried to explain the problem faced by the industry, with the help of defining the
production and distribution means and few other analyses based on the case “Cola War Continue:
Coke and Pepsi in 2010” for example the quest of alternative and comparison of profitability of
bottlers and concentrate producers etc. To sum up in end possible solution which might help the
industry to prevail and which I felt were relevant are mentioned.

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 Problem Statement
Both Coke and Pepsi are facing the same issue which is changing in consumer preferences leading to
a decline in the sales of CSD and emergence of non CSD product in the market. Also, after targeting
to the non CSD market they were not able to solve this situation due to high cost involve with their
supply chain., plus they failed to gain costumer’s loyalty. So the problem question is –
• How could Coke and Pepsi respond to these changes in the consumer preferences?
• How could Coke and Pepsi maintain profitability in both CSD and non CSD market ensuring
Sustainable growth and consumer loyalty?

Production and Distribution

Concentrate Producers
• Their job is to mix the raw material ingredients pack it in plastic canisters and then ship to
bottlers.
• Cost of concentrate manufacturing unit is about 25-50 million dollars.
• Product planning, market research and advertising programs are implemented by concentrate
producers

Bottlers
• Job of bottlers is to buy concentrate and add water and high fructose corn syrup to it bottled
the mixture together and deliver it to costumer account.
• Coke and Pepsi both have bottlers who provide direct store delivery.
• Cost of setting up a bottling unit is about 25-35 million Dollars.

Retail Channel
In 2009 distribution of CSD’s in U.S took place through-

Market Share
Market Share

35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
Supermarkets Founytain Vending Mass Convinient Others
outlet Machine Marchandise store and Gass
station

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 Analysis
Overview
• The main cola war was started between 1975 to 1990s over 74$ billion carbonated soft drink
(CSD) industry. At that time Coke and Pepsi 72 % of the market.
• The CSD industry maintained an average annual growth of about 10% in U.S and most
important segment was cola segment.
• Consumption of per capita of CSD started to decline from early 2000’s from 53 gallon to 46
gallon in 2009.
• This was because increased demand of non CSD beverages.

U.S Liquid consumption Trends (Gallon per Capita)

60

53 51.7
50 50.9
49.3
46.9 47.4 46
40 40.3
35.7 34.2
33
30
26.3 27.2 26.9 26.2
24.3 25
24 24.2
24
22.8
22.7 21.8
21.6 22.8
21.9
21.3 21.8
21.3 21.4 22
21.7 21.7
21.4 21.5
20 20.6 20.3 21
18.5
16.8 16.4 16 15.9 15.8
10

0
1970 1975 1981 1985 1990 1995 2000 2005 2007 2008 2009

CSD's Beer Coffee Milk

The above graph shows the declining trend of consumption of CSD’s

Profit of industry affected by this Cola war over the years-
This war is going on since early 20th century but it was very much affective by the year 1950 and
reached its peak in the year 1980. Initially coke was the leader of the market with very high market
share as compared to Pepsi. But soon Pepsi got a considerable market share and the cola war started,
this war affected the profit share of both concentrate producers and bottlers while bottlers suffered
the most. This was because bottlers were forced to increase their advertising and packaging
expenditure, investing huge capital to install new infrastructure for new products and giving discounts
for shelf space. But concentrate business didn’t affect much because they always managed to increase
price of concentrate. Some events in history which will help to understand the aspects which affected
the profit of the industry-
• 1950- Alfred Steele new CEO of Pepsi started a new “Beat Coke” campaign which majorly
targeted mass family consumption and focused on supermarket sales (take away sales) as a
result they gained some recognition in the market. Coke didn’t reply to this campaign.

• 1960- Both Coke and Pepsi launched their non-cola flavours in disposable plastic bottles plus
they also started targeting on the non CSD market through acquisition and merger by Coke

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 and Pepsi respectively. In this time period coke started looking towards international market
but Pepsi focused on US market only.

• 1963- Modernization was started both Pepsi and Coke significantly invested in their bottlers
plant to improve the production. Here Pepsi under its new CEO Donald Kendall also started
shifting their target to young-at-heart individuals and gained a considerable public interest.

• 1974- Pepsi stared a blind taste tests to prove Pepsi taste better then coke and was successful
in increasing its market share. Coke in response started serious counter advertisement and
retail price cut.

• 1980- Both Pepsi and Coke doubled their marketing expense in the period of 1980-1984. Also,
Coke under leadership of Roberto Goizueta stared the use of high fructose corn syrup instead
of sugar to decrease its retail price plus the introduced diet coke in mid-1982.

• 1985-Coke launched its new formula and made its 99 years old formula as secondary also
they launched 11 new products and many new packaging types with this move shelf space
started getting affected dramatically.

• 1990 and onwards- in early 1990 bottlers of Pepsi and coke started low price strategy in
supermarket to compete with other store brand who decreased their profitability during this
period they both also acquired many small concentrate and bottlers producers and made them
big. Coke started supplying to food chains such as Burger King and McDonald’s in response
Pepsi supplied to taco Bell, KFC and Pizza Huts.

Comparing the profitability of concentrate business and bottlers business-

Though both concentrate and bottlers business are interlinked very closely but still the have very
different profitability (as seen the table) for the following reasons-
Concentrate producers Bottlers
Dollars Percent of net Dollars per Case Percent of net
per Case sales sales
Net sales $0.98 100% $4.63 100%
Cost of goods sold $0.22 22% $2.67 58%
Gross profit $0.76 78% $1.97 42%
Direct marketing $0.21 21% $0.45 10%
expense
Selling& delivery $0.00 0% $0.85 18%
expense
General & admin $0.24 25% $0.31 6%
expense
Operating Income $0.30 32% $0.36 8%
From the above table we can conclude that the initial cost and cost of goods are not so high for
concentrate producers as compared to bottlers and hence operating income of concentrate is 32%
while bottlers are only 8%.

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 • Concentrate producers have a very high bargaining power over bottlers because of their highly
recognised brand and ownership of the patent unique formula, results in guaranteed profit for
them and less profit for bottlers.

• As bottlers don’t have any patent and their profitability is highly based on their contracts with
concentrate producers which prevent them from any intra brand rivalry and another main
reason for less profit margin for bottlers is that they are the direct suppliers to their costumer
with low bargaining power so, generally they are asked for discount for shelf spaces.

• Also, production cost for new CSD and non-CSD beverages is very low for concentrate
producers but line of expansion for bottlers is very costly this decreases the profitability for
bottlers and increases profit for concentrate producers.

The Quest of Alternative

Expanding their product mix both Pepsi and Coke launched many new products like diet soda was
launched by Coke which increased their market share to 30% from 24%. During this time both
intensified their efforts to use alternative sweeteners, they majorly focused to decrease calory level in
their drink to take a mark of a healthy CSD and in the aim of achieving this they launched their own
version of Stevia-based sweetener which was a zero calory sweetener and was approved by Food and
Drug Administration in 2008.
Despite some success with diet drinks, in 2009 the market share of CSD in non-alcoholic beverage
market dropped to 63% as compared to 81% in 2000 this was because bottled water share and non
carbs share was increased to 20% and 17% from 7% and 13% respectively.
Looking at the increasing market of bottled water both Pepsi and Coke came up with Aquafina and
Dasani respectively launched purified-water product that became the leading beverage brand at that
time. However, during the economic downturn in late 2000 the fastest growing bottled water industry
got a hit because cheaper alternative like private label water and tap water took their place.
Environmentalist also started protesting about the use of plastic, and this led to decrease in the market
share of Coke from 22%in 2004 to 15% in 2009 and for Pepsi also suffered negative operating profit
and its share was reduced to 11% as compared to 14% earlier.

Probable solutions
• They could diversify their portfolio into non-CSD products this can be done by more mergers
and acquisition of other brands.

• As Pepsi is more concentrated in us so both have to target international market like India and
China where per capita income is still very low.

• Investment on R&D should be increased for developing their CSD product as a healthy
product and try to reduce the side effect so that they can market their product in that aspect.

• Investing more on marketing campaigns to educate their consumer base about their healthier
product of both CSD and non-CSD category.

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• Concentrate producers and Bottlers should work together and concentrate producers should
help bottlers to achieve high profit margin by reducing their concentrate price and also help
them to modernize their plant by providing capital, to produce the new products launched by
the companies.

• Health education campaign should be used to market their non-CSD product plus
environmentally friendly packaging must be used to gain higher market share.

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