Cola Wars Continue

Coke vs Pepsi in 2010

Submitted by: Dinesh MR (13141)
Submitted to: Prof. NR Govinda Sharma



Case Description
Carbonated soft drinks (CSDs) are popular drinks constituting very attractive and profitable
business for more than a century. This business is capital intensive and was and still dominated
for long period by few giants who had patent rights and who gained very high brand recognition
over the years. The competition between Coca Cola and Pepsi was very aggressive and caused
the industry profitability to fluctuate up and down. The rivalry in this industry was fatal for small
concentrate producers as well as small bottlers and lead to merging and acquisitions that left the
industry controlled by big players of huge firms. Since the year 2000, the industry is facing a big
challenge with the increase in the popularity of the non-CSD drinks especially with the multiple
warnings issued by the health organizations against the carbonated soft drinks.
With huge market size in US and worldwide, with few giants existing in the market for more
than a century mainly Coca and Pepsi controlled more than 70% total of market share and
constituted a duopoly market in this industry, with low product price, with perfect setup of the
business, with vertical integration pattern and with the huge marketing campaigns that created
strong brand names with high customer loyalty.


















Analysis through Porters Five Forces Model



Barriers to Entry
Barriers to entering the CSD industry began almost as soon as the industry itself, as courts
barred imitations and counterfeit versions of Coca-Cola such as Coca-Kola, Koca-Nola, and
Cold-Cola, under trademark infringement. In 1916, courts barred 153 of these imitations,
demonstrating the prevalence of the desire to enter the CSD industry, as well as the extreme
difficulty to do so. This barrier to entry allowed Coca-Cola to dominate and almost single-
handedly develop the CSD industry, and almost excluded Pepsi-Cola from the industry, until
Pepsi-Cola won the 1941 trademark infringement suit that Coca-Cola had filed against it.
The second significant barrier to entry was brand loyalty, created largely by Robert Woodruff
who began leading Coca-Cola in 1923. Woodruffs goal was to place a Coke in arms reach of
desire, so he pushed for new channels through which to make Coke available, including open-


top coolers in grocery stores, automatic fountain dispensers, and vending machines. Woodruff
coupled this mass availability of Coke with an advertising campaign that emphasized the role of
Coke in a consumers life, the combination of which developed brand loyalty through increasing
both the availability of and the desire for Coke. Woodruff further developed brand loyalty,
increasing the barrier to entering the CSD industry, through associating Coke with the United
States military during World War II, promising that every man in uniform gets a bottle of Coca-
Cola for five cents wherever he is and whatever it costs the company.
The third significant historical barrier to entering the CSD industry was the successful vertical
integration of nationwide franchise bottling networks of Coca-Cola and Pepsi-Cola, beginning in
1980. Coca-Cola recognized that most of the family-owned bottlers that it used no longer had
the resources to remain competitive in the industry and began buying up the poorly-managed
bottlers, reinvigorating them with capital, and selling them to better-performing bottlers. In 1985
Coca-Cola bought two of its largest bottlers for $2.4 billion and in 1986 created an independent
bottling subsidiary called Coca-Cola Enterprises, which allowed the company to consolidate its
territories into larger geographic regions, placed it in a better position to negotiation with
suppliers and retailers, and merged redundancy. In the late 1980s, Pepsi-Cola followed Coca-
Colas lead, first attempting to operate its bottlers for a decade before shifting to a bottling
subsidiary, Pepsi Bottling Group, which went public in 1999. By 2009 Coca-Cola Enterprises
handled about 75% of Coca-Colas North American bottle and can volume and Pepsi Bottling
Group produced 56% of PepsiCos total volume. Further, this vertical integration created the
additional barrier to entry of increased dependence on the Pepsi and Coke bottling networks for
product distribution. Franchise agreements since 1987 had allowed bottlers to handle non-
competing brands of other concentrate producers, but this consolidation of bottling networks
limited the flexibility of bottlers to handle alternative brands, and thus heightened the barriers to
entering the CSD industry.
The final barrier to entry was economies of scale. Large bottling and canning production
facilities can cost hundreds of millions of dollars, so the established production lines of major
brands like Coca-Cola and PepsiCo allowed them to continuously introduce new products within
their brands, as well as new container types in which to sell them. In the 1980s Coke introduced
11 new products including Caffeine-Free Coke in 1983 and Cherry Coke two years later and
Pepsi followed suit and introduced 13 new products during the same period.


Buyer Power
The buyers in the CSD industry are the various retail outlets for CSDs, including supermarkets,
fountain outlets, vending machines, mass merchandisers, convenience stores, gas stations, and
other outlets. Overall, there is a moderate amount of buyer power in this industry, because the
buyers have significant power because they determine the shelf space and visibility of the
industrys products, but their power is also limited by the significant sales of CSDs of $12 billion
annually, or about 4% of total store sales in the U.S. Buyer power is also limited by the fact that
CSDs are a big traffic draw for many of these outlets


Supplier Power
Supplier power is low for this industry because the factors of production for both the concentrate
aspect of the industry and the bottling aspect of the industry are basic commodities like caramel
coloring, natural flavors, and caffeine for concentrate and packaging and sweeteners for bottling,
none of which require specialized suppliers. Further, Coke and Pepsi are among the metal can
industrys largest customers, and it is often the case that two or three can manufacturers compete
for a single contract with the companies, giving Coke and Pepsi a large advantage, and therefore
creating a situation of low supplier power. This lowers expenses and therefore increases profits
for CSD producers.
Substitutes
Historically, the threat of substitutes to the CSD industry has been low to moderate. There are
many substitutes, including alcoholic beverages, coffee and tea, sports drinks, and several other
beverages, as well as non-cola CSDs such as lemon/lime and root beer, but the availability and
variety of CSDs make the CSD industry nearly impervious to this threat. Since 1970, beer and
milk have both remained around 20 to 25 gallons per capita, coffee has significantly declined in
per capita consumption, from 35.7 gallons in 1970 to 15.8 gallons in 2009, and tap
water/hybrids/all others has decreased from 68 gallons per capita in 1970 to 31.8 in 2009.
Contrarily, the U.S. consumption of CSDs in gallons per capita has increased steadily from 22.7
in 1970 to 53 in 2000, and has only trended slightly downward since, dropping to 46 gallons per
capita in 2009. The percentage of CSD consumption as a share of total beverage consumption
has followed a similar trend, beginning at 12.4% in 1970 and peaking at 29% in 2000, and has


also only dipped slightly to 25.2% in 2009. This data suggests that even though several
alternative beverage options exist, consumers do not view them as substitutes to CSDs, lessening
the threat of substitutes and allowing the industry to remain profitable. Finally, the threat of
substitutes is low because the CSD industry has already introduced several products, such as diet
versions and flavor variations of classic products, creating its own substitutes for those classic
products and absorbing the subsequent profits.
Rivals
Rivalry is extremely high in the CSD industry and has been a contributing factor to the
profitability of the industry. The two primary CSD companies, Coke and Pepsi, have been
engaged in cola wars for over a century, which has led to innovation in the industry ranging
from new lines of products and vertical integration to marketing campaigns and novel packaging.
Additionally, several rivals exist beyond Coke and Pepsi, including Dr. Pepper Snapple Group,
which has seen a significant increase in U.S. soft drink market share by volume, from 11% in
1970 to 16.4% in 2009, as well as emerging private labels and generic labels, specifically at
discount retailer locations such as Wal-Mart and Target. High rivalry has driven innovation and
led to the historical profitability of the CSD industry.

ECONOMICS OF THE CONCENTRATE BUSINESS VS BOTTLING BUSINESS






IMPACT ON THE INDUSTRY PROFITS:
Although the competition between Coke and Pepsi had started since the very early years of the
20th century; it became intense by the year 1950 and reached its peak to become a real war by
the year 1980. Coke was the leader in the market with considerable market share much higher
than Pepsi, so Pepsi was the leader of the competition with little response from Coke at the
beginning. This war had affected the industry profits for both concentrator producers and bottlers
while the effect of bottlers was much higher. The concentrate producers were always able to
increase their profits by increasing the concentrate price while the bottlers especially the small
size had to suffer from the war dramatically by decreasing their profits. The war forced bottlers
to increasing their advertising and packaging proliferation, giving discounts for shelf space,
injecting high capital for adaptation of plants with new products.
The move and counter move relationship between Coke and Pepsi compelled each company to
take steps to remain competitive. Following Pepsis entrance into the fast food industry with the
Taco Bell, KFC, and Pizza Hut acquisition, Coca-Cola managed to convince market competitors
such as Burger King to switch to their product. Coke retention of Burger King and McDonalds
would be significant since each represented tremendous sales accounts. This battle over the
control of retail channels directly contributed to profit margins in the bottling industry and
spurred each company to take appropriate steps to not only retain market share but expand, as
demonstrated by Quiznos and Subways switch to Pepsi and Coke, respectively. The growth and
expansion put a squeeze on other smaller concentrate producers and the profits of the industry
can be characterized by the shuffling of brands. While profits were increasing, other brands
were pushed aside. Phillip Morris entered the market in 1978 with the acquisition of Seven-Up
only to incur substantial losses and eventually leave the industry in 1985. Furthermore, as both
companies sought to acquire market share and revenue, the rivalry induced a greater degree of
innovative practices to branch out in the market, create lower prices, and packaging. In addition
to its flagship cola brand, Coca-Cola added Fanta (1960), Sprite (1961), and Tab (1964). Pepsi,
quickly responding, developed Teem (1960), Mountain Dew, and Diet Pepsi (1964). Perhaps the
most influential of these additions was Diet Coke (1982) the nations third largest CSD. The
flood of new brands took up shelf space and made entrance by other competitors very difficult.


The industry was monopolized by two companies. The new flavor introductions were
accompanied non-returnable glass bottles and 12-ounce metal cans. In addition, both Pepsi and
Coca-Cola would also try their hand in the non-CSD market. Product innovation, though, was
closely followed by changes within the relationships between bottlers and concentrate producers.
Coke, in response to eroding market share and successful Pepsi marketing campaign (Pepsi
Challenge), began restructuring contracts with bottlers to obtain greater flexibility in pricing
concentrate and syrups. Finally, as the cola wars truly began to increase in competitiveness,
Coca-Cola in 1980 found a lower priced substitute for sugar in high fructose corn syrup. A move
emulated by Pepsi, both of these companies would reap benefits from the shift in ingredients.
Again, the unsubtle shifts in each of these corporations strategies were in direct response to each
other and in the process, made both innovative and in some cases as a result, more efficient.

RECOMMENDATIONS:
1. Integrate horizontally by diversifying their offering portfolio into non-CSD products. This can
be done either by acquisition, merging or by internal inventions

2. Large Investment on R&D to developing their CSD products to meet the healthy requirements
issued by the health organizations and to eliminate or at least reduce the bad side effects of these
products

3. Give more attention to overseas huge markets in Asia and Africa emerging economies like
India and China where per-capita consumption is still very small comparing to US market

4. Build on their global high brand recognition, low rivalry force and their high economics of
scale to gain huge market share of the non-CSDs consumers as they already did with the CSDs
consumers base.

5. Investing more on marketing campaigns and on social activities to acknowledge consumers by
their new healthier products of both CSDs and non-CSD



6. CPs has to Helping bottlers to achieve higher profit margins by reducing their concentrate
prices and inject capital investment to modernize the bottlers plants, to adapting the new product
lines or CPs have to continue the strategy they started by integrating vertically into bottling.
Despite diminishing demand for CSDs, there is no doubt that Coke and Pepsi can sustain their
profits if they respond appropriately to the challenges disrupting their industry. The barriers to
entry in the beverage industry remain high, reducing the likelihood that a rival firm could easily
upset the industrys duopolistic structure. Though consumer preferences have shifted, Coke and
Pepsi have advantages over potential rivals that put them in the best position to adjust to the
changes. Their brand equity, established infrastructures, economies of scale, and relationships
with suppliers and distributors will allow them to maintain dominance. To continue to be as
profitable as they have been historically, Coke and Pepsi must enter emerging markets, bolster
consumption of CSDs in existing international markets, and continue to introduce increasingly
popular non-CSDs domestically.
Coke and Pepsi must continue to reduce their dependence on the domestic market by expanding
into new markets in Asia and Eastern Europe. The firms should take advantage of lowered trade
barriers and use their marketing prowess to establish footholds in these regions as early as
possible. Coke, which already has a strong international presence, has an early advantage in
these markets because during World War II, the United States government helped to set up 64
bottling plants overseas to supply American soldiers with Coca-Cola. Because Coke already has
established facilities and potential consumers with knowledge of the brand in some European
and Asian countries, the entrance into nearby emerging markets is eased. Coke can test the
waters in these markets by shipping product from existing factories before expending the capital
to build new bottling plants in these countries. Pepsi currently derives nearly 50% of its sales
from the domestic market. It will have to be particularly focused on its overseas development
given the flattening of domestic demand. Pepsi should start to strengthen the value of the brand
abroad with marketing efforts like the sponsorship of important local events.
China and India warrant particular attention from both companies because of their growing
middle classes. Coke and Pepsi should focus on introducing both existing products and new
products tailored to the specific preferences of consumers in each area. In China, for example,
Coke has introduced Sprite Tea while Pepsi has developed products using Chinese herbs to
appeal to local taste. In addition, the retail value of juice in China is expected to grow 94% over


the next year. This can be an opportunity for both companies to establish themselves as leading
tea producers in the country, a form of diversification that can help them to weather the changes
in the domestic market.
Efforts should also be made to increase consumption of CSDs in countries where Coke and Pepsi
already sell their products. The marketing campaigns that drove the extraordinary success of the
companies domestically can be adjusted and replicated in new markets that have not been as
affected by rising health concerns that have disrupted the U.S. market. Some of Pepsis top
international CSD markets are Asia, Middle East, and Africa. A campaign tailored to the people
of these regions that focuses on CSD products as lifestyle enhancements as Coca-Colas early
U.S. advertising did, could increase international CSD consumption to offset some of the
domestic decrease in consumption.
In North American markets where demand for CSDs has flattened, there has been a
corresponding increase in the consumption of other types of beverages. Sports drinks, ready-to-
drink teas, and energy drinks have become more popular over the past decade while the
consumption of CSDs has decreased. Coke and Pepsi should continue to introduce non-CSD
products and shift their marketing campaigns to focus on their companies as beverage producers
rather than as makers of carbonated products. This should not be a challenge for either company.
Both firms are known for their product innovation, a factor which allowed them to garner and
maintain profitability despite shifts in consumer preferences away from their flagship products
and toward non-colas and diet CSDs in the 1960s. Both Coke and Pepsi are already leading
producers of several of the non-CSD megabrands including the three highest volume non-
CSDs Gatorade, Aquafina, and Dasani. The acquisition of other firms has been central to the
non-CSD diversification of both brands. Coke and Pepsi should continue to acquire potential
rivals before they have the scale and brand power to be true threats.
In addition to the growth in the consumption of non-CSD products, there has been a substantial
increase in consumption of diet CSDs. In 1999, diet sodas made up about 24% of the CSD
market. A decade later, these drinks captured nearly 30% of the market. The successful launch
of Coca-Cola Zero, which has experienced continued growth since its introduction in 2005, also
suggests that the diet market has not been expended. Coke and Pepsi can maintain some of their
profitability by introducing more diet CSD brands to remain in line with consumer trends.


Overall, despite the flattening of domestic demand for CSDs and the growing popularity of non-
CSDs, Coke and Pepsi will be able to maintain their profits by focusing on their international
markets and expansion and by continuing to develop new products tailored to consumer
preferences and aligned with contemporary trends.