SUMMARY

This case examines the industry structure and competitive strategy of Coca-Cola and Pepsi over 100 years of rivalry. New challenges in 2006 include boosting flagging carbonated soft drink (CSD) sales and finding new revenue streams. Both firms also began to modify their bottling, pricing, and brand strategies. They looked to emerging international markets to fuel growth and broaden their portfolios of alternate beverages like tea, juice, sports drinks, energy drinks, and bottled water. Coca-Cola and Pepsi-Cola had vied for the "throat share" of the world's beverage market. The most intense battles of the cola wars were fought over the $66 billion CSD industry in the United States, where the average American consumes 52 gallons of CSD per year. In a "carefully waged competitive struggle," from 1975 to 1995, both Coke and Pepsi had achieved average annual growth of around 10%, as both U.S. and worldwide CSD consumption consistently raised. This cozy situation was threatened in the late 1990s, however, when U.S. CSD consumption declined slightly before reaching what appeared to be a plateau. Considers whether Coke's and Pepsi's era of sustained growth and profitability was coming to a close or whether this apparent slowdown was just another blip in the course of a century of enviable performance. During the 1980s, Coca-Cola and Pepsi Cola began an escalating campaign of mutually targeted television advertisements which became known as the Cola Wars. This summary is based on the findings with respect to the following key aspects: Carbonated soft drinks industry's structure, evaluation of driving change factors in this industry and finally analysis of key strategic factors it is faced with.

Value Chain Analysis

Analysis of the carbonated soft drink (CSD) industry shows that there are 2 important players i.e. Concentrate Producers and Bottlers. Focusing on the downstream of the supply chain it is to be pointed out that concentrate producers incur relatively low fixed costs with respect to production plant, staff, equipment and R&D as the concentrate is produced of a more than 100 years old formula and relatively cheap raw material (e.g. caffeine). Concentrate is shipped to bottlers which incurs relatively high fixed cost with respect to plant, equipment and staff and which add carbonated water and high fructose corn syrup to the concentrate, bottle or can, package and ship it to the respective retailer. Besides that CDS hold a big stake in the direct delivery of concentrate to diverse fountain accounts like McDonalds, Burger King, Pizza Hut, Taco Bell, Kentucky Fried Chicken etc Taking this cost intensive bottling business into consideration both Coca Cola and Pepsi founded their own bottler spin-offs which operate according to the so called Anchor Bottler Model or are linked to the respective CSD Company via Master Bottler Contracts. In both cases companies under this contract are not allowed to handle a direct competitive brand e.g. no possibility to bottle Pepsi and Cola at the same time. In 2000 Cokes bottling system was the most concentrated with its top 10 bottlers producing 94% of domestic volume followed by Pepsi with 85% and Schweppes with 71% of their respective franchisees.

Economics of the US CSD industry:

From the 1970s consumption of carbonated drinks grew by about 3% every year. This was because new diet flavors were introduced, lots of variety. Prices ad also decreased in real terms. Cola still remained the most popular although its sales reduced from 71% in 1990 to 60% in 2004. To make these drinks you require concentrate, sweetener and carbonated water. So the drinks go through the concentrate producers, bottlers, retail channels and suppliers before being purchased by the consumers.

Concentrate producers:
They blend all the raw materials and put them in plastic canisters to send to bottlers. Bottlers then add sugar or high fructose corn syrup themselves. This process required little capital investment, machinery, overhead or labor. Main costs arose from advertising, marketing, market research and bottler support. They invested in trademarks as well. They implemented and financed marketing campaigns with the bottlers however they usually took the lead. They also developed CDA with retailers such as wal mart so they would finance marketing in exchange for shelf space. With smaller regional accounts bottlers took the lead and agreed to pay a part of the promotional expenses. Concentrate producers normally have a large workforce to deal with bottlers and set standards, discuss operational improvements etc. They also negotiate with the suppliers of bottlers to achieve fast delivery, low prices, and reliability. The industry used to be fragmented but now coke and Pepsi have 74.8% of market share. Cadbury Schweppes and Cott Corporation follow.

Bottlers:
The bottling business was much less profitable than concentrate, particularly in the mid-1990s. Bottling profits improved somewhat in recent years, in part because the concentrate manufacturers could no longer squeeze the bottlers without disrupting their own distribution. Bottlers invested in bottling and caning lines, trucks, and warehouses and earned gross margins 40% and pretax profit of 9%. They purchase concentrate added carbonated water and high fructose corn syrup and then sent it off to retail stores etc. Coke and Pepsi bottlers offer direct store door delivery (DSD) so they deliver it to the retail store, secure shelf space, stack products, position it, set up displays etc. Private label offered warehouse-delivered product. Historically, bottling had been a very good business: Franchised bottling contracts were very generous to the bottler. Coke and Pepsi had given bottles franchises in perpetuity, allowed bottlers the final say on pricing and gave bottlers significant influence over whether to participate in local advertising campaigns promotions new packages and product introductions. In additions bottlers could carry allied brands as long as they did not compete with Coke or Pepsi brand

Retail Channels
For distributors, soft drinks were a large part of their business. Soft drinks drew customer traffic, and historically earned gross margins of 15%-20%. The major distributor of soft drinks was supermarkets, with 32.9% of volume. Mass merchandisers distributor retailers and warehouse clubs such as Wal-Mart and Sams Clubs were also a growing category.

Suppliers
Suppliers, which included packaging and sweetener companies, had virtually no power in the industry. Part of the reason was that even though the bottlers were purchasing from suppliers, Coke and Pepsi negotiated with suppliers on behalf of their bottlers, creating much more buying power than a fragmented bottling network could offer.

Question: Why has the carbonated soft drink (CSD) concentrate industry been so profitable for Coke and Pepsi for decades? Please, present an analysis of Industry Attractiveness (of the concentrate producers) based on the five forces.

Very few but dominant suppliers having a strong brand Smaller Brands have not such influence Less Bargaining power

Alternative beverages (Potential Entrants)

Alternatives are quite low-cost Shelf space is important and can be difficult for new entrants

Industry Competitors
Concentrate (Suppliers) Bottlers (Buyers)

Intensity of Rivalry among existing firms

Less cost of switching between Pepsi and Coke Only basis personal taste is

Mostly owned by Cola Companies

Not such threat of substitute

Other Beverages (Substitutes)

Only Few independent bottlers Less bargaining power

Question: Compare the economics of the concentrate business to that of the bottling business: Why is the profitability so different? (You can also perform a five forces analysis here). Concentrate business: Concentrate producers were dependent on the Pepsi and Coke bottling network to distribute their products. Starting and maintaining a concentrate manufacturing plant involved little capital investment in machinery, overhead, and labor. Significant costs were for advertising, promotion, market research, and bottler relations. Producers negotiated with bottlers major suppliers. One factory could server the entire United States Bottlers: Purchased concentrate, added carbonated water, added corn syrup, bottled it, and delivered it to customer accounts. Gross Profits were high but operating margins were razor thing. Bottlers handled merchandising. Bottlers could also work with other non-cola brands.

Question: Can companies affect the industry structure of their markets?