Cola Wars Continue : Coke and Pepsi in the Twenty-First Century

Sindikat 1
Rizal Abdullah Nur Fadly Sudirman Mars Ega LP Rohimat Efendi

Economics of the U.S. CSD Industry

Background Americans consumed 23 gallons of CSD annually in 1970 and grew by an avg 3% per year over next 30 years, this growth was fueled by increasing availability as well as by the introduction and popularity of CSDs Through the mid 1990s the real price of CSDs fell, consumer demand appeared responsive to declining prices cause many alternatives to CSDs existed, including beer, milk, coffee, bottled water, juices, tea, powdered drinks, wine, etc 60-70% of Americans drank was Soda

Production and Distribution of CSDs

Concentrate Producers Bottlers Retail Channels Suppliers to Concentrate Producers and Bottlers

Concentrate Producers
Blended raw materials ingredients (excluding sugar or high fructose corn syrup), packaged it, and shipped the blended ingredients to the bottler. The process involved little capital investment in machinery, overhead, or labor. Manufacturing cost approximately $25 million to $50 million to build. Most significant costs were for advertising, promotion, market research, and bottler relations.
CSD Brands Coke Classic Pepsi-Cola 7up Dr Pepper Share of Market 2000 1999 20.4 20.3 13.6 13.8 2 2.1 6.3 3.6 Advertisement spending 2000 1999 per 2000 share point 207.3 148.9 10.2 130 91.1 9.6 44.5 39.2 22.3 83.6 71.3 13.3
*$ millions

U.S Market Share

Though Coca-Cola and Pepsi are intense rivals, their aim has never been to put the other out of business. In fact, the two firms growth was not at the expense of each other, but rather the smaller players in the market (Smart Competition)

Bottlers
Purchased concentrate, added carbonated water and high fructose corn syrup, bottled or canned the CSD, and deliver it to customer accounts. Coke and Pepsi bottlers offered direct store door (DSD) delivery for physically placing and managing the CSD brand in the store. The importance of the bottlers relationship with the retail trade was crucial to continual brand. Bottlers gross profits often exceeded 40%, but operating margins were razor thin.

Bottlers
The number of U.S soft drink bottlers had fallen from over 2000 in 1970 to less than 300 in 2000. Coca Cola first to build nation-wide franchised bottling networks, owned a manufacturing and sales operation in an exclusive geographic territory. Different franchise contract system between Coca Cola and Pepsi (when price changes) Agreements allowed bottlers to handle the non-cola brands of other concentrate producers, also allowed to choose whether or not to market new beverages introduced by the CPs.
CSD Brands Net Sales Cost of Sales Gross Profit Concentrate Producer Bottler Dollars per case Percent of sales Dollars per case Percent of sales 0.71 100 5.8 100 0.12 17 3.77 65 0.59 83 2.03 35

Retail Channels
In 2000, the distribution of CSDs in the United States :
U.S CSD Retail Outlets, 2000 Percent of Industry Volume Share of Channel Coca Cola Pepsi Cola Other Brands Bottling Profitability Per Case Net Price NOPBT Food Stores Fountain Outlets Vending Machines Convenience Stores Other Outlets 34.8% 23.1% 13.5% 8.5% 20.1% 35% 32% 32% 3.53 0.23 36% 42% 23% 5.35 0.69 65% 21% 14% 3.18 0.09 50% 40% 10% 8.48 0.97 36% 33% 31% 3.42 0.33

The main distribution channel for soft drinks was the supermarket CPs offered bottlers rebates to encourage them to purchase and install vending machines.

Suppliers to CPs and Bottlers

CPs required : the concentrate for regular colas consisted of caramel coloring, phosphoric and citric acid, natural flavors, and caffeine. Bottlers purchased two major inputs : Packaging (cans, plastic bottles, glass) and sweeteners (sugar and high fructose corn syrup) The Majority of U.S. CSDs were packaged in metal cans (60%), plastic bottles (38%), and glass bottles (2%).

The Evolution of the U.S Soft Drink Industry Early History

Coca Cola was formulated in 1886 by John Pemberton, A pharmacist in Atlanta, Georgia. Asa Candler acquired the Formula, established a sales force, and began brand advertising of Coca Cola. First bottling franchise in 1899 for nominal one dollar. Reaching 370 franchisees by 1910. Robert Woodruff, CEO in 1923 began working with franchised bottlers to make Coke available wherever and whenever a consumer might want it. Also pioneered open-top coolers to storekeepers, developed automatic fountain dispensers, and introduced vending machines and also initiated lifestyle advertising for Coca-Cola. 1942, develop Cokes international business. Was destined for the military or retailers serving soldiers. Coca Cola bottling plants followed the movements of American troops; 64 bottling plants were set up during the war-largely at government expense.

Coca Cola Early History

Pepsi Cola Early History

Pepsi Cola was invented in 1893 in New Bern, North Carolina by pharmacist Caleb bradham Pepsi adopted a franchise bottling system, and by 1910 it had built a network of 270 franchised bottlers

The Cola Wars Begin

1950, Alfred Steele, a former Coca-cola marketing executive became Pepsi CEO. He made Beat Coke his theme and encouraged bottlers to focus on take-home sales through supermarkets. 1963, CEO Pepsi, Donald Kendall launched its Pepsi Generation campaign that targeted the young and young at heart. 1970, Pepsis franchise bottlers were generally larger compared to Coke bottlers, increased the concentrate price to equal that of Coke. Coca Cola and Pepsi began to experiment with new cola and non-cola flavors and a variety of packaging options in the 1960s. Coke : Fanta (1960), Sprite (1961), low-calorie Tab (1963) Pepsi : Teem (1960), Mountain Dew (1964), Diet Pepsi (1964) They also diversified into non-soft-drink industries : Coke purchased Minute Maid (fruit juice), Duncan Foods (coffee,tea), Belmont Springs Water. Pepsi merged with snack food giant Frito-lay in 1965 to become PepsiCo.

The Pepsi Challenge

1974 Pepsi launched the Pepsi Challenge in Dallas, Texas. Blind Taste Tests Fact : Consumers in fact preferred Pepsi to Coke Coke countered with rebates, rival claims, retail price cuts, and a series of advertisements questioning the tests validity. 1979 Pepsi passed Coke in food store sales for the first time with a 1.4 share point lead. Coke renegotiating its franchise bottling contract to obtain greater flexibility in pricing concentrate and syrups

Cola Wars Heat Up

1980 Coke switched from sugar to the lower-priced high fructose corn syrup, intensified its marketing effort, increasing advertising spending from $US 74 mio to 181 mio between 1981-1984 Diet Coke was introduced in 1982 as the first extension of the Coke brand name. Praised as the most successful consumer product launch of the Eighties. -> Third largest selling soft drink in the US April 1985, Coke announced the change of its 99 year-old Coca Cola formula. New CSD Brands proliferated in the 1980s, Coke introduced 11 new products and Pepsi introduced 13 products. 1980s