International Strategic Management

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Madhupriya Dugar

Case Analysis of
Cola Wars Continue: Coke and Pepsi in 2006

Introduction:

The soft drink industry has been a profitable one in spite of the cola wars between the two largest
players. Several factors contribute to this profitability, and these factors also help to show why the
profitability of the concentrate production side of the industry has been so much greater than the
bottling side. Over the years the concentrate producers have experimented with different levels of
vertical integration, and although it has not necessarily been clear which have been more successful
historically, some decision criteria can be developed to help determine if and when complete vertical
integration is necessary.

The case is about the love-hate relationship between the two largest cola companies of America, as
they fight with each other for shares of a $66 billion industry, while also fighting with the industry to
increase and fuel growth for cola consumption. From 1975 to 1990 both companies achieved an average
annual growth of about 10%, while consumption grew in the U.S. and worldwide, but a turn of events in
the late 1990s threatened the companies with consumption of carbonated soft drinks (CSD) dropping
for a consecutive two years and worldwide shipments were also slowing. The decline is thought to be
from the consumers want for alternatives to CSDs like sports drinks, bottled water, juices, teas, etc.
The solution to this problem relies on both of the companies abilities to boost flagging domestic sales,
venture into emerging international markets, broaden their brand portfolio for new streams of revenue
and include non-carbonated beverages in their big plan.

Cola wars continued into the 21
st
century with new challenges:

Was their era of sustained growth and profitability coming to a close?
Could they boost flagging domestic CSD sales?
Would newly popular beverages provide them with new (and profitable) revenue streams?

History of Coca-Cola:

Coca-Cola was formulated in 1886 by pharmacist John Pemperton who sold the product at drug
stores as potion for mental and physical disorders.
In 1891, Asa Candler acquired the formula, established a sales force and began brand
advertising of Coca-Cola.
In its early years, the company was plagued by imitations and counterfeit problems.
The companys bottling network grew quickly, reaching 370 franchisees by 1910.
In 1919, went public under control of Robert Woodruff expanded and developed in national and
international markets.
During WWII with the high CSD consumption from the U.S soldiers Coca-Cola was very
successful.



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Madhupriya Dugar

History of Pepsi:

Pepsi was created in 1893 in North Carolina by Pharmacist Caleb Bradham.
By 1910 Pepsi had built a network of 270 bottlers.
Pepsi struggled and declared bankruptcy twice, once in 1923 and then in 1932.
During great depression it grew in popularity due to price decrease to a nickel.
In 1938, Coke sued Pepsi-Cola brand for infringement on Coca-Colas trademark.

Concentrate Business vs. Bottling Business:








Concentrate Producers
Blend raw material
ingredients
Packaged Mixture in plastic
canisters
Shipped to bottlers
Diet CSDs: Added artificial
sweeteners
Bottlers
Purchased Concentrate
Added carbonated water and
high fructose corn syrup
Bottled CSD product
Delivered to customers
accounts
Diet CSDs: Added sugar or
high-fructose corn syrup
Concentrate Producers
Little Capital Investment
Cost of $25 million - $50
million
One plant to serve US
Significant cost-advertising,
promotion, market research
and bottler support
Bottlers
Capital Intensive
High-speed production lines
Bottling costs $4 million to
$10 million
Capacity of $40 million
warehouse cost $75 million
Coke and Pepsi each require
100 plants
Pressure from Coke/Pepsi
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Madhupriya Dugar

Concentrate Business - Porter Five Forces:



Bottlers Business - Porter Five Forces:



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Pepsi's Distribution:

1) Exclusive contracts with franchise bottlers and independent distributors and retailers like Wal-Mart.
2) Agreements with its competitors like Unilever with Lipton, Starbucks for Frappuccino.

Coke's distribution:

1) Independent bottlers with exclusive contracts.
2) Coca- cola enterprises.

Moreover, PepsiCo has a number of products in the Food segment like potato chips, Quaker oatmeal
etc. as opposed to Coke which deals mainly in the Beverages, this provides PepsiCo more range and thus
a deeper penetration into the Markets.

SWOT Analysis:

Strengths:

Coke: High profile Global Brand Presence, Four of the top five leading brands, Broad-based bottling
strategy, 47% of total volume Sales in carbonates.

Pepsi: High profile global brand presence, world's 2nd best-selling soft-drink brand, constant product
innovation, aggressive marketing strategies using famous celebs, a broad portfolio of products.

Weaknesses:

Coke: Carbonates market is in decline, over-complexity of relationship with bottlers, the existing
distribution system is not so efficient for non-carbonates.

Pepsi: Carbonate market is in decline, Pepsi only targets young people.

Opportunities:

Coke: Soft drinks volumes in the Asia Pacific region forecast to increase by over 45, Brands like Minute
Maid Light and Minute Maid Premium Heart Wise are positioned well with the Health-
concerned market, Use distribution strengths in Eastern Europe and Latin America.

Pepsi: Increased consumer concerns with regards to drinking water, growth in healthier beverages,
growth in RTD tea and Asian beverages, growth in the functional drinks industry.

Threats:

Coke: Growing health-conscious society, PepsiCo's Gatorade, Aquafina and Tropicana are stronger
brands, boycott in the middle-east, earlier protest against Coke in India, negative publicity in western-
Europe.

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Pepsi: Obesity and health concerns, Coke increases Marketing and Innovation spending to $400M
globally, relying on North-America only is bad.

Recommendations for Coke and Pepsi:

Coke and Pepsi need to pursue multiple strategies in order to sustain their profitability and to grow in
the 1990's. They can purse three different strategies

Grow in the International Markets
Enter into growing non- soft drink but beverage industry
Improve their cost structure
Acquire growing brands in the soft drink industry

The International markets have enormous potential for soft drink producers. The spectacular growth of
Coke in the international markets between 1980 and 1993 (Exhibit 2), shows the potential of
international markets for Pepsi and attractiveness of the untapped international markets ( such as
China, India and Eastern Europe) for Coke. The Exhibit 8 shows us that Pepsi and Coke together control
less than 50% of the soft drink marker in Japan, China, Korea, Great Britain and France. It also stated in
the case that the international soft drink market will grow by 7% - 10% a year in the near future( page
12). It should also be noted that Gallon per capita for U.S market is 48.9 and gallons per capita is less
than 10 for most of the potential international markets ( Exhibit 8). This forces the Coke and Pepsi to
pursue a different kind of marketing strategy in these international markets. Initially the marketing
strategy is to boost the soft drink consumption in these untapped markets. Analysis of Exhibit 8 reveals
another interesting factor. Coke and Pepsi control more 50% of the market share in countries where the
Gallons per capita is more than 20, such as Australia, Spain, Germany and Mexico). This tells us that in
the past that these companies grew with the soft drink marker in international markets. The growth of
International trade and abolition trade barriers with eliminate the threat faced by foreign firms in the
international markets. Though we haven't achieved perfect open markets the conditions are improved
in the past years. Its also stated in the case that Operating margins were as much as 10 ten percentage
points higher in many international markets compared to the U.S.

Conclusion:

In my conclusion, i would like to point out that Pepsi and Coke have managed some extremely successful
brands; with time focus will be more and more on Emerging markets plus there will be a lot of emphasis
on healthier beverages and more innovative products. Stress will also be laid on cleaner and more
environment friendly practices employed by these companies.

It should not be a problem to sustain their profits through the next decade. The challenge would be to
sustain their historical rate of growth. To do so they need to seek out new markets and increase
consumption in currently developing markets such as China and India.

When comparing this competitive rivalry to The Porter Five Forces of Competition Model, its easy to see
that the competition was intense between the two companies because of two of the main forces:
Substitutes and Competitors. Both companies were serving to meet similar needs and offer more value,
but when the needs of customers changed and consumers wanted alternatives to CSDs, the threat of
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substitutes was intense. Coca Cola and Pepsi sought out new CSD brands, adding over 10 major brands.
Coca Cola went as far as changing their 99-year formula, but then retracted and stated its regular
formula as its flagship brand due to bad customer feedback. Forming substitutes was also an attempt for
both companies to up slow-growth percentages.