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

Cola has a market cap of $60 billion in US.

Both Coke and Pepsi achieved an average annual growth of 10% in US and worldwide during 1975 to
1995.
Economics of the U.S CSD Industry:
Average American consumed 23 gallons of CSD annually in 1970 and the consumption grew at 3%
annually over next 30 years. Flavored and diet CSDs fueled this growth.
Through mid 1990s price of CSDs fell as a result increase in consumer demand.
Many alternatives to CSDs existed, including beer, milk, coffee, bottled water, juices, tea etc.
Concentrate Producers
Blended raw materials excluding sugar packaged in plastic canisters and shipped to bottlers.
$25 - $50 Million concentrate manufacturing plant can serve the entire US
Most significant costs are advertising, promotion and market research and bottler relations and also
take lead in them including product planning.
Bottlers paid 50% in promotional and advertising costs assuming they have a bigger role.
Negotiated directly with the bottlers major suppliers
In 2002, COKE and PEPSI claimed a combined 76% of the US CSD market in sales volume.
Bottlers
Adds carbonated water and sugar or high fructose corn syrup along with concentrate, bottle and
deliver direct store delivery (DSD) both Coke and Pepsi bottlers did the same.
DSD are responsible for managing the shelf space like stacking, positioning, cleaning packages and
shelves and setting up point of purchase and end of aisle displays.
Bottlers relationship with the retail trade was crucial to continual brand availability and maintenance.
Bottling is a capital-intensive and requires high speed lines.
Requires 80-85 plants for full distribution across the US
Packaging accounts for half of the cost of goods sold, concentrate for 1/3 rd and nutrition and
sweeteners for 1/10th labor accounts to most of variable costs.
In 1970 there were 2000 bottlers and in 2000 its less than 300 due to consolidation.
All three Coke, Pepsi and Cadbury built nation-wide franchised bottling networks first adopted by
Coke.
Bottlers have a perpetual right with the franchiser.
Coca-cola amended the contract in 1921, 1978 and 1987 to adjust concentrate price.
Agreements allowed bottlers to choose the products to market them introduced by concentrate
producer per their wish also has freedom to reject new package instructions campaigns, promotions
and etc.
Bottlers cannot carry directly competitive products Selling Coca Cola forfeits to sell Pepsi or Royal
crown cola but can sell Seven-up if they decide not to carry Sprite.
Retail Channels
Distributions of CSDs in US, food stores(35%), fountain outlets(23%), vending machines(14%)
convenience stores (9%) and other outlets (20%).
Super markets are main distribution channels for CSDs yielding for 15%-20% gross margin and
accounting for 3-4% of food store revenues.
Private label CSD delivery method involves the retailer was responsible for storage, transportation,
merchandising, and stocking the shelves, thus incurring additional costs.
 Pepsi has major sales through retails whereas Coke had through fountain sales. Fountain sales are
extremely profitable for the restaurants sometimes given huge rebates.
Pepsi acquired Pizza Hut, Taco bell and KFC to gain market share in fountain sales, Coke followed
and persuaded Wendys and Burger King to switch to Coke.
Concentrate producers offered bottlers rebates to encourage them to purchase and install vending
machines.
Suppliers to Concentrate Producers and Bottlers
Introduction of 1,2 and 3 liter boosted the sales of CSDs. Single serve 20oz PET bottles quickly
gained popularity and represented 35% of vended drinks in 2000.

Evolution of the U.S. Soft Drink Industry.

Early History
Pepsi declared bankruptcy twice once in 1923 and later in 1932, Pepsi increased their sales when they
lowered the price of its 12 oz bottle for a nickel, Coke was offering 6.5 Oz at the same price.
In 1938 Coke sued Pepsi for an infringement on the Coca-Cola trademark, court ruled in favor to
Pepsi, countersuits and series of suits. Pepsis U.S. sales surpassed those of Royal Crown and Dr
Pepper in 1940s.
The Cola Wars Begin
In 1950, Alfred Steele, a former Coca-Cola marketing executive joined as CEO of Pepsi, with his
strategies Pepsi dynamics has changed. His theme Beat Coke encouraged bottlers to focus on take-
home sales through supermarkets.
With the introduction of 26oz bottles to the market, Pepsis growth has increased from the sales of
Supermarkets and Convenience stores in U.S.
In 1963 under the leadership of new CEO Donald Kendall, Pepsi launched Pepsi Generation
campaign targeting young and young at heart. This campaign helped Pepsi narrow Cokes lead to a
2 to 1 margin. During same time Pepsi worked with its bottlers for modernization of plants and
improvement of store delivery services.
Pepsi sold concentrate to bottlers 20% cheaper price compared to Coke.
Coke and Pepsi started experiments with new cola and non-cola flavors and a variety of packing
options in 1960s, during this time Coke introduced Fanta, Sprite and low-calorie tab and Pepsi
introduced Mountain Dew, Diet Pepsi.
Both diversified into non-soft drink industries, coke acquired Minute Maid, Duncan Foods and
Belmont Spring water, Pepsi merged with Frito-Lay in 1965 and formed as PepsiCo.
During 1960s Coke focused on overseas markets as Coke noticed neared saturation for growth in U.S.
Pepsi battled aggressively and doubled its market shared between 1950 and 1970 in U.S.
The Pepsi Challenge
In 1974 Pepsi launched the campaign Pepsi Challenge, it was an instant hit and soon they rolled-out
campaign to entire U.S. In 1979 Pepsi surpassed Coke for the first time with a 1.4 share point lead.
Cola Wars Heat Up
In 1980 to cut down the costs Coke switched from sugar to high fructose corn syrup, later Pepsi also
adopted this change.
Coke intensified marketing effort increasing the advertising spending form $74 million to $181
million between 1981 and 1984 and Pepsi increased form $66 million to $125 million.
Goizueta sold off most of the non-CSD businesses while keeping Minute Maid.
Coke introduced Diet Coke in 1982 and become a phenomenal success and became 3 rd largest soft
drink in the U.S.
 In 1985 Coke announced the change of original formula which caused a declining share in shrinking
market and later after 3 month reintroduced the same product as Coke Classic.
Coke and Pepsi both introduced new products in the 1980s, 11 and 13 respectively. By late 1980s
both offered more than ten major brands and seventeen containers and numerous packaging options.
Throughout 80s smaller concentrate producers were squeezed by Coke and Pepsi and small brand has
to shift from one owner to another.
In 1980s Cadbury with strategic acquisitions became 3rd largest concentrate producer.
Bottler Consolidation and Spin-Off
The cola wars had weakened the small independent franchise bottlers.
Goizueta announced a plan to refranchise bottling operations, bought poorly managed bottlers,
infused capital and quickly sold to better bottle performers.
CCE was formed in 1986 as a subsidiary company.
In 1999 Pepsi Bottling Group went public owning 35% equity.

Adapting to the Times

In late 1990s due to financial crisis in various parts of world left Coke and Pepsi bottlers over-
invested and under-utilized.
Balancing Market Growth, Market Share, and Profitability in the U.S.
In early 1990s Coke and Pepsi bottlers employed a low price strategy in the supermarket channel for
competing more effectively with high quality, low-price store brands.
Coke growth is from Internationally and Pepsi growth is from Frito-Lays.
Both to boost the flagging cola market, came with exclusive marketing strategy endorsing celebrities.
Pepsi broke Cokes stronghold at Disney, new DisneyQuest, Club Disney and ESPN Zone chains later
Coke again won Burger King fountain contract.
Pepsi sued Coke for monopoly in fountain.
The Rise of Non-Cola Beverages
As customer preferences changed from diet-soda to lemon-lime to tea-based drinks, Coke and Pepsi
vigorously expanded their brand portfolios.
By late 1990s, the soft drink industry had seen various alternative beverage categories come and go.
Flavored soft drinks such as citrus, lemon-lime, pepper, and root beer were also popular.
In 1999, Mountain Dew grew faster than any other CSD brand for the third year in a row, posting
6.0% volume growth, but in 2000, its growth slowed to 1.5% due to competing new-age non-carbs.
Pepsis Aquafina went national in 1998. Coke followed in 1999 with Dasani. Though Pepsi and Coke
sold reverse-osmosis purified water instead of spring water, they had a distribution advantage over
competing water brands.
Coke and Pepsi launched other new drinks throughout the 1990s. They also aggressively acquired
brands that rounded out their portfolios, including Tropicana (Pepsi, 1998), Gatorade (Pepsi 2000),
and SoBe (Pepsi, 2000). Both companies predicted that future increases in market share would come
from beverages other than CSDs.
Cokes Goizueta had echoed the same view: Sometimes I think we even compete with soup.
Internationalizing the Cola Wars
Coke and Pepsi increasingly looked overseas for new growth. Throughout the 1990s, new access to
markets in China, India, and Eastern Europe stimulated some of the most intense battles of the cola
wars.
Coke held a world market share of 53%, compared to Pepsis 21% and Cadbury Schweppes 6%.
However, Pepsi put less emphasis on its international operations during the subsequent decade. In
1980, international sales accounted for 62% of Cokes soft drink volume, versus 20% for Pepsi. Pepsi
 rejoined the international battles in the late 1980s, realizing that many of its foreign bottling
operations were inefficiently run and woefully uncompetitive.
Pepsi utilized a niche strategy which targeted geographic areas where per capitas were relatively
established and the markets presented high volume and profit opportunities.
Coke tried to acquire Cadbury due to regulatory road blocks couldnt.
When the economy foundered in certain parts of the world during the late 1990s, annual consumption
declined in many regions for coke and less impact to Pepsi during the crisis.