Case Study Analysis:

Cola Wars Continue: Coke and Pepsi in 2010

____________________________________________________

Connie Roudier
Pepperdine University
OTMT 481
Managing Organizations
Fall 2015
 Introduction

Coca-Cola and Pepsi dominated the carbonated soft drink (CSD) industry for over a

century but are now experiencing significant and continuing drops in sales due to changes in

their external environments. Government regulations combined with the push towards healthy

diets to fight obesity have threatened the American CSD sales. With the shifting trend towards

non-carbonated drinks (non-CSDs), Coca-Cola and Pepsi need plan, organize and execute

strategies to compete for market share in the non-CSD industry while also maintaining sales in

their CSD lines. This paper will provide background on both companies with an emphasis on

their changing external environments along with their overall organizational structure

arrangements and how they are managing change. I will also provide an analysis of their key

management issues followed by my recommendations and conclusion of how both companies

can grow in the 21st century.

Background and External Environment

The CSD industry was largely controlled by two companies: Coca-Cola and Pepsi. Coca-

cola was formulated by pharmacist John Pemberton in 1886 which was purchased by Asa

Chandler. He then sold it to to a group of investors in 1919 who created the Coca-Cola

Company. Pepsi-cola was invented in 1893 by pharmacist Caleb Bradham. Both companies

implemented a franchise bottling system where they sold their special formula concentrate to

bottlers nationwide who were responsible for creating the end product and delivering it to the

various retail accounts. Coca-Colas lifestyle advertisements instilled the brand and product

into the American culture and by building bottling plants in areas where U.S. troops were

stationed overseas during World War II, Coke was able to establish dominant market shares in
Europe and Asia along with their dominant market share in the U.S.. During the Great

Depression, Pepsi lowered the price of their 12 oz bottle to equal Cokes 6.5oz bottle and based

their marketing strategy around their jingle Twice as much for a nickel, too which helped Pepsi

gain more market share. Coke filed and lost a lawsuit against Pepsi in 1938 that claimed Pepsis

brand was an infringement on the Coca-Cola Trademark and by 1950, Pepsi became the second

largest selling CSD brand, Coca-cola being the first. Pepsis mission was to beat coke, and thus,

the Cola Wars Begin. Pepsis Pepsi Generation campaign targeted the young and young at

heart, had helped them close the share gap between the two brands. Originally, Cokes share of

the U.S. market was 47% and Pepsi was 10%., the success of Pepsis campaign narrowed cokes

lead to a 2-1 margin. Coke and Pepsi began experimenting with different flavored CSDs to

compliment their cola lines. They launched 3 new lines each, Coke with: Fanta, Sprite, Diet

Coke and Pepsi with: Teem, Mountain Dew and Diet Pepsi. By the late 1980s, both companies

each offered over 10 major brands and more that 17 different container types leaving little shelf

space for smaller concentrate producers which caused the sale and resale of these small

companies until Cadbury Schweppes, later renamed to Dr. Pepper Snapple Group, acquired a

handful of them, becoming the third largest concentrate producer with brands such as Dr. Pepper,

Canada Dry and Seven-up. Coke revamped their bottling operations by buying their bottlers and

creating an independent bottling subsidiary named Coca Cola Enterprise, which became Cokes

largest bottler, handling 94% of Cokes North America volume. Pepsi followed Cokes bottling

operations model and created Pepsi Bottling Group which produced 89% of their total volume

(Yoffie & Kim, Pg. 2).

Coca-Cola and Pepsis external environments were changing in an unfavorable direction.

Starting in the early 2000, U.S. consumption of carbonated soft drinks declined due to new
federal nutrition guidelines that identified CSDs as the largest source of obesity-causing sugars

in the American diet. Such events as schools banning the sale of soft drinks and states charging

soda tax completely changed the CSDs legal-political dimension in their general environment.

Their sociocultural dimension started changing as well because consumers identified high

fructose corn syrup as a health hazard. Government regulation and shifting sociocultural trends

threatened CSDs sales. Coke and Pepsi tried to counteract dwindling sales with extravagant new

marketing campaigns, sponsorships and innovative dispensing machines. In the event of

changing consumer taste, Coca-Cola and Pepsi made it their mission to maintain market share. In

order to keep their CSD product lines alive, they started searching for alternatives. Both

companies looked into using other sweeteners instead of high-fructose corn syrup. Stevia based

products were introduced into the CSD market after FDA approval in 2008. Expanding the

product mix with diet drinks and coke zero helped the company maintain sales. Coke and Pepsi

came to a realization that company growth would be from non-CSDs and bottled water. One

strategic goal for both companies was to launch new beverages including sports drinks and tea

based products which, for Pepsi, totaled to 43% of the U.S. non-carb market over Cokes 32%.

(Yoffie & Kim, pg. 10). The two companies also entered in the bottled water industry, Pepsi with

Aquafina, and Coke with Dasani. Both companies flourished based on their already established

distribution channels but soon experienced drops in market share due to consumers turning to

cheaper, private brands.

Another strategic goal for both companies was to tap into international markets with high

per capital consumption, particularly in India and China where they intended to invest $2 billion

over the next few years. Due to the Coca-cola name becoming synonymous with the American

culture along with their access to distribution channels, Cokes sales outperformed Pepsis by
far. Coke procured 80% of its sales from the international market whereas Pepsi, less than 50%.

Because foreign countries consumed far less CSDs, Coke and Pepsi focused on their juice and

tea lines, tailoring them to local tastes such as green teas and beverages derived from Chinese

herbs. Coke also adopted a new packaging of returnable glass bottles to reach rural consumers.

Structural Arrangements and Reaction to Managing Change

The production and distribution of CSDs involve concentrate producers (Coca-cola and

Pepsi), bottlers, retail channels and suppliers. The concentrate producers manufacturing process

requires minimal capital, they combine raw ingredients to create their proprietary blend,

packages the liquid and ships it to the bottlers. Most of their costs are advertising, promotion,

market research and bottler support. Bottlers add carbonated water, bottle or can the mixture and

deliver it to the retail channels. Coke and Pepsi used direct store door delivery where the

bottlers would manage stocking, positioning and in store placement of their brand. The bottlers

need to invest extensively in capital such as high-speed production lines that could only produce

high-volume, similar packaging, automated inventory, and delivery trucks which all could sum

up to hundreds of millions of dollars. Coke and Pepsi built a nationwide bottling network where

a bottler exclusively owned the manufacturing and sales operation in their specific territory.

The consumers preference shift to non-CSDs forced the companies to change their

traditional production and distribution processes. Concentrate companies became more directly

involved in manufacturing non-CSDs, however, this was not the case for the bottlers. Non-

CSDs required a smaller and more specialized production process which was challenging for

bottlers with their existing infrastructure. Profit margins were higher on non-CSDs such as

energy and sports drinks which angered bottlers since they were not fully involved in the new
growth because Coke and Pepsi opted to selling finished goods at a markup to the bottlers to be

sold alongside their own bottled products, if not completely bypassing the bottlers altogether.

Mass-merchandisers, such as Walmart, negotiated directly with the non-CDS concentrate

makers, which was originally the bottlers task, disrupting their traditional practice of

distributing products in their exclusive territories. It was also becoming costly for bottlers to

inventory the rising number of stock-keeping units (SKUs) for all the different types and sizes of

non-CSDs and since these beverages sold at lower volumes than their counterparts, bottlers were

forced to load more than one product type on a pallet which increased shipping and distribution

costs. Some of Cokes biggest bottlers saw their cost of goods sold reach 90% of their sales, the

highest level in more than two decades. (Yoffie & Kim, Pg. 12)

In response to the bottlers discontent with cokes flat rate charging, coke implemented

incidence pricing where coke varied concentrate prices according to the prices charged in

different channels and for different packages (Yoffie & Kim, Pg. 12). Since independent bottlers

accounted for almost 90% of cokes sales volume world wide, it was imperative to motivate

them by pursuing more 50-50 joint ventures to split cost and risk more evenly. In 2009 Pepsi

announced it would buy two if its biggest bottlers which would consolidate more than 80% of

their North-America operations. A year later, Coke bought their North American operations

which brought 90% of Cokes business in that region under its control. I believe that Coke and

Pepsis bottler consolidation was the right move to handle the technology change in the bottling

process for the product change of CSDs to non-CSDs. However, had Coke and Pepsi stayed on

top of their market research and followed the health conscious trend sooner instead of wasting

millions of dollars rebranding and creating new campaigns to promote their old unhealthy

product, they would have been able to ease into the non-CDS industry which could have given
their bottlers time to transition their operations to efficiently support the product change.

Analysis

Historically, the soft drink industry has been profitable due to its high revenue,

contributed by large sales quantity and competitive pricing, and low cost structure. With the

dropping prices of raw materials for the concentrate and new bottling technology, Coke and

Pepsi were able to offer sodas at bargain prices making it easily accessible to every American.

Also Coke and Pepsis powerful promotional messages in their advertisements engrained their

product in the peoples minds creating strong brand loyalties where a price raise would not affect

their consumers purchasing patterns. Most importantly, up until the early 2000s, people did not

view soft drinks as a health hazard and the main cause for obesity in Americans so it was served

in all establishments including schools. Both companies failed to efficiently create plans for

transitioning into the non-CSD industry

The two main players in CSD and non-CSD production are the concentrate producers and

the bottlers however, both are not equally profitable. In reference to exhibit 4 (Yoffie & Kim,

Pg.17), cost of goods sold as a percent of net sales for the concentrate producer and the bottler is

22% and 58% respectively. The source of this discrepancy is the difference in capital investment

required for their operations. Concentrate producers costs included raw material ingredients to

make the concentrate, advertising, promotion, market research and bottler support. Their

operations required minimal amounts of capital investment in comparison to the bottlers.

Bottling and canning lines for high-speed production in a large plant and automated warehousing

cost hundreds of millions of dollars. That coupled with the cost of concentrate, packaging, labor,

overhead and capital investment in trucks and distribution networks add up to a large operating
expense resulting in a high cost of goods sold lowering their operating income to 8% of net sales

which is a quarter of the concentrates producers 32%. With the addition of non-CSD to their

production line, bottlers cost of goods sold reached 90% of their total sales due to specialized,

low-volume orders that forces the plant to work under capacity. This was a major organizing

issue because Coca-Cola and Pepsi did not account for the financial strain it would cause the

bottlers when they entered the non-CSD industry. The bottlers current infrastructure did not fit

the concentrate producers strategic goals of shifting over to the non-CDS industry. Bottlers for

Coca-Cola Company and PepsiCo, Inc. will have to plan to restructure their operational

processes to lower their cost of goods sold.

Due to the negative effects of price wars, the competition between Coca-Cola and Pepsi

has decreased the profitability of the CSD industry. Both companies are competing to gain

market share through increasing revenue by lowering prices. Based on exhibit 2, Coca-Cola

Company controls 41.9% of the U.S. soft drink market and PepsiCo, Inc. controls 29.9%. The

companies combined controls over 70% of the total industry so if they are selling their products

at a discount, the other smaller brands are forced to do the same to stay competitive and maintain

what little market share they currently have. Also, over the years of the Cola wars, consumers

have grown accustomed to the discounted prices which narrows the profit margin for producers.

This exemplifies a failure to control. Coca-Cola and Pepsi were so focused on gaining market

share through sales, they lost sight of any organizations true goal, profit. For instance the

average case price for energy drinks is $34.32 compared to $8.99 for CSDs (Yoffie & Kim,

Pg.11). This shows how much the competition for market share drove down the profitability of

the CSD industry which hits bottlers the hardest. Fortunately, Americans preferences are

shifting to non-CSDs, an industry that is relatively untouched by competitive discounting, but

with Coca-Cola Company and PepsiCo. Inc entering the industry, I fear that the non-CSD

industry will suffer the same fate of its counterpart.

In order for Coca-Cola Company and PepsiCo Inc to maintain or grow their profits, they

will need to embrace innovation to find a product that tailors to the changing taste of their

consumers while also not entering an already saturated non-CSD market such as teas and energy

drinks which already have established dominant market share holders. Top management needs

continually monitor the business external environment and strategize to stay ahead or in line of

change. One strategy Coca-Cola and Pepsi can use is to create a stretch goal or a BHAG, a goal

that is so big, inspiring and outside the prevailing paradigm that it hits people in their gut and

shifts their thinking. ( Daft, Pg. 227) They will need to do extensive market research to pinpoint

consumer wants and their product development department will need to create a beverage that

consumers have never seen before or see very little of. If the new product line is unlike any other

non-CSD, Coke or Pepsi would essentially be the first to enter the market for that type of

beverage thus making it easy to establish market share dominance. Even though the demand for

CSDs is flattening, Sodas will remain a staple in the American diet for a while therefore the

companies should maintain some original bottling operations but should plan to convert some of

their bottlers to a bottling operation that would be optimal for efficiently producing specialized,

small batches of non-CSD lines. Most of all, Coke and Pepsi need to be innovative with their

advertising to keep their brand in the consumers minds. Coca-cola recently rolled out an

innovative promotional campaign where they printed names on every coke bottle and can,

relating their product to the consumer on a very personal level. Even with consumers shift to

non-CSDs, Coca-Cola Company is a strong fit for the soft-drink industry because they offer a

selection of brands that are CSDs and non-CSDs plus, the Coca-Cola name is synonymous with
American culture which is a strong fit as a strategy for tackling the international markets.

PepsiCos fit in the soft drink industry is weaker than Coca-Colas and could possibly not fit at

all in the near future since their current product mix does not include non-CSDs showing that

they are not in line with current consumer preferences.

Conclusion

Coca-Cola and Pepsi are currently the giants in the beverage industry. Their names are

now recognized worldwide. Both companies made the strategic blunder of fighting the declining

sales with costly, new advertisements instead of responding to shift in legal-political and

sociocultural trends towards health but later. Coca-Cola and Pepsi eventually entered the non-

CSD industry but they are struggling to gain dominant market share as they had with their CSD

lines. Both companies also have current operations that do not support efficient production of

non-CSD lines. Consumer tastes are constantly changing so top-management need to proactively

monitor the external environment to gain accurate information for production planning if new

product lines are needed and also preventing any more loss in sales and market share. A major

looming challenge that faces Coca-Cola and Pepsi is to not drive down the profitability of the

non-CSD industry through competition as they had done with the CSD industry. In order for both

companies to grow in the 21st century, they will either have to come up with a new non-CSD

product line and convert their bottling operations or acquire established non-CSD brands who

already have efficient operations and productions.

Ways to successfully achieve this shift in strategy of diversifying their portfolio mix

through increasing their non-CSD product offerings are:

-! Conduct consumer surveys to gain consumer insights on types of non-CSD beverages

they like or wish to see offered more.

-! Consider leveraging knowledge of customer base, marketing competency and

established distribution channels by diversifying into healthy snack foods after careful

analysis of market attractiveness.

-! Divest poor performing unhealthy brands to free up resources for acquisitions and

product development.
Works Cited

Yoffie, David B., and Renee Kim. "Cola Wars Continue: Coke and Pepsi in 2010. Harvard
Business School Case 706-447, 2006 (Revised May 2011.)

Daft, Richard (2012). Management (11th ed). Maso, OH: Thomson-Southwestern.