strategic management

Title – Cola Wars Continue : Coke & Pepsi in

the 21 st Century

Sumit Thakur

A bstract :

This report is based upon the information provided from the Harvard business school

case - “Cola Wars Continue: Coke and Pepsi in the Twenty-First Century”. Both

Coca Cola Company and Pepsi Co. are the largest players in the Carbonated Soft

Drinks (CSD) industry. Cola war is the term used to describe the campaign of mutually

targeted television advertisement & marketing campaigns between Coke & Pepsi.

Both Coke & Pepsi have segmented the soft drink industry into two divisions, via –

1. Production of soft drink syrup.

2. Manufacturing & distribution of soft drinks at retail level.

Coke & Pepsi have chosen to operate primarily on the production of soft drinks syrup,

while leaving independent bottlers with more competitive segment of the industry.

The purpose of this report is to gain insight into the possible strategies that can be

applied, in order to expand the overall throat share in the future. History revealed that a

highly competitive strategy that was utilized in the past by both companies resulted in

cannibalization. Because of this, the report is described from the perspective of both

Coca-Cola and Pepsi. This report focuses on increasing the overall share and finding

new opportunities in the unrevealed markets.

Structure of soft drink industry :

Concentrate Producers Soft drink Company Bottlers

Overview of the case :

➢ Major players of the soft drink industry were –

1. Concentrate producers2. Bottlers3. Retail channels4. Suppliers

The value chain –

Concentrate producers

Main activities Developing the Program

Main activities Focus

• Blending new material ingredients

• Packing in plastic containers

• Shipment to

• Product Planning

• Marketing research

• advertising

• Combine carbonated water and syrup

• Bottling/ canning

• Delivery to customer

• Product management

• Product positioning

• Continual brand availability

• maintenance

Suppliers Retailers

Bottlers

1. Concentrate producers – • Blended raw material ingredients, packed the mixture and shipped these

containers to bottlers.• Key investment in machinery, overhead or labor.

• Significant costs were for advertising, promotion and marketing research.

• Coca cola & Pepsi Co. claimed a combined 76%of the U.S. CSD market, in sales.

2. Bottlers – • Purchasing concentrate.

• Adding carbonated water & high fructose corn syrup.

• Bottled or canned the product.

• Delivery to customer.

• Capital intensive process.

• Direct store door delivery.

• Cooperative merchandizing agreements, key factor of soft drink sales.

3. Retail channels – • Super markets

• Vending machines

• Convenience stores

• Gas stations.

4. Suppliers – • Coca cola & Pepsi were among the metal can industry largest

customers.• Major can producers were American National Can, Crown Cork & Seal

and Reynolds Metals.

•➢ The Cola war begins - (Market Campaigns)

Pepsi Coca Cola

“Beat Coke” “Americans preferred taste”

“Pepsi generation” “No wonder Coke refreshes best”

“Young at heart”

Concentrate price 20% lower

Large bottlers (1970)

➢ Product Portfolio diversification –

Pepsi Coca Cola

Teem (1960) Fanta (1960)

Mountain dew (1964) Sprite (1961)

Diet Pepsi (1964) Low calorie Tab (1963)

Non CSD (Merger) Non CSD (Purchased)

Frito Lay Minute Maid

Duncan Foods

Belmont Springs Water

➢ Pepsi Co. challenge –

Pepsi Co. Coca Cola

Blind taste test Rebates

Eroded Coke’s market share Retail price cuts

Advertisement questioning test validity

Re- negotiation of contract with franchisee bottlers.

About 70% of Coke’s sales & about 80% of its profit came from outside the U.S.; only about 1/3rd of Pepsi leverage sales took place overseas.

➢ Product launch –

Pepsi Coca Cola

Teem (1960) Fanta (1960)

Mountain Dew (1964) Sprite (1961)

Diet Pepsi (1964) Low calorie cola tab (1963)

Lemon Lime Slice (1984) Diet Coke (1982)

Caffeine free Cola (1987) Caffeine free Coke (1983)

Sierra Mist (2000) Coca Cola Classic (1985)

Mountain Dew Code Red (2001) New Coke (1985)

Pepsi One (2005) Cherry Coke (1985)

➢ Expansions –

Pepsi Coca Cola

Acquired Pizza Hut (1978), Taco Bell (1986) Exclusive deal with Burger King, Mc Donald.

Merged with Frito Lay to form Pepsi Co. Purchased Minute Maid, Duncan foods, Belmont Spring Water

Purchased Quaker Oats Acquired planet Java coffee drink brand

Acquired Mad River juices & Tea

➢ Challenges to soft drink industry –

1. Flat demand during 1998 – 2004.2. Contaminations scare at India.3. Obesity issues.4. Challenges of internationalization.

•➢ Challenges to Coca Cola –

1. Performance and execution –– On providing alternative beverages.– On adjusting key strategic relationships.– On cultivating international market.

2. Currency crisis in Asia & Russia.3. Series of legal problems.

➢ Reversal of Fortune – (1996 - 2004)

Pepsi CokePepsi flourished Coke struggled

Acquisition of Quakers oat Flat growthNet income rose by 17.6% per year

Annual growth in net income falls to 4.2% from 18% (1990 - 1996)

ROI 29.3% from 9.5% (1996) Share holder’s return 26%

➢ Market Share –

Product 2000 (yr), % 2004 (yr), %

CSD 80 73

Diet Soda 24.6 in (1997) 29

Bottled Water 6.6 13

Non CSD 12.6 13.7

➢ Evolving structure and strategies –

– System profitability– Low cost strategy by bottlers– Incidence pricing– Retailer’s series price increase.– Coke’s dysfunctional relation with bottlers.

➢ Internationalization –

– Mexico, Brazil, China n Asia & Eastern Europe are the next big markets.– Coke is dominant in Western Europe and much of Latin America whereas

Pepsi is dominant in Middle East & Southern Asia.– Coca Cola became synonym with American culture.

Profitability - Concentrate producers earn more profit than bottlers, also cost of sale is more in bottlers.

➢ SWOT Analysis – of (Pepsi Co.)

Strengths Weaknesses

• High profile global presence• World’s 2nd best selling soft drink

brand• Constant product innovation

• Aggressive marketing strategy using celebrities

• Broad product portfolio

• Carbonated soft drink market is declining

• Only target young people.

Opportunities Threats

• Increased customer concern regarding drinking water

• Growth in healthier beverages

• Growth in Asian beverages

• Growth in functional drink industry

• Obesity & health concern

• Coca Cola increases spending on marketing and innovation

• Relying only on North America is bad

➢ SWOT Analysis – of (Coca Cola)

Strengths Weaknesses

• High profile global presence

• 4 0f top 5 leading brands

• Broad based bottling strategy

• 47% of global volume sales in carbonates

• Carbonated soft drink market is declining

• Over complexity of relationships with bottlers in North America

• Execution ability

Opportunities Threats

• Soft drink volume in the Asia Pacific region forecast to increase by over 45%

• Wise & Health concerned positioning of brands like Minute Maid & Minute Light.

• Use distribution strengths in Eastern Europe & Latin America.

• Obesity & health concern

• Tropicana & Aquafina from Pepsi

• Protest in India

• Negative publicity by Pepsi.

➢ Porter’s Five Forces Analysis –

Barriers to entry• Exclusive territories• Substantial investment

• Current market performance

• Fear of retaliation

Power of buyers

•

Power of Suppliers

• Sugar

• Packaging

• Weak as only basic commodity ingredients are required

• o

•••

Rivalry• Coca Cola

• Pepsi

• Cadbury

•

• Super markets

• Mass merchandiser

• Fountain

•

Substitutes

➢ Liquids Gallon/Capita in 2004 -

• Alliances

• Acquisitions

• Product

➢ U.S. Liquid consumption trends -

➢ Issues in the Case & R ecommendation s –

1. Who has been loosing?Smaller brands are loosing because of entry barriers and duopoly.

2. Who is winning the war?Year Coke (%) Pepsi (%)1950 47 101970 35 291990 41 322000 44 31.42006 43.1 31.7

3. Could they boost flagging domestic CSD sales?

– Through product innovation– Aggressive marketing and promotion– Packaging innovation–

4. Would newly popular beverages provide them with new and profitable revenue streams?

– Yes– Non carbonated & bottled water contributed to total volume growth,

approximately 100% for coke & 75% for Pepsi.– Contamination issue & obesity issue.

5. Can Coke & Pepsi sustain their profit in wake of flattening demand & the growing popularity of Non CSD’s?

– Coke and Pepsi didn’t just inherit this business; they created it.– By Diversification– Innovation eg. Diet Coke.