[ ]

Group AI2 : Namrata Singh| Akshay Shankar | Anurag PV| Badri Narayanan

AI2

Executive Summary

The rivalry between Coca cola and Pepsi can be traced back to early 1950’s and can be seen

even now. The major rivalry involved targeting different groups of people with Coca cola

expanding into international borders with the excellent tie up they had with the US military

troop during World War II. This helped not just increase revenue but also expand

international operations. Also with the unique bottle design Coca Cola soon became the

pride and the way of life of the Americans. Very soon Pepsi took the advantage of the

evolution of televisions which helped them communicate their brand among the Americans

in a faster way. Pepsi targeted the young population and promoted the brand aggressively

under the “Pepsi Generation” campaign. Soon however, both the players saw a decline in

the market of CSD on account of obesity and increasing awareness for healthy lifestyle.

Infact, the threat for the CSD market was getting so serious that many of the US states

started imposing special taxes on such CSD drinks to reduce the consumption among the

American population. Soon both had to change strategies and both started entering new

segments like juice, sport drinks, energy drinks etc. With the expansion in Asian continents

they also felt the need for clean, hygienic and purified drinking water which made them

enter the bottled water segment which is currently $14 billion segment.

With the major shift in the segments from CSD to non CSD, the two major brands are

competing for market share and trying out new innovative ways to expand operations and

increase the size of their business. With many challenges posed by local brands in different

parts of the world for shelf space, it may possibly result in many more consolidations in the

future. Will there be a continuation of war between Coca Cola and Pepsi?

Major Case Facts:

$74 billion CSD market and the major leaders were coca cola and Pepsi.

Cola segment market share reduced from 71% in 1990 to just 55% in 2009 within the

CSD category.

1

37%

21%12%

30%

Market share-1970Coca Cola PepsiDr. Pepper others

44%

31%

17%7%

Market Share-2009Coca Cola PepsiDr. Pepper others

Both players entered the non carb and bottled water category due to the shrinking

market of CSD segment.

Obesity and nutrition issues were the major reasons for the decline in the CSD

market.

US non CSD Unit sales were increasing YoY as shown in the chart below.

Coca cola was present in more than 200 countries and 80% of its sales were from

international markets, contrary to Pepsi which had 50% sales from US market.

Brands

Domestic

Revenue%

internationa

l revenue%

Pepsi 50 50

Coke 20 80

Answers to case questions

Q1.Why historically has the soft drink industry been so profitable?

1. The Soft drink industry is a huge $78 billion market in the US.

2. The industry historically had only two major players i.e. coca cola and pepsi along

with a few small players and a lot of local domestic players all around the globe.

3. There was a large consumption base for these drinks since the 1970’s. Americans

alone consumed around 23 gallons of CSD in the year 1970. Also with increasing

2

population and the entire demographic population preferring to drink such soft

drinks the market share increased at a CAGR of around 10% till around 1980’s.

4. Strong tie ups with the concentrate producers and bottlers enabled increase

profitability and to speed up production process to supply more of the drinks in the

market.

5. The gross profit margin for the brands were around 40 to 70% in most cases which in

turn translated into higher net profits on account of low administrative and general

costs.

6. Tie ups with retail chains like Walmart helped in increased sales in the early 2000’s.

Around 29.8% of the total sales came from such large supermarket sales.

7. Both the major players coca cola and pepsi installed a lot of fountain outlets in

different places which made availability of the soft drinks easier for customers. This

enabled an increase in sales of more than 30% to the soft drink players.

8. Later the soft drink companies started tie ups with fast food restaurant chains such

as Pizza hut, Taco Bell, Kentucky Fried Chicken, Wendy’s ,Burger King etc., which

made such drinks available even in these fast food outlets.

9. Right since the early years these soft drink companies ensured that such drinks are

available even in convenience stores and gas stations so that almost the entire area

is covered.

10. Robust distribution channel coupled with a large supply of such soft drinks to the

entire geographic area covering almost all places like movie halls, gas stations,

supermarkets, convenience stores, retail outlets etc., ensured a robust supply side of

the market. With aggressive marketing and huge advertising spend they ensured a

huge demand for such drinks which ensured an overall large market for the soft

drink industry, which effectively translated the entire industry profitable.

Q2. Compare the economics of the concentrate business to that of the bottling business: why is the profitability so different?

The roles played by both concentrate business and the bottling business is very different

from each other yet complementing.

3

The concentrate producers blended the raw materials together and packaged the mixture in

plastic canisters. The plants used for the preparation of canisters costs between $50 million

to $100 million. A plant made with this investment is enough to cater to the demand of

whole of United Nations. Further the other roles played by the concentrate businesses

were:

They did the advertising, promotion, market research and bottle support:

Being part of the $74 billion US CSD industry, the concentrate producers they invested

heavily in the branding of their products. It required huge investments in trademarks and

took the lead in developing these programs, market research for the new product

development and advertising. The net sales of the concentrate producers comprised of 22%

COGS and 78% was the gross profit which can be broadly divided between 46% expenses

and 32% of operating income.

The bottlers had more elaborate role to play in the business of CSD. After purchasing the

concentrate from the concentrate they mixed it with carbonated water and high fructose

corn syrup, and then canned or bottled it over production line. The concentrate price has

always been in debate between the concentrate producers and bottlers, as it involves

various raw materials. The initial fixed price contract of Coke in 1899 was modified several

times over the years. Coke covered most of its bottlers with the Master Bottler Contract that

granted Coke to determine the process and also legally free to invest in advertising and

marketing.

Pepsi gave more freedom in its master bottler agreement where it adjusted the price of the

in accordance with the CPI (Consumer Price Index). Also the business of bottlers has a high

entrance cost because setting up a bottling plant requires between $4 million to $10 million

each. Coke and Pepsi have 100 of such plants all over US. Further the bottlers were

responsible for delivery of the products to the customer accounts which involves cost/rent

of trucks, buying shelf save at shopping marts.The net sales of bottlers had 58% COGS and

gross profit of only 42% in comparison to the 78% of bottlers. Further this gross profit had

34% expenses and operating income of 8%.

4

Hence we can see that major cost for the bottlers was due to the concentrate syrup, the raw

materials. Further the responsibility of delivering the manufactured goods added to the

operating costs.

Q3. How has the competition between Coke and Pepsi affected the industry profits?

“Without Coke, Pepsi would have a tough time being an original and lively competitor… Coke would say that nothing contributes as much to the present-day success of the Coca-Cola Company than… Pepsi”

Packaged wa-ter

Juice and juice drinks

Sports drinks Ready to drink Tea

Energy Drinks

3221 3030

488 43029

4588

2498

843 706218

US non-CSD unit case volume sold in millions

2002 2009

The competition as such took a face off as early as 1950s, when Steel (Coke Marketing

Executive) made “Beat coke” as his motto. This rivalry led to increase in number of

supermarkets in the United States; from 10,000 in 1945 to 32,000 in 1962.Pepsi bottlers

were generally larger than their coke counterparts because Pepsi sold its concentrate to

bottlers at 20% lesser than what coke was charging them.

Rise of New Flavours:

The competition between the rivals gave an opportunity for people to try different

tastes with minimal variation. In 1960, when coke launched FANTA, Pepsi launched

TEEM in the same year. In 1961, coke launched SPRITE. As a result Pepsi launched

MOUNTAIN DEW in the year 1964. Similarly, when LOW CALORIE COLA TAB was

launched by coke in the year 1963, DIET PEPSI was launched by Pepsi in 1964. Thus

with various choices to opt for, the people started trying out everything and the

industry profits grew.

5

Rise of New Mergers:

After all the above mentioned products, they took the rivalry to next level by

purchasing different companies. Coke purchased Minute Maid, Duncan Foods,

Belmont Springs Water and Pepsi merged with Frito-Lay to be called as PepsiCo

thereafter.

In the 1970s Pepsi launched “Pepsi Challenge” and almost eroded the Coke market. And

Coke retaliated with rebates, retail price cuts, and advertisements questioning the

credibility of the tests conducted during Pepsi Challenge. In Parallel both the companies

were increasing their Advertisement spend and thereby increasing profits.

The already impossible entry to the CSD industry was made even more complicated because

of the rivalry that existed between Pepsi and Coke. The market was a typical Oligopoly

market. By late 1980s, Coke and Pepsi each offered more than 10 major brands and 17 or

more container types. Therefore the struggle for market share intensified.

Shelf space for other brands started decreasing and small brands were shuffled from one

owner to another. Many suffered huge losses and left CSD business.

The Cola war had a great impact on independent bottlers. The capital requirements

increased and many family owned bottlers no longer had the resources needed to remain

competitive.

Their war continued in shifting to non-CSDs too. Pepsi developed a portfolio of non-CSD

products that outsold Coke’s rival products in several key categories. During the late 1990s

both Pepsi and Coke entered the bottled-water category and became the leading beverage

brands outstripping many competing brands.

Q4) How can Coke and Pepsi sustain their profits in the wake of flattening demand and the growing popularity of non-CSDs?

The demand for CSDs(carbonated soft drinks) is declining in America due to growing health

concerns and obesity being one of them. However, this decline is compensated by rise in

demand of non CSD beverages. Hence to sustain their profits, Coke and Pepsi should

venture into non CSD market. Both Coke and Pepsi have already introduced zero calories,

sugar free CSDs in the form of Diet Coke and Pepsi Lite respectively. Both of these products

6

performed well and boosted sales with Diet Coke registering a double digit growth. On the

other hand, Pepsi outsold Coke in non-carbonated products. These products included juices,

energy drinks, tea based drinks and bottled water. Combined, the non-carbonated products

have a 17% market share.

The bottled water market alone stands at $14 billion with 20% of non-alcoholic beverages

sold in America being bottled water. Keeping this in mind, both Coke and Pepsi entered the

bottled water business with Coke launching Dasani and Pepsi launching Aquafina as their

brands for the same. This also helped both the companies to cater to more price sensitive

consumers. From exhibit 9, we can see that the non-CSD market, packaged water has shown

an increase of 1,367 million case units sold from 2002 to 2009. Sales of sports drinks have

increased by 355 million case units. Similarly tea based drinks have shown an increase of

276 million case units sold and energy drinks an increase of 190 million case units sold over

the same period of time.

From the data given in exhibit 10, it is clear that the brands enjoy higher Gross Margins than

the retailers. Hence, keeping all the above factors in mind, Coke and Pepsi should look to

aggressively market, distribute and promote their non-carbonated offerings. In the CSD

market, diet sodas should be pushed more than their respective flagship sodas. This strategy

will help them in offsetting the declining demand for carbonated drinks while also

capitalising on the growing non-carbonated market segment.

Summary:

The CSD market in US has witnessed the Cola war between Coke and Pepsi for almost a 100

year. The market is no more about the flagship brands alone but Coke has introduced 11

new products and 13 by Pepsi. They are both at loggerheads in each product category eg.

Maaza vs Slice, Sprite vs Mountain Dew, Mirinda vs Fanta, Minute Maid vs Tropicana etc.

Both the companies are evolving with the times and moving with the consumer preferences

and change in attitude.

Both the brands have the contracts with different retails, food chains, restaurants, malls,

supermarkets. Both the brands have conquered the world and are competing all over with

7

the local players and mostly emerging as the winners. The advantages of broadening

overseas are scope of innovating, experimenting, researching and reviving the CSD revenue

as US market has reached its saturation. The new markets include India, China, and Middle

East Asia etc. Coke and Pepsi are constantly reviving themselves to suit the target markets.

Conclusive Infographic

8