Cola Wars!!

Stage 1 – 1950 - 1970

Brief History (coke)

• Formulated at the Eagle Drug and Chemical Company

• Initially sold as a patent medicine for 5 cents (1886)

• A cure for head ache and impotence• By 1935 coke had achieved status of a national

icon

History (Pepsi)

• 1931: Bought sole right of Pepsi for $10,500 – Charles Guth

• Grew with the growth of super markets (1945-62)• Young at heart campaign• A buy out by coke refused• Strategy to target the African Americans (feature

noble prize winners) :ads targeted specifically at them• “Starting to get termed as a Niger drink” and thus fall

back on that strategy.

New products through 1950-70

• Coke:

New products through 1950-70

• Pepsi

Relative strategies implemented..

• Coke started to focus on the over seas markets (1960)

• Coke assumed American consumption was reaching saturation point

• Pepsi doubled its consumers in the US in the same period ( more bottlers and reduced price of concentrate)

• Thus Pepsi decided to attack Coke on the home turf

What Coke could have done ..back then

• Realize importance of the highly westernized US market accounting for high consumption.

• Retain its market share• Flank Pepsi by competing in the other

businesses as well diverting their attention from Cola drinks

• Threaten Pepsi with a buy out , so that Pepsi does not get the leverage to think freely

Stage 2 – 1970 - 1990

Major Events

• CSD market share 71% in beverages• Pepsi diversified in food industry– Pizza Hut, KFC,Taco Bell

• Pepsi had more bottlers than coke• Coke had fragmented bottlers, >800 franchised• Pepsi challenge– 1974 blind test in Dallas, Texas– Publically demonstrated

US Soft Drink Market Share By Case Volume (%)

1970 1975 1980 1985 19900

5

10

15

20

25

30

35

40

45

34.7 35.3 35.939.5 41.1

19.8 21.1

27.830.3

32.4

Market share

Coca ColaPepesiCo

Perc

enta

ge

Strategies FollowedCoca cola

• Product Development and line extension– Introduction of 11 new

products

• Divestiture– Non CSD businesses were

sold off

• Forward integration– CCE, independent bottling

subsidiary of Coke

Pepsi

• Product development and line extension– Introduction of 11 new

products

• Forward Integration– PBG established

• Concentric Diversification– Acquired Pizza Hut, KFC, Taco

Bell

Competitors

• Shelf space decreased• Shuffle of smaller brands from one owner to

another• Dr.Pepper was sold several times, canada dry

twice• Philip Morris acquired 7up 1978, losses,1980’s

left business• Cadbury Schweppes emerged as third largest

competitor

• In short both were capable to imitate each other in every dimension

• Lifestyle based advertisement and brand name• Perceived differences created through advertisements

• 1971 I’d like to buy the world of coke

• 1979 Have a Coke and a Smile

• 1989 Can’t beat the feeling

• 1970 Join the pepsi people

• 1980 Catch the pepsi spirit

• 1990 Pepsi ‘The choice of new Generation’

Stage 3 ( 1990 – 2006)

Challenges Faced1. US sales volume grew at a rate less than 1% during 1998 - 2004

– Worldwide demand for CSDs remained flat– Decline in annual per capital consumption from 125 to 119 servings

2. Association of CSDs to obesity– New federal nutrition guideline– Ban of CSD in Schools– Morgan Stanley Survey

3. Concentrate providers gain at the cost of Bottlers profitability– Huge debts from consolidation and infrastructure investment– Change in the product portfolio resulted in additional costs for the

bottlers– Rapid growth of mass merchandiser channel like Wal-Mart and

various other club stores posed a new threat to the profitability

Challenges specific to Coke

• Performance and Execution– Key strategic relationship with CCE– Providing alternative beverages

• Legal Issues– Contamination scare in Belgium– A law suit filed by Burger King worth $ 21 Mil– Channel Stuffing charges

• Currency Crisis in Russia and Asia

Challenges specific to Pepsi

• Venezuela Crisis (1996) - Reduced the market share of Pepsi from 45% to 5 %

• Challenges of internationalization

Strategies Adopted 1. Flat Demand During 1998 – 2004

Pepsi– Concentric Diversification

− Acquired Quaker Oats( 2000)− Acquired South Beach Beverage & Co (2001)

− Product Development− Aquafina (1998)

– Market Development− Introduced CSD variants like Sierra Mist (2000) and Mountain Dew Code Red

(2001)− “Grow the core and add some more”

Coke– Although Pepsi swept away the new evolving markets, Coke fared better in the

bottled water category after introducing Dasani in 1999.– Packaging Innovation: Fridge Pack (2001), replaced 2 ltr with 1.5 ltr which was later

imitated by Pepsi

Strategies Adopted

2. Association of CSDs to obesity

Coca Cola− Introduced new or renamed products− Diet Coke with Splenda (2005) and Coca Cola Zero ( 2005)

Pepsi− Sierra Mist Free (2004) and Pepsi One (2005)− Pepsi declared itself as a total beverage company and move more

aggressively than Coke to the non CSDs segment− By 2004, Pepsi had a market share of 47.3 % in the US non Carb market

compare to Coke’s share of 27.0 %− Treating Diet Pepsi as its flagship brand

On Stranger Tides

• Coke flourished in international market and also relied upon them far more then Pepsi.

• About 70 % of the revenue of Coke came from non US markets compared to 33 % of Pepsi

• Coke’s share of global beverages market stood at 51.4 % followed by Pepsi at 21.8 %

• Some of the reasons behind Coca Cola’s success in the international markets was due to its ability to understand and defend its positions really well (except the exclusion from the ME and Soviet bloc.)

US Soft Drink Market Share By Case Volume (%)

1990 1995 2000 2004E0

5

10

15

20

25

30

35

40

45

50

41.1 42.344.1 43.1

32.4 30.9 31.4 31.7

3.2

15.1 14.7 14.5

CokePepsiCadbury Schweppes

Porter’s Five Force Analysis

Threat of new entrants:- Huge Capital requirements- Strong bottling networks- Brand loyalty- Strong distribution links- Market Saturation

Threat of Substitutes:- Shift in demand towards non-CSD products in early 2000s on health-related concerns- Main substitutes included juices, sports drinks, energy drinks,

tea-based drinks and bottled water- Pepsi more aggressive in shifting to non CSDs- Low switching costs for consumers

Suppliers’ bargaining power:- Few inputs required for concentrate producers- Inputs for bottlers-packaging and sweeteners- Coke and Pepsi-largest customers of metal can industry

Buyers’ bargaining power:• Bottlers- High switching costs- Tied by contracts• Retail channels- Supermarkets and Fountain outlets-highbargaining power- Low for vendingmachines and Convenience stores

Sales

SupermarketsFountain out-letsVending machinesMass mer-chandisersConvenience storesOthers

32.9%

23.4%14.5%

11.8%

7.9%

9.5%

Intensity of competitive rivalry:- Pepsi and Coca Cola key players contributing to about 75% of

market share- Plank for achieving competitive advantage:• Product differentiation - Combative advertising - Direct product comparison based on a real attribute: taste

SWOT Analysis: Pepsi

• Enjoys a High-Profile Global Presence• Owns the World’s 2nd Best-Selling Soft

Drinks Brand• Constant Product Innovation• Aggressive Marketing Strategies • A Broad Portfolio of Products

Weakness

Opportunity Threat

• Carbonates Market is in Decline• Pepsi is Strongest in only North America• They Only Target Young People

• Increased Consumer Concerns in comparison to bottled water

• Growth in Healthier Beverages• Growth in Tea and Asian Beverages

• Obesity and Health Concerns• Increased Marketing and Innovation

Spending by Coke• Restriction to only North America as target

market

SWOT Analysis: Coke

• Enjoys a High-Profile Global Presence• Fourth amongst the top five leading brands• Broad-based bottling strategy• 47% of global volume sales in carbonates

Strength Weakness

Opportunity Threat

• Carbonates Market is in Decline• Over-complexity of relationship with

bottlers• Inefficient execution of business

• 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

• Growing "health-conscience" society• PepsiCo’s Gatorade, Tropicana and Aquafina

are stronger brands• Boycott in the Middle East• Protest against Coke in India