Cola Wars Continue: Coke and Pepsi in 2006 Essay

Coca-Cola and Pepsi-Cola have a long history of intense competition since 1950. Besides the CSD (carbonated soft drink) consumption rise, it brought both Coke and Pepsi enjoyed significant revenue growth. In 2004, CSD has 52.3% of total US Liquid Consumption. Coke and Pepsi had 22.1% and 14.4% in Net profit/sales respectively.

There are four major participants involved in the production and distribution of CSDs: 1. Concentrate Producers (Coke, Pepsi, and others)). They blended raw material ingredients, packaged the mixture, and shipped to the bottlers. They have large number of employees located in bottler site to support sales efforts, set standards, and suggest operational improvements.

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They negotiated with the bottlers’ suppliers to achieve reliable supply, fast delivery, and low prices. 2. Bottlers (CCE, PBG, and others). They purchased concentrate, added carbonated water and sweetener, bottled or canned the product, and delivered it to customers. The number of bottlers had fallen from more than 2000 in 1970 to fewer than 300 in 2004, especially after Coke and Pepsi did bottler consolidation and spin-off as part of plan to refranchise bottling operation.

Coke built Coca-Cola Enterprise (CCE) and Pepsi formed Pepsi Bottling Group (PBG) as their main bottlers.

3. Retail Channels. They consist of supermarket (32.9%), fountain machines (23.4%), vending machines (14.5%), mass merchandisers (11.8%), convenience stores and gas stations (7.9%), and others (9.5%). Pepsi focused on sales through retail outlets, and Coke dominated fountain sales. Both Coke and Pepsi entered fast-food restaurant business in order to have exclusive sales territory on the restaurant chains. 4. Suppliers. Concentrate producers needs caramel coloring, phosphoric/citric acid, natural flavors, and caffeine from suppliers. Bottlers also need to purchase packaging (cans, plastic bottles and glass bottles), and sweeteners. Coke and Pepsi establish stable long-term relationships with their suppliers and their bottlers’ suppliers.

Chronology of the Cola Wars:

* 1950s: Pepsi introduced “Beat Coke” motto. Pepsi introduced 26-ounce bottle, targeting family consumption. Coke stayed with its 6.5-ounce bottle. * 1960s: Pepsi launched new slogan, “Pepsi Generation”. By focusing on the younger population Pepsi narrowed Coke’s lead to a 2-to-1 margin. Pepsi had larger and more modern bottling facilities. Both groups started adding new soft drink brands. * 1970s: Pepsi Challenge: Starting in Texas, Pepsi’s bottlers had public blind taste tests to prove that Pepsi tasted better. This marking stunt increased sales significantly. Pepsi gained a 1.4 points lead in food store leads. Coke countered with rebates and renegotiations with franchise bottlers. Coke response by cutting costs (used corn syrup instead of sugar), doubling advertising spending, and selling off most non-CSD business.

Diet Coke was introduced to become a phenomenal success. Coke tried to be innovative by changing its formula, but that failed miserably. Coke introduced 11 new products. Pepsi introduced 13 new products. Pepsi emulated most of Coke’s strategic moves. * 1980s: Coke did refranchising bottling operation and created independent bottling subsidiary, Coca-Cola Enterprise (CCE). Pepsi implemented similar anchor bottler model by forming its bottler, Pepsi Bottling Group (PBG). * 1990s: Soft drink industry faced new challenge on stagnant demand. * 2000s: Although Coke and Pepsi encountered obstacle in international operations, including antitrust regulation, price controls, advertising restrictions, foreign exchange control, lack of infrastructure, cultural differences, political instability and local competition, Coke enjoyed a world market share of 51.4% and Pepsi 21.8%.

Coke and Pepsi have been very successful and profitable due to their dominance in the soft drink market. In 2004, the Herfindahl Index (HHI) for market concentration ratio is 0.3130. H = (Coke)2 + (Pepsi)2 + (Cadbury)2 + (Cott)2 + (Others)2

= (.431)2 + (.317)2 + (.145)2 + (.55)2 + (.52)2
= 0.3130

This index indicates high concentration with one or two strong players only. Soft drink industry has been so profitable because Americans drink more soda than other beverage. Head-to-head competition between both Coke and Pepsi reinforce brand recognition of each other. Coke and Pepsi devoted spending on marketing, advertisement, innovation, and market expansion.

It is a unique industry where Concentrate Producers and Bottlers are two different entities. Concentrate manufacturing process involved little capital investment in machinery, overhead, and labor. Other significant costs were for advertising, promotion, market research, and bottler relations. One plant could serve entire United States. In the other side, the bottling process was capital-intensive and involved high-speed production line. Bottlers also invested in trucks and distribution networks. Bottlers handled merchandising. Bottler’s could also work with other non-cola brands. From the financial data of Coke, Pepsi, CCE, and PBG, concentrate producers are far more profitable than their bottlers.

The colossal war between Coke and Pepsi really affected the soft drink industry. It shaped the industry into what it is now. The fact that those two major players has involved in the competition since the very beginning (1950s) is the advantage for them to keep dominating the market and gain brand popularity in US market and international market.

Since 1990s, Coke and Pepsi faced new challenge on flattening demand, banned the sales in some US schools, and obstacles in their international operations (regulatory challenges, cultural and any existing competition). Popularity of non-carbonated beverages has also increased. But Coke can Pepsi can sustain their profits in the industry because they are still dominant (no new threats from new competition, no new significant competitors), they have been in the industry long enough to place their brand recognized globally (easy to diversify new product by leveraging their brand), globalization has opened opportunity for them to expand their international market (especially in emerging economies), potential to growth is still high in the emerging market (consumption is still low), and they have diversified into non-carbonated drinks as well as “diet” drinks (less sugar or zero sugar beverages). In my opinion, Coke and Pepsi need to focus on emerging international market and focus on the innovation to create new products as alternative (non-carbonated, diet, and healthier).

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