strategic management

Title – Cola Wars Continue : Coke & Pepsi in

the 21st Century

Sumit Thakur
Abstract:
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

Main activities Developing the Main activities Focus
Program

• Blending • Product • Combine • Product

new Planning carbonat managem
material • Marketin ed water ent
ingredien g and • Product
ts research syrup positioning
• Packing • advertisi • Bottling/ • Continual
in plastic ng canning brand
containe • Delivery availability
rs to • maintenan
• Shipmen customer ce
t to

Overview of the case :

➢ Major players of the soft drink industry were –

1. Concentrate producers
2. Bottlers
3. Retail channels
4. Suppliers

The value chain –

Concentrate producers
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 Coke
Pepsi flourished Coke struggled
 Acquisition of Quakers oat Flat growth
Net income rose by 17.6% per Annual growth in net income falls
year 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 • Carbonated soft drink market is
• World’s 2nd best selling soft drink declining
brand • Only target young people.
• Constant product innovation
• Aggressive marketing strategy
using celebrities
• Broad product portfolio
Opportunities Threats
• Increased customer concern • Obesity & health concern
regarding drinking water • Coca Cola increases spending on
• Growth in healthier beverages marketing and innovation
• Growth in Asian beverages • Relying only on North America is
• Growth in functional drink industry bad

➢ SWOT Analysis – of (Coca Cola)

Strengths Weaknesses
 • High profile global presence • Carbonated soft drink market is
• 4 0f top 5 leading brands declining
• Broad based bottling strategy • Over complexity of relationships
• 47% of global volume sales in with bottlers in North America
carbonates • Execution ability

Opportunities Threats
• Soft drink volume in the Asia Pacific • Obesity & health concern
region forecast to increase by over • Tropicana & Aquafina from Pepsi
45% • Protest in India
• Wise & Health concerned • Negative publicity by Pepsi.
positioning of brands like Minute
Maid & Minute Light.
• Use distribution strengths in
Eastern Europe & Latin America.

➢ Porter’s Five Forces Analysis –

Barriers to entry
• Exclusive territories
• Substantial investment
• Current market performance
 • Fear of retaliation

Power of buyers

•
• Super
markets
• Mass
merchandis
er
• Fountain
Power of Suppliers
• Sugar
• Packaging
• Weak as only basic
commodity
ingredients are
required

• o

•
•
•
Rivalry
• Coca Cola
• Pepsi
• Cadbury
•
 •

Substitutes

• Alliances
• Acquisitions
• Product

➢ Liquids Gallon/Capita in 2004 -

➢ U.S. Liquid consumption trends -

➢ Issues in the Case & Recommendations –

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 10
1970 35 29
1990 41 32
2000 44 31.4
2006 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.