cola wars continue coke and pepsi in 2006-1
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Cola Wars Continue Coke & Pepsi in 2006
DILSHAN HYE JOO LEE
Dae-Ryang-Woo
Overview
Industry Background
Production & Distribution of CSD
Questions
1886: John Pemberton
1893: Caleb Bradham
Concentrate producer
Bottler
Supplier
Retail Channel
Concentrate Producer
• Key produc+on investment areas
• Manufacturing plant
• Customer Development Agreements (CDA)
• Spent for adver+sing, promo+on, market research
Bo.lers • Purchased concentrate
• Added carbonated water and
high-‐fructose corn syrup
• BoEled or canned the resul+ng
CSD product
• Delivered it to customer account
Suppliers • Coke and Pepsi were among the Metal Can industry’s
largest customers.
• Major Can producers-‐ Ball, Rexam, Crown Cork & Seal
Retail Channels In 2004, distribu+on of CSDs in U.S. was through:
• Super Markets (32.9%)
• Fountain outlets(23.4%)
• Vending Machines(14.5%)
• Mass Merchandisers(11.8%)
• Convenience Stores &Gas Sta+ons(7.9%)
• Other outlets(9.5%)
32.90%
23.40%
14.50%
11.80%
7.90% 9.50% Supermarkets
Fountain Outlets
Vending Machines
Mass Merchandisers
Convenience stores and Gas Stations Other Outlets
Sales through Retail Channel
Suppliers to Concentrate producers & Bo.lers
56% 42%
2%
Metal Cans Plastic bottle Glass bottle
� Relationship with the bottlers has been critical to Pepsi’s success over Coke
� Coke raised its concentrate prices leaving the bottlers a narrower proBit margin in the highly price sensitive industry
Bottlers UP!
1. Why has the so< drink industry been so profitable?
Threat Of New Entrants –Low • Bottling Network -‐ Have franchisee agreements with their existing bottlers who have rights in a certain geographic area in perpetuity
• Access to distribution is limited
• High brand loyalty
• Advertising Spend -‐huge advertising and marketing spend required
• Commodity Ingredients
• Majority of the U.S. CSDs were packed in metal cans - Coke and Pepsi were among the largest customers for metal can industry - Cans are commodity, 2-3 manufacturers
competed for single contract
• Plastic Bottles - 42% of CSD packaging - Bargaining power of them was low
Bargaining power of Buyer -‐ moderate
Super markets, 31%
Convenience and Gas, 15%
Supercenters, 9%
Mass retailers, 4%
Club stores, 4%
Drug stores, 3%
Fountain and Vending, 34%
Supermarkets (Food stores) - Several chain stores , Intense competition for shelf space
Mass Merchandiser
- Have private label CSDs - Extremely fragmented
Fountain
- Intense competition : Sacrificed profits to land and keep Fountains
Threat of Substitutes - Low
• Large number of substitutes were available
• Americans drank more soda than any other beverage with cola market share 71% in 1990
• Huge advertising, brand equity, and making easy availability of product reduced the threat of substitutes
Extent of Rivalry - High
• Concentrate Producer Industry – DUOPOLY
• Rest of the competition too small to cause any upheaval of pricing or industry structure
• Strategic convergence
• Head-to-Head Competition between both
• Coke and Pepsi reinforced brand recognition of each other
2. Compare the economics of the concentrate business to the bo.ling business: why is the profitability so different?
Concentrate Producers • Blend raw material ingredients, packaged the mixture and shipped those to the container bottler.
• A typical manufacturing plan costs $25 million to $ 50million.
• Significant costs were for advertising, promotion, market research and bottler relations
• Invest heavily in their trademarks and innovative marketing campaign
Bottler • Cost of sale is more in bottlers than concentrate producers
• Bottled or canned is the resulting CSD product
• Bottling process is capital - intensive plant, and involved specialized lines
• Invest a lot of capital in trucks and distribution networks
• Purchase major inputs: packaging in can, bottle and class , sweetener …
3. How has the compeIIon between Coke and Pepsi affected the industry’s profits? • The war between Coca-cola and Pepsi enables
them to elevate their level of innovation
• Overseas operations after 1960s.
• Two companies changed from American companies to international ones.
• Coca-cola and Pepsi share the most of the market;
3. How has the compeIIon between Coke and Pepsi affected the industry’s profits? • Advertising budgets are significantly increased.
• The cola wars weaken the other competitors by their advantages of plants and equipments
• Many small bottlers fold
• Coca-cola and Pepsi are both able to share the market with high profits.
4. Can Coke and Pepsi sustain their profits in the wake of fla.ening demand and the growing popularity of non-‐CSDs?
Alternative beverages bring increasing profitability due to the health consciousness of the consumers.
• Coca-cola and Pepsi can sustain their profits in the industry
• Adding new products allows larger margins and brings more potential opportunities.
• Shifting the advertising budget and marketing slogans to deliver the messages related to health consciousness also increase the demand of the consumers.
Number of competitors • 2 major players: Coke, Pepsi • Combine market share: 74.8%
Competitive strategy • Focused on advertising and promotion • Main strengths from advertising campaigns
Industry Growth • Average of 10% till 1990s and then demand leveled off • Diversify to address beverage need
Competitor Diversity • Coke and Pepsi are very similar products • Similar changes made
Exit Barriers
• Relatively low costs to exit • Contractual agreements with bottling companies
Proprietary Information
• Secret and famous cola recipe for both Coke and Pepsi • Difficult to copy by other firms
Competitive Advantage
• Famous, international brands • Partnered with fast food franchises as well
• Initially through the early 1960s Coke was the winner.
• But passage of the time Pepsi creates strong hold on the market.
• Coke was focused on overseas markets, while Pepsi focused on the US grocery channel.
• Coke and Pepsi hold almost 75% the whole market and 25% have other local CSDs or non CSDs brands.
Thank You