cola wars section a group 3

COKE OR PEPSI: ITS YOUR CHOICE, THEIR BATTLE

04/11/23 Strategic Planning and Development: Cola Wars 1

All war is deception.: Sun Tzu

Cola Wars Continue Coke and Pepsi in 2006

Case Discussion: August 23, 2012

Group 3

Major Themes

Underlying economics of an industry: Relationship to profits

Different stages of the value chain in an industry: Incentives for vertical integration

How globalization can impact industry structure

War does not determine who is right - only who is left.Bertrand Russell

04/11/23 3Strategic Planning and Development: Cola Wars

Opening Questions In such a profitable industry (see Exhibit 4),

why have so few firms successfully entered this business over the last century?

Why haven’t other great marketing companies, such as P&G (see Exhibit 9), been successful in launching competitive products?


What are the barriers to entry?


First-mover Advantages

• Brand equity: Cumulative spend on Ad. Brand identity over a long period. Part of American “culture” / World culture.

• Limited shelf space, vending slots, and fountains: Much more costly than moving into open channels.

• The franchise system: Bottling is very capital intensive, and bottlers have exclusive arrangements for colas ( 60% of CSD demand). It cost roughly $4 billion to $7.5 billion [100 plants X $40m-$75m per plant] to build national distribution (p. 3).

• Scale economies in advertising: Coke and Pepsi get much more “bang for the buck” for their core brands than smaller brands do. (From Exhibit 8 )


Question Weren’t there substitutes available? What did

they cost? Why didn’t they have much of an effect on the price?


SubstitutionMany substitutes: Water Coffee Fruit juice, etc Most of the substitutes are free, or much less costly

per ml than CSDs. How do the soft drink companies get away with

charging Rs. 60 (2.5 ltr)for a product when the “healthy” substitute (water in your home) is free?


Substitutes Not always conveniently available. In many cases, soft drinks are an impulse buy. Lifestyle choices: Coke and Pepsi have made their drinks

represent a choice about how you live, not just how you quench your thirst.

“Addiction” (especially to Coke): Half the consumption of Coke is reportedly consumed by people that drink an average of 8 cans per day!

Americans drink more soft drinks than any other beverage by a huge margin (Exhibit 1); and in some foreign countries, drinking Coke or Pepsi is a status symbol


Suppliers Do suppliers have any real power vis-à-vis the

concentrate manufacturer? Who are they?

What really goes into regular concentrate for Coca-Cola?• Not sugar (added by the bottler)• Not water (added by the bottler)• IT’S A SECRET!• NO ONE KNOWS?• How much do you think the ingredients cost?


The concentrate for 70 percent of Coca-Cola’s 1.5 billion drinks served each day originates in the tax haven of Ireland, where enough concentrate for 50,000 Cokes costs $2.60—including labor. The concentrate’s main ingredient? Caramel. *

*Newseek Aug 2009 issue


Buyers: Bottlers Bottlers have had very little power in the last 25 years, even

when they were independent. Why?• High switching costs• Franchise agreements locked bottlers into exclusive deals

Concentrate is 40% to 45% (p. 3) of COGS to the bottler, but CPs offer significant benefits:o . buying power for cans, sugar, etc.o .marketing, brand development, and product development

Competitors are very concentrated and large, relative to the bottling network: Historically, Coke had 800 bottlers.


Buyers: Final Customers Fragmented: Customers number in the

billions! Price-sensitive, but susceptible to advertising No switching costs, but substitutes not

always available


Rivalry How can companies make so much money in

the middle of a “war”?

Who has won the cola wars?

Who has lost? Why?

What have been the “weapons of war”?


Rivalry: Structural Characteristics Two players, with a long history of

interaction, dominate almost 75% of the market.

The terms are clear and well defined; both have carefully avoided downward spiral seen in other competitive contexts.

High degree of perceived differentiation


Rivalry: Tools of War “War” is measured one from the beginning: Prices

on concentrate have not been affected since the early 1970s (Exhibit 5).

Competition is focused largely on: Shelf space Lifestyle-based advertising and brand name Selective discounting on the downstream products (not on

the upstream product) DSD

BUT… NOT ON CONCENTRATE PRICES


RivalryWhy doesn’t the war escalate out of control? How do Coke and

Pepsi keep the war “within bounds”?

Opportunity for gaining advantage is very short-term Both are capable of quickly imitating each other on almost

every dimension Efforts to escalate are simply met by imitation (Michael

Jackson & Bill Cosby, FridgePack & FridgeMate; Kinley & Aquafina)

‘War’ is just to keep fizz and froth alive rather than to fight it out


Who has been winning the war?(Exhibit 2)

1950: Coke 47%, Pepsi 10% 1970: Coke 35%, Pepsi 20% 1980: Coke 36%, Pepsi 28% 1990: Coke 41%, Pepsi 32% 2000: Coke 44%, Pepsi 31.4, Cadbury Schweppes 14.7% 2006: Coke 43.1%, Pepsi 31.7%, Cadbury Schweppes 14.5%

Initially (through the 1960s), Coke was the winner:• Extensive bottling franchise• Brand name

Then Pepsi gained significant share


Pepsi Strategy Selective discounts in distribution outlets Targeted growing take-home market (i.e.,

contestable locations—supermarkets) Targeted younger consumers (“Pepsi Generation”) Motivated its bottlers (bottler size; concentrate

pricing) Competed on package size and advertising, not

price. Coke was focused on overseas markets, while Pepsi

focused on the US grocery channel


Who wins since Pepsi Challenge?

Both Coke and Pepsi! Increased share of total CSD market

[Although Coke’s cola share has actually declined; see Exhibit 2]

Expanded primary demand for CSDs

[In the last five years, cola share declined, but CSD VOLUME has soared].

Rising tide has lifted both boats!04/11/23 20Strategic Planning and Development: Cola Wars

Who has been losing?Smaller Brands Historically, they could piggyback on Coke and Pepsi’s

bottler systems Historically, little head-to-head competition (classic

niche/focus strategies)

1990s and after: Coke and Pepsi proliferate product Force head-to-head competition Coke and Pepsi fill shelf space, push small brands off the

shelf Industry is consolidating; smaller brands sell to Cadbury


Summary, so far Constrained competition High Barriers to entry Locked-in buyers Secret ingredients (low cost, hard to imitate) Lots of substitutes, but advertising and

widespread distribution limit their impact

In sum, a great business!


BOTTLERS How do the Economics of Bottlers differ

from the economics of Concentrate Producer’s?

What was the logic of the franchise system? Why did Coke and Pepsi use exclusive (vs. non-exclusive) franchise agreements in the past?


Bottling: Barriers to Entry

Exclusive franchises High capital investment in bottling and

canning lines High investment in trucks, distribution centers Shelf space limited


Open Question If you could be a bottler for Coke or Pepsi,

would you rather have NYC or Mexico City as your territory?


Buyers: Fountain Large fountain accounts, such as McDonalds, have

significant power: Fountains usually carry only one brand, so they can easily play dominant players off against each other

Coke and Pepsi are strongly motivated to get fountain accounts, in order to build brand awareness.

They don’t lower the price of concentrate; they simply “give back” money to the fountain in the form of promotions.


Buyers: Vending Highly profitable for the bottler—why? (Data in Exhibit 6

combine vending--the most profitable channel-- with fountain, the least profitable).

Machines are in hard-to-reach places, allowing for high retail prices.

In general, single-serve channels are always more profitable, explains why the growing convenience/gas channel is very profitable for bottlers

Barriers to entry/capital costs are high for vending machine The bottler shares the profit with the owner of the real estate


Buyers: Supermarkets For the supermarket, it is a high turn product—it draws in

customer traffic. Not necessarily as price-sensitive as they are in other product categories

Coke and Pepsi try to minimize supermarket power by offering more efficiency—i.e., product is delivered to the door, stocked for them.

Compared with convenience stores, mass retailers, drug stores, etc supermarkets get some of the lowest prices (Exhibit 6) and bottler margins are generally lower because of the supermarkets’ buying power and the competition for shelf space.


SuppliersDo they have power?

Concentrate Producer’s have significant power, But … Suppliers, such as can makers, are intrinsically weak

(commodities), and Coke and Pepsi negotiate the contracts on bottlers’ behalf


Substitutes for Bottlers NONE (except direct delivery to the fountain

by the Concentrate Producer) Warehouse delivery reduces some of the

function of the bottler


Rivalry Other brands share the rivalry problems with Coke and Pepsi But …Geographic exclusivity limits the competition among

bottlers. For CP producer, every sale (no matter how much it costs to

deliver) is a profitable sale; for bottlers, the key is to find profitable sales (i.e., where sales and delivery do not eat all of their margin).

If bottlers had non-exclusive territories, the tendency would be to expand geographically and go after the easy sales (vending, warehouses, etc.).

But the CP wants exclusive franchises to force the bottler to saturate their territory: A bottler can only grow in this system if it increases saturation.


Summary, so farBottling is clearly much less profitable; most bottlers

lost money in the 1990s. The keys are rivalry and suppliers: Barriers To Entry—high Substitution—limited Rivalry—can be fierce in certain markets where Coke and

Pepsi are fighting Suppliers—Coke and Pepsi appropriate most of the

returns Buyers—vary with the distribution channel


TransitionCoke and Pepsi have created a very profitable

industry that has lasted more than a century. What are the likely challenges to the stability of the industry structure in the coming decade? What are the potential drivers of structural change? Globalization Demographics/flattening demand Non-CSD beverages


Non-CSD beverageCoke and Pepsi are attacking these categories

themselves, each trying to become a “total beverage company.” Will this approach lead to brand dilution? Do CPs risk becoming a less profitable business

if they do not extend the brand? No good answers yet to these questions: Pepsi, so

far, has had more success and has been more aggressive with non-CSDs.


Pepsi’s Portfolio


Non-CSD beverage The business model for non-CSDs is

somewhat different from the classic CSD model (pp. 11-14)

The supply chain and bottling requirements add complexity to the value chain, compared with the relatively simple CSD model.


Non-CSD beverageThe basic principles of the business remain the same: Coke and Pepsi own the brand and control product

development; Dedicated bottlers leverage economies of scope in

distribution (selling to same outlet, same trucks). There are exceptions—e.g., Gatorade is delivery

through food wholesalers. As niche products, non-CSDs carried prices and

margins that are higher for everyone in the value chain.


The Implications of Bottled Water Will Coke and Pepsi be able to repeat their

success with CSD in the water segment, or will a new competitive dynamic emerge? (page 14)


Bottled WaterRepeat of CSD New (less attractive) Industry Structure

Economies of scale in advertising Hard to create brand loyalty Barriers to entry in distribution Highly fragmented, competitive structure Similar economics of concentrate firm High price sensitivity Little differentiation (e.g., taste)


Bottled Water Unless Coke and Pepsi can generate brand

loyalty and establish their brands, water is more likely to become a commodity-like product, where despite the scale and barriers in distribution, most of the profits will be extracted by the distribution channel (retailers) rather than by the concentrate companies or (especially) the bottlers.


Summary of the Case1. One of the clearest examples on how firms can create

and exercise market power.

2. To really understand the opportunities for strategy, we have to look at the underlying economics of the firm and the industry, and its related (upstream and downstream) parts.Without understanding the economics of the CP and bottler,

we cannot understand the motivations and the likely success of moves like vertical integration.


Summary3. Coke and Pepsi did not just inherit this business; they

created it. Part of their on-going success will be a function of their ability to structure not only their businesses, but the industry as a whole (In other words, industry structure is not always exogenous, it can be endogenous).

4. Coke and Pepsi are the classic case (no pun intended) of “smart” competitors:

When they go to war, they kill the bystanders— not themselves.


Cola Wars: Indian perspective


Carbonating Indian throats Any guess on how Coke and Pepsi are able to

achieve Bottom of the Pyramid Sales in India, a country which has by itself traditional cool drinks ?


The recyclable 200ml glass bottle


Brand building Strategies Coke : As an expression of happiness. To be

savored in happy moments. ‘Open Happiness’ is the latest campaigns.

Pepsi: As a drink for the youth. Use celebrities to promote its drinks.


Use of Celebrities

More profound by Pepsi. Ad campaigns of Youngistaan with Ranbir and Deepika.

Also most Indian young cricketers promote Pepsi products. It is known to drop aging celebs in favour of young and upcoming celebs. For example: Ranbir in place of SRK and Dhoni in place of Sachin Tendulkar.

Coke except with the Aamir Khan starrer Thanda Matlab Coca Cola ads has not created a sustained celeb endorsement


Attracting local tastes Coke’s acquisiton of Parle’s beverage

divisions , brands like Thumbs Up, Maaza etc.

Both Pepsi and Coke releasing Nimbu Paani versions of their drinks


An alternate reality: Health conscious individual There is a lot of talk about lifestyle diseases

and people being health conscious. Though there is not much traction in general. Its an niche waiting to explode mainstream.

Who gets hurt more? Pepsi or Coke?


Pepsi’s Portfolio of snacks brand can be leveraged but not with the current snacking options which are not healthy. But a step ahs been taken with Lays Baked Chips.

Both Pepsi and Coke has a line of fruit juices to target this segment/

Coke tends to lose more if it does not diversify.


Thank You

cola wars section a group 3

Documents