Cola Wars Continue:Coke and Pepsi in 2006

Presented by:

Tigers TeamSpring 2008

Overview History

Historical Industry Profitability

Concentrate vs. Bottler Profitability

Competition between Coke and Pepsi

Sustaining Profits

History of Pepsi Pepsi was created in 1893 in North Carolina by

Pharmacist Caleb Bradham. By 1910 Pepsi had built a network of 270

bottlers. Pepsi struggled and declared bankruptcy twice During Great Depression grew in popularity due

to price decrease to a nickel. In 1938, Coke sued Pepsi-Cola brand for

infringement on Coca-Cola’s trademark.

History of Coca-ColaCoca-Cola was formulated in 1886 by pharmacist John Pemperton who sold the product at drug stores as “potion for mental and physical disorders.” In 1891, Asa Candler acquired the formula, established a sales force and began brand advertising of Coca-Cola.In 1919, went public under control of Robert Woodruff expanded and developed in national and international markets.Successful during WWII with the high CSD consumption from the U.S soldiers.

Industry Profitability: Porter’s Five Forces Rivalry

Coke

Pepsi

Cadbury

Substitutes

Alliances

Acquisitions

Product Innovation

Porter’s Five Forces (Cont.) Barriers to Entry

Exclusive Territories

Substantial Investment

Current Market Presence

Power of Suppliers

Sugar

Packaging

Porter’s Five Forces (Cont.) Power of Buyers

Super Markets

Convenience and Gas

Mass Merchandisers

Fountain

Vending Fast Food

Profitability of the CSD Industry

Concentrate Business vs. Bottling BusinessConcentrate Producers

Blend raw material ingredients Packaged Mixture in plastic canisters Shipped to bottlers

Diet CSDs Added artificial sweeteners

Concentrate Business vs. Bottling BusinessBottlers

Purchased Concentrate Added carbonated water and high fructose

corn syrup Bottled CSD product Delivered to customers accounts

Diet CSDs Added sugar or high-fructose corn syrup

Concentrate Business vs. Bottling Business Concentrate

Producer Little Capital

Investment Cost of $25 million -

$50 million One plant to serve US Significant cost-

advertising, promotion, market research and bottler support

Bottlers Capital Intensive High-speed

production lines Bottling costs $4

million to $10 million Capacity of $40

million warehouse cost $75 million

Coke and Pepsi each require 100 plants

Pressure from Coke/Pepsi

Bottler Consolidation

Bottler plants decreased in the US2000 plants to 300 from 1970-2004Coke’s re franchising bottling operationsBuying Poor managed bottlersInfusing with capitalSelling to large bottling plants

•In 1985, Coke purchased two of the largest bottling companies

Vertical integration

Affects on Industry’s Profits Coke was the first concentrate producer to build a

nationwide franchise bottling network, that Pepsi and Cadbury Schweppes followed suit.

Franchise agreements with both Coke and Pepsi allowed bottlers to handle the non-cola brands of other concentrate producers.

Bottlers could not carry directly competing brands.

Affects on Industry’s Profits (Cont.) Throughout the 1980s, the growth of Coke and

Pepsi put a squeeze on smaller concentrate producers

Shelf space for small brands declined and were shuffled from one own to another.

Affects on Industry’s Profits (Cont.) In a five year span, Dr Pepper was sold several

times, Canada Dry twice, Sunkist once, Shasta one, and A&W once.

Phillip Morris acquired Seven-UP in 1978 for a big premium, but racked up huge losses in the early 1980s, and then left the CSD business in 1985.

Affects on Industry’s Profits (Cont.) In 1990s, through a series of strategic

acquisitions, Cadbury Schweppes became the third-largest concentrate product.

Coke has a world market share of 51.4%, Pepsi has 21.8% and Cadbury Schweppes has 6%

Sustaining Profits Shift to non-carbonated beverages

(keep up with demand of health conscious society)

Continue on current path and see where it leads

U.S. Liquid Consumption Trends

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1970 1981 1990 1996 2000 2003

CSDAlcoholMilk NCSD