Cola Wars Continue Case Study Analysis

Presented by-Dhirendra Singh

Erwin Saurabh Tigga

Debabrata Swain

Dilip Kumar

Ganesan.M

War over $66bn industry

lasted between 1950-1990s

New Challenges

• Cola wars continued into the 21st century with new challenges– Was their era of sustained growth and profitability

coming to a close?

– Could they boost flagging domestic CSD sales?

– Would newly popular beverages provide them with new (and profitable) revenue streams?

Production & distribution of CSD

• concentrate producers • Bottlers • Retail channels • suppliers

Concentrate Producer

• Blended raw material ingredients,packaged the mixture, shipped those container to the bottler.

• Key production investment areas - machinery, overhead and labor. A typical manufacturing plant cost - $25 million to $50 million

Concentrate Producer• Significant costs were

for advertising, promotion, market research.

• Coca-Cola and Pepsi-Cola claimed a combined 74.8% of the U.S. CSD market in sales volume in 2004

Bottlers

• Bottlers purchased concentrate

• Added carbonated water and high-fructose corn syrup

• Bottled or canned the resulting CSD product

• Delivered it to customer account

Bottlers • Bottling process is capital intensive.• Packaging accounted for 40% to 45% of sales,

same for concentrate and sweeteners for 5% to 10%.

• Coke and Pepsi bottlers offered “direct store door delivery”.

• Cooperative merchandizing agreements is a key ingredient of soft drink sales.

Profitability

• Concentrate producer earn more profit than bottler.

• Cost of sale is more in bottler.

Retail channel

• Super markets• Vending machines• Convenience

stores• Gas stations

Suppliers to Bottlers

• Coke and Pepsi were among the metal can industry’s largest customers.

• Major can producers- Ball, Rexam, Crown Cork & Seal

Cola War beginsCola War begins• “Beat Coke”

• “Pepsi Generation”• “young at heart.”• Concentrate Price 20%

lower• 1970 – larger bottlers

• “American’s preferred taste”

• “No wonder Coke refreshes best”

Year 1960s – Year 1960s – the the ArmageddonArmageddon

• Fanta (1960)• Sprite (1961)• Low calorie cola Tab (1963)

Non-CSD (Purchased)Non-CSD (Purchased)• Minute Maid (fruit juice)• Duncan foods (coffee, tea, hot chocolate)• Belmont Springs water

• Teem (1960)• Mountain Dew (1964)• Diet Pepsi (1964)

Non-CSD (Merged) Non-CSD (Merged) •Frito Lays

Pepsi’s ChallengePepsi’s Challenge• Blind taste test• Eroded Coke’s Market share• Part of Pepsi’s promotional strategy not a part of marketing research.

• Rebates• Retail price cuts• Advertisements that questions tests validity• 1978 – Re-negotiation of contract with franchisee bottlers

Leadership• 1980 – Roberto Goizueta•Share price rose by 3500%•Most valuable Brand• Use of lower priced corn syrup against sugar• Double spending on ads 1981-84• Sold non-CSD business• Diet Coke (1982)

• 2001: Steve Reinemund “Grow the core add some more”• Launched new CSD products (Sierra Mist, Mountain Dew code red)• Acquisition of Quaker Oats • Net income raised by 17.6% per year• ROI capital 29.3 (2003) from 9.5 (1996)

Product Launch• Teem (1960)• Mountain Dew (1964)• Diet Pepsi (1964)• Lemon Lime Slice (1984)• Caffeine free Pepsi Cola (1987)• Sierra Mist (2000)• Mountain Dew Code Red (2001)• Pepsi One (2005)• Diet Coke with Splenda (2005)

• Fanta (1960)• Sprite (1961)• Low calorie cola Tab (1963)• Diet Coke (1982)•Caffeine free coke (1983) •Coca-Cola Classic (1985)• New Coke (1985)• Cherry Coke (1985)• Sierra Mist Free (2004)• Coca-Cola Zero (2005)

Expansions• Acquired – Pizza hut (1978), Toco Bell (1986), KFC (1986)• Merged with Frito Lay to form PepsiCo• Pepsi purchased Quaker Oats

• Exclusive deals with Burger king, McDonalds• Purchased Minute Maid, Duncan Foods, Belmont Springs water• Acquired – Planet Java coffee drink brand• Acquired - Mad River juices and tea

Marketing Campaigns• Pepsi generation• Young at heart• Pepsi challenge• Smart Spot – good for you

• Americans Preferred Taste• No wonder Coke refreshes best

ChallengesChallenges

•Flat demand during 1998 to 2004.•Contamination scare at India•Obesity Issue•Challenges of Internationalization

Challenges to Coca-ColaChallenges to Coca-Cola

• Performance & execution: on providing alternative beverages on adjusting key strategic relationships, on cultivating international markets

• Currency crisis in Asia and Russia• Recall in Belgium – (public relations disaster)• Series of legal problems

1996-2004:reversal of fortune

• Pepsi flourished• Acquisition of

Quaker oats• 3% growth 2004• Net income rose by

17.6% per year• ROI 29.3% from

9.5%(1996)• Shareholders return

46%

• Coke struggled• Flat growth• Annual growth in

net income falls to 4.2% from 18%(1990-96)

• Shareholders return -26%

Quest for alternatives• Market share:• CSD- 80%(2000) to 73.1%(2004) • Diet soda- 24.6%(1997) to 29.1%(2004)• Bottled water 6.6%(2000) to 13.2%(2004)• Non-carbs 12.6%(2000) to 13.7%(2004)• Non-carbs & bottled water contribution to volume

growth – coke 100% & Pepsi 75%

Quest for alternatives

• No longer designing of marketing course

• Diet Pepsi, Pepsi One, Diet Coke with slpenda

• Diet Pepsi as flagship brand

• Non-CSD: total beverage company

• Reluctant to diversify

Evolving stuctures and stratgies

• System profitability• Price war• low -cost strategy by the bottlers• Incidence pricing• Retailers resist price increases(Wal-Mart)

• Coke’s relationship with bottlers :• Dysfunctional,

Internationalisation• Next largest market: Mexico, Brazil, Germany, China, and

the United Kingdom • Asia and Eastern Europe• 837 eight ounce cans: 21 eight ounce cans• Coke’s dominance : Western Europe, much of Latin

America, while Pepsi :Middle East and Southeast Asia.• Coca-Cola became synonymous with American culture. • About 70% of Coke’s sales and about 80% of its profits

came from outside the United States; only about one-third of Pepsi’s beverage sales took place overseas.

• Arab and Soviet exclusion of Coke

Venezuela crisis Before After

SWOT : Strengths• Coke Brands Enjoy a

High-Profile Global Presence

• Four of the top five leading brands

• Broad-based bottling strategy

• 47% of global volume sales in carbonates

•PepsiCo Brands Enjoy a High-Profile Global Presence

•Pepsi Owns the World’s 2nd Best-Selling Soft Drinks Brand•Constant Product Innovation

•Aggressive Marketing Strategies Using Famous Celebrities

•A Broad Portfolio of Products

SWOT : Weaknesses• Carbonates Market

is in Decline• Over-complexity of

relationship with bottlers in North America

• Execution ability

•Carbonates Market is in Decline•Pepsi is Strongest in North America•They Only Target Young People

SWOT :: Opportunities• Soft drinks volumes in the

Asia-Pacific region forecast to increase by over 45%

• Brands like Minute Maid Light and Minute Maid Premium Heart Wise are positioned well with the “Health-concerned” market

• Use distribution strengths in Eastern Europe and Latin America

•Increased Consumer Concerns with Regard to Drinking Water

•Growth in Healthier Beverages

•Growth in RTD Tea and Asian Beverages

•Growth in the Functional DrinksIndustry

SWOT : Threats• Growing "health-

conscience" society• PepsiCo’s Gatorade,

Tropicana and Aquafina are stronger brands

• Boycott in the Middle East

• Protest against Coke in India

• Negative publicity in WesternEurope

•Obesity and Health Concerns

•Coca-Cola Increases Marketingand Innovation Spending to$400M Globally

•Relying on North America onlyis Bad

Profit Margins of Industry Concentrate Producers and Bottlers

US Liquid consumption trends (gallons/capita)

Source- US Beverage industry Consumption Statistics

Promising SegmentUS Liquid consumption trends (gallons/capita)

Source- US Beverage industry Consumption Statistics

Market Share by case volume(percent)Coca cola 1966-04 : 29.04% GainPepsiCo 1966-04 : 55.14% GainOthers 1966-04- 82.55 % loss

Q:Who has been losing?• Smaller Brands:• Because-Entry Barrier, Duopoly

Q: Who has been wining the war?• 1950: Coke have 47% and Pepsi have 10%• 1970: Coke have 35% and Pepsi have 29%• 1990: Coke have 41% and Pepsi have 32%• 2000:Coke have 44%Pepsi have31.4% other

beverage Cadbury Schweppes 14.7%• 2006:Coke have 43.1% Pepsi have 31.7% Cadbury

Schweppes 14.5%

Key questions

Q: Could they boost flagging domestic CSD sales?

• Through Product innovation• Aggressive marketing and promotion• Packaging innovations

• Would newly popular beverages provide them with new (and profitable) revenue streams?

• Yes• Non carb and Bottled water contribution to Total volume growth: Coke-100%, Pepsi-75• Contamination issue, Obesity issue

Q-Can Coke and Pepsi sustain their profits in the wake of flattening demand and the growing popularity of non-CSDs?

• Coke and Pepsi did not just inherit this business they created it.

• By diversification.• Innovation : e.g diet coke

Thank you