GIFT University

Final Project

Cola Wars
Continue
Coke and Pepsi in 2006

Cola Wars Continue: Coke and Pepsi in 2006

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Executive Summary
Prior versions of the case have been used to teach various subjects, including industry
analysis, competitive dynamics, and vertical integration. While this case tries to incorporate some
of the essential elements about the history of competitive dynamics and the historical patterns of
vertical integration the primary teaching purpose of this case is to discuss the economics of the
U.S. soft drink industry. Concentrate producers (CPs) sold syrup and concentrate to franchised of
company owned bottlers, and made gross margins of 83% and a pretax profit margin of 30%. The
best-know CPs were Coke and Pepsi. Historically, Coke and Pepsi were also major bottlers, but in
the mid-to late 1990s, both had divested their bottling operations while maintaining significant
equity ownership and indirect control of bottling networks. CPs invested heavily in advertising
and marketing. One of the key issues for students to understand is why most of the profits in this
industry are earned upstream in the concentrate business.
The bottling business was much less profitable than concentrate, particularly in the mid-
1990s. Bottling profits improved somewhat in recent years, in part because the concentrate
manufacturers could no longer squeeze the bottlers without disrupting their own distribution.
Bottlers invested in bottling and caning lines, trucks, and warehouses and earned gross margins
40% and pretax profit of 9%. Coke and Pepsi bottlers delivered their products directly to the store
which was part of their strategy for differentiation over private label. Private label offered
warehouse-delivered product. Historically, bottling had been a very good business: Franchised
bottling contracts were very generous to the bottler. Coke and Pepsi had given bottles franchises
in perpetuity, allowed bottlers the final say on pricing and gave bottlers significant influence over
whether to participate in local advertising campaigns promotions new packages and product
introductions. In additions bottlers could carry allied brands as long as they did not compete with
Coke or Pepsi brand.
For distributors, soft drinks were a large part of their business. Soft drinks drew customer
traffic, and historically earned gross margins of 15%-20%. The major distributor of soft drinks
was supermarkets, with 32.9% of volume. Mass merchandisers distributor retailers and
warehouse clubs such as Wal-Mart and Sam’s Clubs were also a growing category. It is worth as
king students warehouses are so profitable for CPs. This would appear to be counter-intuitive
since the answer gets to the heart of war
Suppliers, which included packaging and sweetener companies, had virtually no power in
the industry. Part of the reason was that even though the bottlers were purchasing from suppliers,
Coke and Pepsi negotiated with suppliers on behalf of their bottlers, creating much more buying
power than a fragmented bottling network could offer.

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The case then summarizes the history of the Cola Wars, spanning 100 years. Early
History starts with the creation of both drinks in the late 1800s at the fountain counter. Pepsi
managed to become a contender by selling 12 ounces of Pepsi for 5 cents, while Coke was selling
6.5 ounces for 5 cents. Pepsi almost went bankrupt twice but finally emerged as a viable
competitor in the 1930s. Coke entered the overseas market with the advent of World War II giving
the company a huge lead over Pepsi in international markets. Up until the 1970s Coke never
referred to its closest competitor by name signal that it did not believe it had any real competition.
Pepsi was fighting fiercely for share and managed to double its share between 1950 and 1970 by
focusing on supermarket sales. The take-home market was not Coke’s core business, and Coke
tended to focus on vending and fountain.
The Pepsi Challenge deals with Pepsi’s emergence as a serious, head-to-head competitor.
The challenge was a local gimmick introduced in Dallas Texas by a small Pepsi bottler. It was so
successful in conveying the message that Pepsi tasted better than Coke that it was rolled out
nationally. Coke ended up losing market share. In 1979 Pepsi passed Coke in food store sales for
the fist time. This was also the first time that a Pepsi attack made Coke sit up and take notice.
During this period Coke amended its bottling contract so that if could increase the price of
concentrate. Pepsi countered this move by increasing the price of concentrate to its bottlers.
The Cola Wars Heat Up covers the era that began when Roberto Goizueta took over at
Coca-Cola. The company began buying up its bottlers and selling off non-sot-drink businesses.
The Coke brand was extended for the first time to Diet Coke and the formula for Coca-Cola was
changed for the first time. While all this was going on smaller Cps were being bought and sold
numerous times.
Bottler Consolidation and Spin-Off explores the important trends in vertical integration
and disintegration from the mid 1980s to roughly the present. Coke spun off its bottlers and
created anchor bottlers which it controlled but did not own. Pepsi continued to own run and
manage its bottlers until the end of the 1990s when it decided to imitate Coke.
The case gives some of the obvious rationales. The CP wanted more control of its bottling
network in order to increase economies of scale introduce more new packages and products more
frequently change national advertising and promotional campaigns and phase out under
performing local bottlers. However it is not necessarily clear that CP had to buy the bottlers to
achieve these results. In addition these comments in the case are at a high level of abstraction.
Part of the incentive to vertically integrate was to solve a classic transaction cost problem. When
Coke or Pepsi with their bottlers over how best to deal with the other competitor company-owned
bottlers could respond faster and with greater efficiency. In addition to competition was limiting

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price flexibility for the bottler. Prices of soft drinks had been below the CPI for a decade. It was
getting harder and harder for Coke and Pepsi to raise the price of concentrate and appropriate the
profits upstream if the bottler were incapable of passing the costs along of squeezing more costs
out of the system. By buying bottlers and creating greater economies downstream coke and Pepsi
were better able to appropriate profits upstream.
After a decade of squeezing the bottlers however both Coke and Pepsi realized that they
may have extracted too much from their downstream partners. Bottler’s profitability had dropped
precipitously in the 1990s causing under-investment and poor performance. The case highlights
the decisions by Coke and Pepsi in the early 2000s to re-inject some margin into the bottlers
business and to show greater flexibility on concentrate pricing through incidence pricing.
The newest section of the case “Adapting to the Times” which examine recent problems
faced by Pepsi and especially by Coke the rise of non-CSD beverages and the international
dimension of the cola wars. The biggest problem facing Coke and Pepsi is the flattening of CSD
demand for the first time in several decades combined with the growing popularity of tea bottled
water and other non-CSD alternatives. The very end of the case posses the problem clearly. Was
the fundamental nature of the cola wars changing? Or did the changes under way represent
simply another step forward in the evolution of two of the world’s most successful companies?
Can Coke and Pepsi make the transition to the non-CSD segment?

SWOT Analysis

Strength
• Brand Equity

• Wide World Market

• Brand Attachment

• Competitive Advantage

Weakness
• Strong Competition

• Alternative

• Change Failover

Opportunity

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• Introduce New Failover

• Segment

• Encourage their supplier

• Take More Profited

Threat
• Substitution

• Suppliers

• Buyers

Brand Equity
• According to this case Coke and Pepsi both cumulative spending on advertising.
• Coke and Pepsi established brand identity over a long period of time. Now these brand
become culture of almost every countries and in the case of Coke become part of World
Culture
• So this is very strong point of the these brand for establish their identity and their
consumer attachment
Wide World Market
• According to the case Coke and Pepsi capture wide world market. Its impact on
globalization.
• These both brand hold global market, and other brand just capture just their areas market.
Brand Attachment
• Coke and Pepsi both establish almost for more than a century and consumers have
emotional attachment with these two brands.
• Consumers identify these two brands for distance, these all things are the brand
strategies.
• Advertisement create cozy relationship with their consumers they feel relax to use these
brands.
Competitive Advantage
• In these both companies they invests heave amount which other competitor do not
invest in their company.

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Strong Competition
• According to this case the first and biggest week point both brand is strong competition
between Coke and Pepsi.
• Much expansive advertisement for their brand equity

Alternative
• In this case the second important thing is that the alternative of the CSDs. The local brand
in different areas available and these local brands are very low cost and low price.
• Consumers using non-CSDs brand. They are moving non-CSDs brands.

Introduce New Brands

• For Coke and Pepsi have more opportunity to introduce new brands in different taste.
These both brand Coke and Pepsi have very strong brand.
• Consumers have interest in both brands, and each new brand have market value very
strong then other.
• Coke and Pepsi have almost world culture and some new strategy they can easily capture
the market.

Segment
• Coke and Pepsi have focus on customer segmentation, for each segment they can easily
serve.
• They can easily search new segment for their products.

• Franchise system is the best way to search new segmentation, which have very strong
segment? And how can they serve in those segments.
• Segmentation proved very easily approach for their targeted customers.

Problems & Solution

Q: What are the challenges to the stability of the industry structure in the coming decade?
-Globalization
-Demographics or Flattening Demand

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-Non-CSD Beverages
Regarding non-CSD beverage Coke and Pepsi are attacking these categories themselves,
with each trying to become a total beverage company.
Pepsi so far has had more success and has been more aggressive with non-CSDs. From pages 11-
14 we know that the business model for CSDs is somewhat different from the classic CSD model.
The supply chain and bottling requirements add complexity to the value chain, compared with the
relatively simple CSD model. Nonetheless the basic principles of the business remain the same.
Coke and Pepsi own the brand and control product development their dedicated bottlers leverage
economies of scope in distribution. However there are exceptions Gatorade is delivery through
food wholesalers. Meanwhile as niche products non-CSD carried prices and margins that are
higher for everyone in the value chain.

Q: Who has been losing?

Smaller Brands:
Historically they could piggyback on Coke and Pepsi bottler systems.
Historically little head-to-head competition
1990s and after:
Coke and Pepsi profitable 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.
These all things focus on that Coke and Pepsi are wining and the other local brands and
substitutes.

Q-Can Coke and Pepsi sustain their profits in the wake of flattening demand and the
growing popularity of non-CSDs?
For example water, coffee, fruit juice, and etc
Most of the substitutes are free or much less costly per ounce than CSDs. Americans drink more
soft drinks than any other beverage by a huge margin. Coke and Pepsi did not just inherit this
business they created it. Part of their own going success will be a function of their ability of
structures not only their businesses but the industry as a whole. In other words industry structure
is not always exogenous, it can be endogenous.

Q-Who has been wining the war?

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If we see the exhibit 2, we can easily observed

 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%
Initially through the early 1960s Coke was the winner. The reason was the extensive bottling
franchise. And the second most important is its brand name.
But passage of the time Pepsi creates strong hold on the market. If we see 1950 to 1960 Coke
was the leader but after 1970 to 1990 Pepsi capture the market. Then Pepsi gained significant
share: to selective discounts in distribution outlets, targeted growing take-home market, and
targeted younger consumers like “PEPSI GENERATION “
Motivated its bottlers like bottler size, concentrate pricing etc.
Competed on package size and advertising not price.
Coke was focused on overseas markets, while Pepsi focused on the US grocery channel.
And they are trying to hold on all the market. In other side Coke was the winner in 1970s its share
was down but Coke to sustain their growth and after 1970s Coke have capture their market. Coke
and Pepsi hold almost 75% the whole market and 25% have other local CSDs or non CSDs
brands.

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