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EJM
53,1
2 Jagdish Sheth
Received 22 July 2018
Accepted 23 July 2018
European Journal of Marketing
Vol. 53 No. 1, 2019
pp. 2-19
© Emerald Publishing Limited
0309-0566
DOI 10.1108/EJM-07-2018-0489
Do brands compete or coexist?
How persistence of brand loyalty
segments the market
Emory University Goizueta Business School, Atlanta, Georgia, USA, and
Anthony Koschmann
Eastern Michigan University College of Business, Ypsilanti, Michigan, USA
Abstract
Purpose – This study aims to question the conventional wisdom that brands compete for customers,
especially in mature industries such as soft drinks. Rather than engaging in price wars or promotion wars,
brands coexist in the markets by focusing on their own brand loyal customers.
Design/methodology/approach – Consumer panel data of carbonated beverages are examined using
Markov chains to measure switching between two brands: Coke and Pepsi. Switching rates are conducted for
all Coke households (n = 10,474) and Pepsi households (n = 7,227). This is further examined with respect to
heavy half (upper median) consumers of each brand who make up approximately 86 per cent of volume
purchases.
Findings – Households that made a majority of their purchase volume in either Coke or Pepsi products
stayed with their preferred brands in subsequent quarters: 85 to 97 per cent of households. These findings are
validated at all levels of the brand architecture (family brands, product brands and modified brands), even
though both brands engage in similar marketing mix tactics (advertising, price cuts, distribution, product
offerings). Loyalty was even higher among the heavy user households.
Research limitations/implications – The research was conducted using two well-known brands in a
mature industry. Services or non-mature markets may exhibit different loyalty patterns.
Originality/value – The study extends prior research on competition, loyalty and branded offerings to
show that brand loyalty remains high despite marketing efforts to switch the brand buying behavior.
Keywords Brand management, Brands, Brand loyalty
Paper type Research paper
Introduction
A central tenet of the free enterprise economic system is that firms compete for consumers.
The business press often highlights examples such as McDonald’s versus Burger King,
Chevrolet versus Ford and Microsoft versus Apple. This belief of direct competition is
especially held for mature products and industries such as soft drinks in which growth is
stagnant (or possibly declining); staying alive often means stealing market share from
competitors or acquiring competitors through mergers and acquisitions. Companies use
marketing tools such as creative advertising, loyalty programmes and packaging
innovations to appeal to consumers to avoid price wars.
Yet, there is significant prior research that substantiates the belief that advertising
largely reinforces the existing brand loyalty, that distribution is often saturated and that
loyalty programmes are designed to retain the brand’s heaviest users (who make up a
disproportionately greater amount of sales). This typically leaves price reductions and
product innovations as tools to maintain consumer loyalty and reduce defections. If brand
loyalty declines over time – and managers believe that consumers are becoming more price Do brands
conscious – brands lose their differential advantage and become commodities. The allure of compete or
price cuts is that it may sway heavy users of competing brands, who are presumed to be
more price aware (and sensitive). This reinforces price consciousness, resulting in greater
coexist?
brand switching and reduced brand loyalty among the competing brands. While product
innovation is a great way to differentiate the brand and create renewed interest, it can be
imitated by competitors. Additionally, brand innovations and line extensions largely create
their own loyalties among existing brand users. 3
The prevailing view is that firms ruthlessly compete against each other using these
marketing tools to win over customers and gain market share, especially in mature product
categories. The authors propose that brands segment the market and coexist with one
another rather than compete directly. That is, loyalty among the brand’s heaviest users
remain high, despite advertising and price cuts, as these consumers seldom switch to a
competitor.
Using two well-known brands which have similar marketing mix tactics (Coke and
Pepsi), the authors examine brand loyalty at several levels of the brand architecture: the
“family brand” (Coke vs Pepsi overall), the “product brand” (e.g. Diet Coke vs Diet Pepsi) and
the “modified brand” (e.g. Diet Caffeine-Free Coke vs Diet Caffeine-Free Pepsi). The authors
find that at all three levels, Coke (Pepsi) households remain loyal to Coke (Pepsi) in future
periods at a rate of between 85 per cent and 97 per cent. These high rates hold across all
three levels of the brand architecture.
Additionally, Coke households have slightly higher loyalty than Pepsi households.
Furthermore, loyalty increases with “heavy half” households, or those who consume more
than the median level of volume purchases. Even though both brands engage in similar
advertising, promotion, distribution and pricing strategies, households remain quite loyal to
their brand of choice. This challenges the belief that consumers – especially the heavy
users – switch brands in a mature industry. Furthermore, the switching that does take place
happens primarily among the lighter half of consumers; the heavy half Coke and Pepsi
households make up 86 per cent of each brand’s volume and have even greater loyalty rates.
In short, both brands coexist by holding onto their loyal customers rather than compete for
each other’s consumers. The empirical findings contribute to the area of brand loyalty in a
mature category.
This research paper is organized as follows. First, prior research on brand competition,
brand loyalty and brand architecture is reviewed. This provides the theoretical explanation
for why brands coexist in mature markets rather than compete. Next, household panel data
are analyzed using Markov chains to measure brand switching between Coke and Pepsi
products. The paper concludes with implications for mangers and future research directions.

Theoretical background
A key development for marketing, as both a field of practice and academic inquiry, is its
splintering from the normative concepts of classical economics on how firms should
compete. Rather than competing as winner-take-all profits (monopoly) or winners-take-none
profits (perfect competition), a middle ground developed for competing on characteristics
other than price. Imperfect competition (Robinson, 1933) and monopolistic competition
(Chamberlin, 1933) of markets took into account that consumer tastes vary, enabling firms
to differentiate and segment the market on dimensions other than price such as quality and
convenience.
Identification of different segments within a market, to not compete on price, lies at the
heart of current marketing practice and theory. One key tool is the use of the brand and its
EJM meaning to consumers. In creating distinct meanings, a brand aims to create a differential
53,1 advantage by distancing itself from competing brands. The more the brand can insulate
itself from competitive forces, the less it has to compete on price, allowing for greater
margins and profitability.
As product categories grow over time, adoption rates and consumption habits reach a
natural ceiling. Mature categories become less differentiated and resemble commodities
4 (Rangan et al., 1992), particularly if all brands become fast followers by imitating the
innovative brand. As competitive pressures intensify and brands are perceived as more or
less the same, competitive brands end up in a prisoner’s dilemma and are more likely to have
better outcomes through building implicit coalitions (Fader and Hauser, 1988).

Why Brand strategies matter more in mature categories

For brands in a mature product category, competitive strategies shift from growing the
brand to defending the brand. This includes diversifying the product line, price matching,
intensifying distribution and communicating brand differences (Kotler and Keller, 2015). A
key trait of mature categories is that they eventually evolve to only two or three large
volume players (Sheth and Sisodia, 2002). Prior research has concluded that in the long run,
the elasticities are higher for product and distribution than for advertising or promotions
(Ataman et al., 2010).
Pricing actions through promotions represent a risky path for a mature brand, since the
intent of the brand is not to compete on price in the first place. Competing on price has
shown disastrous effects, as was the case of the airline industry in the early 1990s. American
Airlines slashed fares up to fifty per cent on most routes and its competitors (Delta and
United) fast followed in matching the price cuts. The industry lost $13bn over four years
(Morrison and Winston, 1996). There are similar experiences in the beer, automobile and
aerospace industries. Price wars have other adverse long-term effects, such as ultimately
lowering product quality (Heil and Helsen, 2001) and damaging brand equity. According to
Levitt (1980), products and brands can avoid the “commodity trap” by differentiating. As
Levitt stated, “You can differentiate anything”.
Advertising also presents challenges. As mentioned before, advertising elasticity is
generally lower in the mature stage than growth stage of the product lifecycle (Sethuraman
et al., 2011). It also has less effect in a mature market than in-store displays or price cuts
(Tellis, 1988), with the effect dominated by loyalty. Consumers in mature categories are
more likely to be familiar with the brands and the product category, making advertising
appeals less persuasive.
While distribution is identified as having better elasticity on sales, a fair question is how
much more the brand can gain. In mature markets, distribution coverage is usually
equalized and short-term changes (such as demand from a promotion) have little impact
(Krider et al., 2008). Past evidence suggests brands generally phase out certain distribution
outlets when the category starts to decline, implying that mature categories are near peak
with respect to accessibility (Kotler and Keller, 2015). This is further accelerated be the fast
growth of online retailing.
This leaves brand development as the most promising effort to defend and grow in a
mature market. However, managers are often concerned that new brands and brand
extensions might:

cannibalize the existing brand (e.g. did launching Courtyard by Marriott take away
sales from existing Marriott customers?); or

affect the brand equity of the original brand.
One way to grow a mature product category is to develop a variety of sub-brands under a Do brands
master brand and in the process, discover new segments. The use of a brand architecture compete or
(Aaker, 1996) ranging from “branded house” to “house of brands” creates sub-brands or sub-
categories. Firms often segment the market further by adding new brands or variants of the
coexist?
existing brand. To reach price-conscious consumers, for example, a brand may launch a
“fighter brand” to use brand resources like procurement, processes and distribution (Ritson,
2009). Two examples are the Intel Celeron processor and Luvs brand disposable diapers,
which were configured to compete for different segments other than the Intel Pentium
5
processor and Pampers brand disposable diapers, respectively.
How Brand architecture enhances customer loyalty. The brand architecture strategy uses
the brand name and conveys distinct brand elements across products (Keller, 2013). Of
interest here are three brand levels: the family brand, the product brand and the modified
brand (Keller, 2013). This includes not just flavor varieties but also formula and size
modifications. Some examples highlight this strategy: Ford automobiles, Dell computers
and Hunt’s tomato products. These are all family brands, where the brand name covers
multiple product categories. For instance, Ford sells cars, trucks and vans. Dell
manufactures laptops, servers and monitors. Hunt’s (owned by ConAgra Foods) makes
ketchup, tomato sauce and diced tomatoes. Within each of these family brands is a product
brand – a particular brand that speaks to one particular differentiated product category.
Continuing the example, Ford F-150 is a line of trucks; Dell Latitude is a line of laptops, and
Hunt’s Tomato Sauce is a line of tomato sauces. These are instances of product brands. The
lowest level of the hierarchy is the modified brand. Here, the brand is configured to a specific
variety. Modified brand examples would include the Ford F-150 Raptor truck, the Dell
Latitude E5470 and Hunt’s Tomato Sauce with Roasted Garlic.
When the brand partitions itself in this manner, it seeks to uncover and meet different
customer needs. At the same time, it extends its brand name and recognition to a new and
differentiated offering. In mature markets, consumers tend to be loyal to their brands due to
habit and inertia (Howard and Sheth, 1969). Even consumers new to a mature category are
likely to develop and stay with a preferred brand path through learning and experience
(Heilman et al., 2000). This suggests consumers are more likely to be brand loyal in mature
product categories. Since the brand extends its name to specific products in the brand
architecture, this loyalty presumably extends through the brand architecture. Accordingly,
the first hypothesis is:

H1. In a mature market, consumers will be loyal to the brand at each level of brand
architecture.
Are heavy consumers more loyal? A particular consideration for marketers is that
consumption is invariably skewed, resulting in the popular 80/20 ratio in which the top
twenty per cent of customers procure (and consume) eighty per cent of the volume. Heavy-
half theory (Twedt, 1964; Frank et al., 1967; Morrison, 1968) advocates that the upper
median of a firm’s consumers constitute a much greater proportion of purchase volume. In
short, a sub-group of consumers make up a disproportionately larger part of the sales base,
making these consumers more valuable to the firm.
For more frequently purchased goods, such as carbonated soda beverages, consumers
may be interested in variety-seeking (Zhang et al., 2000), increasing vulnerability to brand
switching, resulting in less loyalty. Heavy consumers are generally more price and value
conscious (Kim and Rossi, 1994). As these consumers encounter prices more frequently, they
may develop a more accurate reference price and sense of promotion schedules.
EJM Although heavy users may be price sensitive, it actually can heighten brand loyalty. One
53,1 explanation is stockpiling. By knowing more about the pricing and promotion schedule of
brands, heavy users are more likely to watch and wait for a better deal and purchase greater
quantities. Since stockpiling and consumption go hand-in-hand (Ailawadi and Neslin, 1998),
an additional consideration is that stockpiling creates “lock-in” of consumers by taking
consumers out of the market for some time. Furthermore, these “super consumers” not only
6 buy and use more of the product but also have more involvement and commitment to the
brand (Yoon et al., 2014). Thus, the heavy users, despite being more knowledgeable about
prices, are likely to be even more loyal to the brand. The second hypothesis is as follows:

H2. In a mature market, heavy consumers will be even more loyal than all consumers at
each level of brand architecture.

Methodology
To investigate the hypotheses that customers are loyal in a mature industry, and that heavy
use consumers are even more loyal, the analysis is conducted at the three brand levels
(family brand, product brand and modified brand). The context, data and method used are
described below.

History of the cola wars

To examine the hypotheses requires a product category that is mature and features two
well-known brands which are perceived to compete head-to-head. The cola wars, a pop
culture play on words during the time of the Cold War, saw the rise and stabilization of
Coca-Cola and Pepsi as the two largest companies in the carbonated soda beverage category
with a combined market share of more than 70 per cent of the total market during this time.
The history of the relationship between the two brands also highlights that managers used
all the competitive strategies of mature brands discussed in the previous section including
price, promotion and trade wars. Both are famous for their creative advertising. Finally, the
carbonated soda beverage category further demonstrates that both brands engage in quite
similar marketing tactics.
Historically, product innovation and branding drove growth for both brands. In the early
1960s, both Coca-Cola and Pepsi sought to further their brand architecture by launching low
calorie, sugar-free colas to segment the market: Pepsi launched Patio in 1963 (re-branding it
as Diet Pepsi in 1964) and Coke launched Tab that same year. It was not until 1982 that Coke
launched Diet Coke, which quickly overtook Tab in sales of the low-calorie carbonated soda
category. Both Coca-Cola and Pepsi have innovated products, but these have been quickly
copied by the other. For instance, Pepsi launched a caffeine-free version in 1982 and Coke
followed suit the next year. Cherry Coke premiered in 1985 and Pepsi Wild Cherry launched
in 1988. More recently, Coca-Cola further segmented the low-calorie category by launching
Coke Zero; Diet Coke had been primarily viewed as geared towards women and Coke Zero
was aimed at male consumers. Pepsi launched its counterpart, Pepsi Max, in the USA, in
2007. Another brand modification is Coke’s recent launch with a stevia sweetener version for
reduced calories (branded as Coke Life). Pepsi announced shortly thereafter it will also
launch its own version, Pepsi True. Similarly, a packaging innovation is the “fridge pack” in
which Coca-Cola bottlers tested and found that the box fits into refrigerators, adding
incremental consumption. Pepsi was not initially interested in the new packaging, but the
success of Coke forced Pepsi’s hand to also adopt similar packaging.
 Further evidence of both brands using similar marketing tactics is that both Coke and Do brands
Pepsi engage in sales promotions, especially during holidays and family gatherings. Both compete or
spend significant amounts of money in advertising campaigns. Both operate similar in-store
promotion frequencies and price cuts (Meade et al., 2009). However, it seems that rather than
coexist?
switch the brand, loyal consumers of each brand engage in stockpiling or pre-purchase of
their brands.

Data
7
Of particular interest for examining brand loyalty is a product category where the brand
name is extended into product sub-categories and then further varied by creating modified
brands. Carbonated soda beverages fit these criteria. Coca-Cola and Pepsi are also highly
visible brands, ranking as the 3rd and 22nd best global brands (Interbrand, 2013). Two
related, yet distinctly different, product categories are examined: regular and diet soft
drinks. Although both companies own other soda brands (e.g. Coca-Cola owns Sprite, Pibb
and Mello Yello), only the cola category of carbonated soda beverages is examined.
A benefit of examining the carbonated soda beverage category is the ability to account
for similar marketing mix elements between the brands. Coca-Cola and Pepsi use line
pricing on products within the pack size (e.g. Diet Coke in a 2-liter bottle is the same price as
Coke Zero in a 2-liter bottle). Distribution is also the same within the modified brand level.
For example, stores carry the same pack sizes of both Diet Vanilla Coke and Diet Coke.
Promotions are also consistent: weekly grocery flyers, in-store displays and price cuts apply
across the brand varieties. In fact, both brands exhibited near parity in advertising
expenditures; Kantar Media reports in 2011 that Coca-Cola spent $161.1m and Pepsi spent
$161.9m for their carbonated soda beverage family brands. Additionally, data from
Information Resources Inc. among their panel of 55,100 households in 2011 showed that
consumers pay similar prices per unit of regular soda ($2.75 for Coke versus $2.69 for Pepsi).
There is a similar depth of average price cut (19.9 per cent for Coke versus 21.4 per cent for
Pepsi) and similar proportion of volume sold on any promotion (54.6 per cent for Coke
versus 52.4 per cent for Pepsi).
Consumer shopping history data comes from the Marketing Data Center at The
University of Chicago Booth School of Business (http://research.chicagobooth.edu/nielsen/).
The results are calculated (or derived) based on data from The Nielsen Company (US), LLC
and marketing databases provided by the Kilts Center for Marketing Data Center at The
University of Chicago Booth School of Business. Available to academic researchers, the
representative panel contains information on approximately 1.4 million UPC bar codes, as
well as purchase location, household demographics and product information. The data used
here are calendar year 2011, which tracks purchases of fast-moving consumer goods by
nearly 62,000 participating households across the USA (hereafter, consumer and household
are used interchangeably and soda in place of carbonated soda beverages or soft drinks for
brevity).
To get a feel for the market structure of both product categories, Table I presents volume
share summaries for the top soda brands in both regular and low-calorie categories. Coke
sells more than Pepsi in both product categories and the two combines for almost 50 per cent
of the market share of soda. While no particular brand comes close as a third player in the
space, private label varieties (which includes non-colas, such as lemon, lime and root beer
flavors) are treated as the number three player in the category.
A total of 50,337 households made any soda purchase during 2011. To determine which
households to include in the analysis, a two-step filtering criterion was used. First, a
household needed to purchase a majority of its volume within a family brand. For example,
EJM Brand Regular Diet Total (%) Regular (%) Diet (%) Total
53,1
Coke 32,156 46,002 78,158 21.0 30.1 25.6
Pepsi 28,590 32,669 61,259 18.7 21.4 20.0
Private label 20,475 23,215 43,690 13.4 15.2 14.3
Mtn Dew 13,870 9,679 23,549 9.1 6.3 7.7
Dr Pepper 11,528 11,220 22,748 7.5 7.3 7.4
8 Sprite 6,270 2,967 9,237 4.1 1.9 3.0
A&W 3,647 3,331 6,978 2.4 2.2 2.3
7-Up 3,540 3,380 6,920 2.3 2.2 2.3
Sierra Mist 3,095 2,430 5,525 2.0 1.6 1.8
Table I.
Canada Dry 3,144 1,560 4,704 2.1 1.0 1.5
Volume (ounces, 000) Sunkist 2,014 2,223 4,237 1.3 1.5 1.4
and market shares of Crush 2,027 564 2,591 1.3 0.4 0.8
top carbonated soda All others 22,656 13,466 36,122 14.8 8.8 11.8
beverage brands Total 153,012 152,705 305,717 100.0 100.0 100.0

a household that purchased 60 per cent of its regular soda volume as Coca-Cola products
would be a “Coke” household. This same approach was applied to regular versus low calorie
soda (for the product brand level) and also at the modified brand level (e.g. of low calorie
“Coke” households, one would be classified as Diet Coke, Caffeine-Free Diet Coke, Coke Zero
or other Coke varieties if a majority of its “Coke” purchase volume fell into one group).
Households that had no majority, such as 50/50 volume splits or a plurality of purchase
volume were excluded from analysis. These excluded households represent less than 5
per cent of the household panel and therefore, made no difference in the results. Volume
purchased is the measure used since number of shopping trips does not account for units or
unit sizes (carbonated soda beverages are frequently purchased as several units within a
shopping trip, as well as mixing-and-matching of pack sizes for different usage occasions).
Second, households in the upper half of volume purchased were further analyzed as
“heavy half” households. This serves several purposes. One, casual users generally do not
reflect true brand loyalty. Two, this also eliminates small sizes. A household with one
purchase, for example, is by definition 100 per cent loyal. Three, heavy users matter more to
the firm because they constitute the bulk of purchase volume and provide per capita
economy of scale. Table II presents descriptive statistics on Coke and Pepsi purchase
volume for all households and heavy half households in the first quarter of the year.
From the table, the Coke and Pepsi heavy half households purchase approximately twice
as much as the household median. This represents the upper quartile and is 2,188.2 ounces
for Coke households and 2,539.2 ounces for Pepsi households. To put that in perspective, the
Pepsi heavy half number represents household purchasing of more than two 12-ounce cans
of Pepsi per day. This also reflects the skewness in consumption. As a per cent of volume in
the first quarter, Coke’s heavy half households purchased 86.0 per cent of its total volume
and Pepsi’s heavy half households bought 85.5 per cent of its total volume.

Model
To estimate brand switching, households were identified as either Coke or Pepsi households
based on first quarter purchases. These Coke (Pepsi) households were then observed in the
subsequent second, third and fourth quarters (three, six and nine months later, respectively)
to see if they continued making the majority of their purchases as Coke (Pepsi) or switched
to Pepsi (Coke). The proportion of households switching between the first quarter and
Table Brand Count Mean Median SD Minimum Maximum
Do brands
compete or
Descriptive statistics of all first quarter household purchases by brand level coexist?
III ALL 50,337 1,558.9 917.4 1,918.6 8.0 45,696.0
Coke 10,472 1,680.0 1,061.1 1,927.4 14.0 27,960.0
Pepsi 7,227 1,942.9 1,219.6 2,213.9 16.0 38,656.0
IV Coke (Reg.) 4,524 1,307.1 798.7 1,558.3 14.0 19,840.0
Pepsi (Reg.) 3,590 1,576.1 1,008.0 1,782.0 20.0 14,112.0 9
V Coke (Diet) 5,809 1,645.9 1,081.6 1,823.4 16.0 22,352.0
Pepsi (Diet) 3,561 1,911.2 1,216.8 2,146.4 16.0 36,994.8
Descriptive statistics of first quarter heavy half household purchases by brand level
III ALL 25,155 2,721.8 2,028.0 2,140.9 779.2 45,696.0
Coke 5,236 2,890.3 2,188.2 2,100.0 1,061.6 27,960.0
Pepsi 3,611 3,324.0 2,539.2 2,424.7 1,221.6 38,656.0
IV Coke (Reg.) 1,964 2,456.2 1,872.0 1,776.4 344.0 19,840.0 Table II.
Pepsi (Reg.) 1,640 2,832.2 2,160.0 1,980.4 558.4 14,112.0
V Coke (Diet) 3,243 2,601.1 1,975.0 1,954.1 355.6 22,352.0
Descriptive statistics
Pepsi (Diet) 1,954 3,053.2 2,337.4 2,328.3 432.0 36,994.8 of all first quarter
purchases for
Notes: Count is number of households; all other measures are soda purchase volume (ounces) subsequent tables

subsequent quarters are based on a Markov chain, which classifies the probability of
switching from one brand to another in the subsequent time period (Styan and Smith, 1964;
Ehrenberg, 1965; Lattin and McAlister, 1985; Poulsen, 1990). The time frame chosen was one
quarter. This time period length was chosen to balance between too long a purchase
window, such as one year and too short a time period (Sharp, 2010; Dubé, 2004). Quarterly
time periods allow for brand persistence while also capturing opportunities for brand
switching; Information Resources Inc. found the average inter-purchase cycle time for
regular Coke and Pepsi purchases among all panel households to be about two months.
Among heavy half households, the time between purchases should be even shorter,
providing ample opportunity for households to switch brands.
The highest level of brand loyalty analysis examines household loyalty at the family brand
level (e.g. Coke or Pepsi). These households were also divided into heavy half households
based on median purchase volume, comprising 5,236 Coke heavy half households and 3,611
Pepsi heavy half households.
The middle level of brand loyalty looks at product category level loyalty (i.e. the product
brand). The households were classified as mutually exclusive to regular soda or low calorie
(diet) soda. The heavy half household counts at the product level were: 1,964 for regular
Coke, 1,640 for regular Pepsi, 3,243 for low calorie Coke and 1,954 for low calorie Pepsi.
The lowest level of brand loyalty examined is at the modified brand level. This allocates a
household from one of four product brand level groups (i.e. regular Coke, regular Pepsi, low
calorie Coke and low-calorie Pepsi) to one based on a majority of its purchase volume at the
modified brand level. For regular soda households, this was one of three brand modifications:
original flavor (i.e. the flagship brand of Coke Classic and Pepsi), Caffeine-Free Coke (Pepsi) and
Cherry Coke (Pepsi). The low-calorie households were assigned to one of four brand
modifications: original flavor, caffeine-free, cherry and zero/low calorie. While the category is
defined as “low calorie”, the zero/low calorie designation is to separate out Coke Zero and Pepsi
Max from Diet Coke and Diet Pepsi, respectively. At the modified brand level there were other
flavors of Coke and Pepsi, but these were not included as too few households purchased them
as a majority of their soda purchases (e.g. Coke with Lime, Vanilla Pepsi).
EJM After assignment to a family brand, product brand and modified brand in the first
53,1 quarter, the households were examined for majority purchase (volume) classification in
subsequent quarters.

Results
The following sub-sections describe the loyalty rates between Coke and Pepsi households at
10 each level of the brand architecture. The tables report the Markov chain results as per cent
of households that are loyal or switch brands in subsequent quarters. The family brand
loyalty for all and heavy half households is presented first, followed by the product brand
and finally, the modified brand loyalty.

Family brands
Table III presents the switching rates between Coke and Pepsi households over time.
For instance, 94.4 per cent of Coke households identified in the first quarter continued to
make a majority purchase in Coke products, while 5.6 per cent switched to making
Pepsi their brand of choice. This shows the percentage of Coke (Pepsi) households that
remained as Coke (Pepsi) households in subsequent quarters. Among all households,
Coke (94.4 per cent) exhibited greater retention of its customer base than Pepsi (91.0 per
cent) from the first quarter to the second quarter. These numbers are similar in the third
and fourth quarters. Thus, most households that were Coke (Pepsi) households
remained as Coke (Pepsi) households, exhibiting high persistence levels of brand
loyalty. This lends support to H1 that in a mature category, consumers exhibit high
levels of brand loyalty.
Displayed next to the Coke (Pepsi) households are the heavy half Coke (Pepsi)
households. Heavy half Coke (96.1 per cent) households had greater loyalty than all Coke
households (94.4 per cent). Similarly, heavy half Pepsi (93.8 per cent) households exhibited
greater loyalty than all Pepsi households (91.0 per cent). Again, these loyalty probabilities
were similarly high in third and fourth quarters. This supports H2 that in a mature category
like soda, brand loyalty is even greater among the heavy consumers. Household numbers
show some decline over time due to attrition in the panel data. This contradicts the prior
theoretical assumptions about consumption and loyalty.

Product brands – all households

In mature markets, brands aim to entrench consumer loyalty through product line
extensions. Low calorie sodas helped regular soda makers identify a new market segment:

All households Heavy half households

n time t + 1 (Q2) Coke (%) Pepsi (%) n time t + 1 (Q2) Coke (%) Pepsi (%)

6,975 Coke 94.4 5.6 4,475 Coke 96.1 3.9

4,876 Pepsi 9.0 91.0 3,347 Pepsi 6.2 93.8
Table III. time t + 2 (Q3) time t + 2 (Q3)
Switching rates 6,446 Coke 93.9 6.1 4,176 Coke 95.6 4.4
among Coke and 4,464 Pepsi 10.0 90.0 3,115 Pepsi 7.1 92.9
Pepsi households at time t + 3 (Q4) time t + 3 (Q4)
the family 6,491 Coke 94.3 5.7 4,164 Coke 95.9 4.1
Brand level 4,455 Pepsi 10.3 89.7 3,083 Pepsi 7.1 92.9
consumers who like soda but were concerned about the calories. Tables IV and V Do brands
respectively show the loyalty and switching rates of regular soda and low-calorie Coke compete or
and Pepsi households. Among all households, loyalty remains high for both regular coexist?
Coke (90.5 per cent) and Pepsi (88.9 per cent) households into the second quarter. This
high degree of loyalty also holds true in the third and fourth quarters. In the low-calorie
soda category, Coke also has higher customer loyalty (92.5 per cent) than Pepsi (87.0 per
cent) in the second quarter. The loyalty probabilities are similar for subsequent 11
quarters. Diet Coke has a higher degree of loyalty in low calorie (diet) sodas than
regular, but the opposite is observed for Pepsi.

Product brands – heavy half households

Since the heavy half households make up a larger share of volume, their loyalty is
particularly important to Coke and Pepsi. At the product brand level, Table IV shows
heavy households that purchased regular Coke (93.1 per cent) or Pepsi (92.8 per cent)
remained highly loyal. These levels similarly carried over into subsequent quarters.
The loyalty levels for the diet soda category are similarly high. For heavy half Diet
Coke households (95.0 per cent), Coke enjoys greater loyalty than all Coke households.
Heavy half Pepsi households (90.5 per cent) also exhibit greater loyalty than all Pepsi
households. The loyalty rates were similar in the subsequent quarters. The findings
across these levels of the brand architecture show that loyalty rates are quite high for
each of the brands, supporting H1.

All households Heavy half households

n time t þ 1 (Q2) Coke (%) Pepsi (%) n time t þ 1 (Q2) Coke (%) Pepsi (%)

3,681 Coke (reg.) 90.5 8.6 1,860 Coke (reg.) 93.1 6.3
3,009 Pepsi (reg.) 10.3 88.9 1,579 Pepsi (reg.) 6.7 92.8
time t + 2 (Q3) time t + 2 (Q3) Table IV.
3,497 Coke (reg.) 90.7 8.9 1,805 Coke (reg.) 93.3 6.5 Switching rates
2,815 Pepsi (reg.) 12.1 86.9 1,533 Pepsi (reg.) 8.4 91.3 among regular Coke
time t + 3 (Q4) time t + 3 (Q4) and Pepsi households
3,509 Coke (reg.) 90.8 8.3 1,825 Coke (reg.) 93.3 6.2 at the product
2,816 Pepsi (reg.) 13.9 85.5 1,513 Pepsi (reg.) 9.5 90.1 Brand level

All households Heavy half households

n time t þ 1 (Q2) Coke (%) Pepsi (%) n time t þ 1 (Q2) Coke (%) Pepsi (%)

4,982 Coke (diet) 92.5 6.8 3,121 Coke (diet) 95.0 4.6
3,102 Pepsi (diet) 13.0 87.0 1,888 Pepsi (diet) 9.5 90.5
time t + 2 (Q3) time t + 2 (Q3) Table V.
4,792 Coke (diet) 91.8 7.5 3,013 Coke (diet) 93.6 5.7 Switching rates
2,981 Pepsi (diet) 13.4 86.6 1,836 Pepsi (diet) 9.1 90.9 among low calorie
time t + 3 (Q4) time t + 3 (Q4) Coke and Pepsi
4,852 Coke (diet) 91.7 7.6 3,040 Coke (diet) 93.7 5.8 households at the
3,003 Pepsi (diet) 13.4 86.6 1,855 Pepsi (diet) 9.3 90.7 product Brand level
EJM Modified brands – all households
53,1 Continuing with identifying sub-segments of the consumer base, next examined are
household loyalties across three varieties of the brands: original flavor (i.e. just Coca-Cola or
Pepsi in its base flavoring), caffeine-free and cherry.
Tables VI and VII display the switching and loyalty probabilities at the modified brand
level for regular and diet sodas, respectively. Since an additional dimension (product
12 variety) is considered, this table makes the comparison of all households and heavy half
households within the brand. Regular soda is presented first, then diet sodas are discussed.
Similar to the product brand levels, loyalty is also high among the modified brands. Original
flavor Coke (92.9 per cent) and Pepsi (92.5 per cent) exhibit near parity in their loyalty
probabilities in the second quarter, although Coke retains more households in the
subsequent quarters. Loyalty rates are even higher for the caffeine-free variations, again
higher for Coke (95.9 per cent) than Pepsi (94.0 per cent). The cherry flavor exhibited the
fewest number of households that made a majority purchase at any particular modified
brand, with Coke (93.1 per cent) having higher household retention than Pepsi (84.9 per cent)

All households Heavy half households

n time t þ 1 (Q2) Coke (%) Pepsi (%) n time t þ 1 (Q2) Coke (%) Pepsi (%)

Regular (original flavor) cola

3,128 Coke 92.9 7.1 1,669 Coke 94.8 5.2
2,468 Pepsi 7.5 92.5 1,373 Pepsi 5.1 94.9
time t + 2 (Q3) time t + 2 (Q3)
2,948 Coke 92.9 7.1 1,589 Coke 94.3 5.7
2,318 Pepsi 9.1 90.9 1,328 Pepsi 6.1 93.9
time t + 3 (Q4) time t + 3 (Q4)
2,945 Coke 93.6 6.4 1,600 Coke 95.1 4.9
2,290 Pepsi 10.5 89.5 1,317 Pepsi 7.8 92.2
Caffeine-free cola
time t þ 1 (Q2) time t þ 1 (Q2)
122 Coke 95.9 4.1 68 Coke 95.6 4.4
216 Pepsi 6.0 94.0 110 Pepsi 2.7 97.3
time t þ 2 (Q3) time t þ 2 (Q3)
142 Coke 91.5 8.5 66 Coke 93.9 6.1
195 Pepsi 7.7 92.3 101 Pepsi 2.0 98.0
time t þ 3 (Q4) time t þ 3 (Q4)
131 Coke 92.4 7.6 60 Coke 95.0 5.0
201 Pepsi 11.4 88.6 98 Pepsi 5.1 94.9
Cherry cola
time t þ 1 (Q2) time t þ 1 (Q2)
87 Coke 93.1 6.9 32 Coke 87.5 12.5
86 Pepsi 15.1 84.9 36 Pepsi 13.9 86.1
Table VI. time t þ 2 (Q3) time t þ 2 (Q3)
Switching rates 78 Coke 88.5 11.5 22 Coke 86.4 13.6
among regular Coke 84 Pepsi 15.1 89.3 35 Pepsi 11.4 88.6
and Pepsi households time t þ 3 (Q4) time t þ 3 (Q4)
at the modified 73 Coke 94.5 5.5 24 Coke 91.7 8.3
Brand level 72 Pepsi 11.1 88.9 30 Pepsi 3.3 96.7
 All households Heavy half households
Do brands
n time t þ 1 (Q2) Coke (%) Pepsi (%) n time t þ 1 (Q2) Coke (%) Pepsi (%) compete or
coexist?
Diet (original flavor) cola
2,537 Coke 95.4 4.6 1,734 Coke 96.9 3.1
1,610 Pepsi 8.2 91.8 1,045 Pepsi 5.6 94.4
time t + 2 (Q3) time t + 2 (Q3) 13
2,359 Coke 95.1 4.9 1,631 Coke 96.3 3.7
1,523 Pepsi 8.5 91.5 1,019 Pepsi 6.5 93.5
time t + 3 (Q4) time t + 3 (Q4)
2,362 Coke 95.0 5.0 1,646 Coke 96.1 3.9
1,461 Pepsi 9.2 90.8 973 Pepsi 7.1 92.9
Caffeine-free diet cola
time t þ 1 (Q2) time t þ 1 (Q2)
907 Coke 93.8 6.2 566 Coke 95.9 4.1
554 Pepsi 9.2 90.8 349 Pepsi 9.5 90.5
time t + 2 (Q3) time t + 2 (Q3)
838 Coke 93.3 6.7 545 Coke 94.7 5.3
522 Pepsi 12.8 87.2 324 Pepsi 10.5 89.5
time t + 3 (Q4) time t + 3 (Q4)
819 Coke 94.1 5.9 528 Coke 95.5 4.5
505 Pepsi 11.3 88.7 327 Pepsi 9.2 90.8
Cherry diet cola
time t þ 1 (Q2) n time t þ 1 (Q2)
138 Coke 92.8 7.2 87 Coke 93.1 6.9
160 Pepsi 10.0 90.0 108 Pepsi 4.6 95.4
time t + 2 (Q3) time t + 2 (Q3)
130 Coke 87.7 12.3 81 Coke 86.4 13.6
151 Pepsi 7.3 92.7 103 Pepsi 3.9 96.1
time t + 3 (Q4) time t + 3 (Q4)
124 Coke 89.5 10.5 74 Coke 90.5 9.5
149 Pepsi 4.7 95.3 101 Pepsi 5.0 95.0
Low/zero calorie cola
time t þ 1 (Q2) time t þ 1 (Q2)
772 Coke 94.8 5.2 468 Coke 95.1 4.9
337 Pepsi 10.7 89.3 216 Pepsi 8.8 91.2
time t + 2 (Q3) time t + 2 (Q3) Table VII.
692 Coke 94.8 5.2 423 Coke 95.3 4.7 Switching rates
310 Pepsi 9.0 91.0 201 Pepsi 7.5 92.5 among low calorie
time t + 3 (Q4) time t + 3 (Q4) Coke and Pepsi
692 Coke 94.7 5.3 430 Coke 94.9 5.1 households at the
303 Pepsi 13.5 86.5 199 Pepsi 11.1 88.9 modified Brand level

in the second quarter. While there is greater variation in the loyalty rates for cherry Coke
(Pepsi) households, loyalty still remains high for these households.
The low-calorie category (Table VII) has the same three varieties as the regular soda
category (original flavor, caffeine-free and cherry) along with a modified brand for the low/
EJM zero calorie varieties (Coke Zero and Pepsi Max). Original flavor Diet Coke (95.4 per cent) has
53,1 higher loyalty rates than Diet Pepsi (91.8 per cent) and is higher than that of regular Coke
households. Loyalty rates in the subsequent quarters were comparable. The results are not
unlike those for the ultra-low calorie modified brands of Coke Zero (94.8 per cent) and Pepsi
Max (89.3 per cent). Caffeine-Free Diet Coke (93.8 per cent) and Caffeine-Free Pepsi (90.8 per
cent) exhibited similar results. Finally, Diet Coke Cherry (92.8 per cent) and Diet Cherry
14 Pepsi (90.0 per cent) also display high levels of loyalty.

Modified brands – heavy half households

Once again, the heavy half households tell a similar story at the modified brand level. Of the
regular original flavor, Table VI shows Coke (94.8 per cent) and Pepsi (94.9 per cent)
households had near parity, with loyalty rates higher than that of all households. For
caffeine-free households, though, heavy half Coke households had slightly less loyalty (95.6
per cent) than all Coke households in the second quarter but stronger loyalty in subsequent
quarters. Surprisingly, Coke loyalty trailed Pepsi loyalty (97.3 per cent) in this product
space. Heavy half households that primarily purchased cherry had less loyalty than all
households for Coke (87.5 per cent). Heavy half Pepsi cherry households (86.1 per cent)
showed greater loyalty than all Pepsi cherry households, yet also one of the lowest loyalty
rates from the data. One possible explanation here is that the number of households that
chose the cherry variant of modified brands as a majority of their purchase volume is
relatively few (in the second quarter, n = 32 for Coke; n = 36 for Pepsi) compared to the
original and caffeine-free varieties. These findings, though, largely support the hypotheses
of substantial brand loyalty.
Analyzing the heavy half households that purchased diet sodas, the base flavorings of
Diet Coke (96.9 per cent) and Diet Pepsi (94.4 per cent) have greater loyalty than that of all
households in Table VII. Although having not been around as long in the marketplace as the
base flavoring, Coke Zero (95.1 per cent) and Pepsi Max (91.2 per cent) displayed greater
loyalty rates among heavy half households than all households. Caffeine-Free Diet Coke
(95.9 per cent) also has greater loyalty than Caffeine-Free Diet Pepsi (90.5 per cent). Among
heavy half households that primarily purchased low calorie cherry soda, Coke (93.1 per cent)
and Pepsi (95.4 per cent) showed greater loyalty than all Coke and Pepsi households,
respectively, for this modified brand offering. These findings lend support to H2, that
loyalty rates are even higher for the heaviest consumers of a mature brand (which
conversely implies that the lighter consumers raise the switching rates as seen in all
households).

Robustness checks
As a robustness check, switching to “other brands” was examined. At the family brand
level, the loyalty probabilities were re-examined to include “other brands” if the majority
purchases were neither Coke nor Pepsi products. These 47,665 households covered 95 per
cent of all households that purchased any carbonated soda beverages; the remaining 5 per
cent had no volume majority for Coke, Pepsi or “other” but instead was a plurality. Results
still showed strong loyalty among all households from the first quarter to the second quarter
in Table VIII, with Coke at 72.4 per cent, Pepsi at 70.8 per cent and “other brands” at 85.8 per
cent. The “other” households show a stronger loyalty because it encompasses all possible
other brands, including private label variants. “Other” households that did switch were
more likely to switch to Coke (8.7 per cent) than to Pepsi (5.4 per cent). Similar findings held
true in subsequent quarters. For heavy users, the loyalty was even greater for Coke (81.6 per
cent) and Pepsi (80.9 per cent) than all households from first to second quarter. Households
 All households Heavy half households
Do brands
Coke Pepsi Other Coke Pepsi Other compete or
n time t þ 1 (Q2) (%) (%) (%) n time t þ 1 (Q2) (%) (%) (%) coexist?
All soda flavors
10,472 Coke 72.4 4.3 23.3 5,236 Coke 81.6 3.1 15.3
7,227 Pepsi 7.0 70.8 22.2 3,611 Pepsi 5.0 80.9 14.1
29,966 other 8.7 5.4 85.8 14,973 other 7.1 4.7 88.2 15
time t þ 2 (Q3) time t þ 2 (Q3)
9,112 Coke 67.2 4.3 28.5 5,148 Coke 76.1 3.4 20.5
6,140 Pepsi 7.3 65.6 27.2 3,542 Pepsi 5.5 75.5 19.0 Table VIII.
27,285 other 8.3 5.2 86.4 14,522 other 7.1 4.7 88.2 Switching rates
time t þ 3 (Q4) time t þ 3 (Q4) among low calorie
9,448 Coke 67.3 4.1 28.6 5,268 Coke 75.9 3.2 20.9 Coke and Pepsi
6,122 Pepsi 7.5 64.6 27.9 3,513 Pepsi 5.5 75.2 19.4 households at the
27,252 other 9.2 5.3 85.5 14,406 other 7.8 4.7 87.5 modified Brand level

of “other brands” stayed at 88.2 per cent, with again Coke (7.1 per cent) gaining more
switchers than Pepsi (4.7 per cent). These results show that even a “competitive” and mature
product category, given its extensive use of the marketing mix elements, displays
substantial degrees of loyalty, particularly for heavier users.
The product brand level loyalty was also re-analyzed using single person households.
This addresses concerns that a household could purchase both regular and low-calorie soda
for different household members. Using this analysis, the substantive results were not
different than those reported in the tables.

Discussion
This research contributes to our understanding of brand loyalty by re-examining whether
loyalty erodes when brands compete with each other for market-share. This is attributed to
the observation that in mature product categories brands approach commoditization and
resemble one another. The temptation of competing on price, unfortunately, adversely
impacts margins and profitability of all brands as price usually does not generate
incremental demand. Prior research has indicated that distribution and product
development are more effective than advertising or promotional actions, including price
cuts. For consumer-packaged goods in a mature product space, distribution is likely
saturated, leaving product innovation as the primary course of action.
Indeed, this is commonly observed in practice as “old” brands try “new” tricks with
flavors, pack sizes and varieties. Yet, product modification is no guarantee for success. For
example, Diet Raspberry Coke, Coca-Cola C2 and Diet Coke with Lime all failed to generate
enough impact to grow the Coca-Cola brand. However, these modified brands satisfy
consumer wants for variety-seeking, to which the brand can leverage its name and take a
chance that a new product variation might take hold in the brand architecture (such as Coke
Zero).
The findings show that brand loyalty is highly persistent in a mature product category.
Both brands exhibit large yet similar advertising spending and frequent promotional efforts,
yet loyalty remains high for each brand; between 85 per cent and 97 per cent of households
continue purchasing the majority of their volume in the branded product after one, two and
three quarters. On average, these loyalty rates are several percentage points higher for the
EJM heaviest consumers of each brand, who also constitute the bulk of volume purchased (86 per
53,1 cent of the volume). This suggests that Coke and Pepsi coexist in the market, retaining loyal
customers while having a challenging time persuading customers to switch. For these
customers, advertising and promotion likely imply reinforcement. The lower half of
households, who make up the remaining 14 per cent of volume, are less loyal and therefore
less attached to the brand. It is these consumers that give the impression of competing head-
16 to-head. Returning to the introductory quote, managers have some understanding as to who
their consumers are and which consumers can potentially switch brands. Rather than
compete with each other, both brands try to gain share from other brands such as private
labels and regionally dominant brands. They also try to attract casual consumers who buy
carbonated soda beverages only occasionally.
Several implications for marketing theory arise. First, there is a limited amount of
empirical research on brand architecture. Not only is it shown that loyalty is incredibly high
for mature brands but that this loyalty extends from the higher level of the family brand,
down to the product brand level and finally to the lower level of the modified brands.
Second, heavy half theory demonstrates that a smaller segment of the customer base makes
up a disproportionately larger share of the volume sold. Retention rates of these households
in subsequent quarters is even higher than among all consumers of the brand. The findings
highlight the persistence of brand loyalty in mature categories through brand architecture.
Whereas most prior research has focused on the role of the marketing mix on loyalty, this
study has empirically documented that loyalty is incredibly high despite competitive
marketing mix tactics by both brands.
For managers, this research demonstrates that loyalty rates for mature brands are
quite high, especially among the heavier consumers. Furthermore, brand loyalty is robust
even with the inclusion of a third option to switch to all “other brands.” The historical
context of the Cola Wars highlights these findings: mature firms are better off reinforcing
brand loyalty by sub-segmenting their loyal customers through product modifications.
By further segmenting the market, the brand manager can establish an even greater
differential advantage against competition. In short, Aaker’s (1996) suggestion that
creating new subcategories by brand variation is the best approach to keep – or even
grow – market share in a non-growing, mature industry. Of course, another option is non-
organic growth through brand acquisitions, which Coca-Cola has also done in recent
years.
Several contingencies were accounted for in conducting this research. First, two well-
known brands (Coke and Pepsi) who have a legendary and competitive rivalry were
selected. Both brands also represent competitive actions that are near parity. Both have
similar product offerings (and copy each other when an innovation arises); they have similar
distribution systems, similar prices and promotional schedules and spend heavily on
advertising. Given this, other product categories in which brands compete differently in
terms of marketing mix activities may exhibit different loyalty rates. A second
consideration is that this study has focused on mature brands in a mature product category.
For growing product categories as well as new brands, the goal may be to expand the
market first, then compete at the fringes for market share.
This research also suggests that there is a possible direction for future research in
that brands in growing categories also do not compete head-to-head but instead seek
out less competitive sub-segments of consumers first. For example, USA Cellular has
successfully targeted the market of older consumers with affordable monthly rates for
voice and data services with no contracts. Additional research areas include those
beyond consumer-packaged goods. Perhaps slower-moving consumer-packaged goods
(such as baking soda and razor blades) may exhibit different patterns of loyalty. Do brands
Durable goods like appliances and automobiles, as well as services like utilities and compete or
satellite television, also present areas of interest regarding loyalty and brand
architecture.
coexist?
While these goods are purchased less frequently, automobiles, blue jeans and
appliances might have similar loyalty patterns in their brand architecture. For services,
such as healthcare, insurance and utilities, loyalty rates may be even higher due to
inertia and switching costs. Similarly, a repurchase environment such as B2B
17
procurement of office supplies and industrial raw materials may show high loyalty rates
due to company procurement policies. While brand extension through product
modification is a viable strategy, one of the risks managers face in extending the brand
into a new category is whether the newly differentiated offering will cannibalize sales of
the extant brand. For example, in a short time, Coke Zero developed loyalty rates nearly
as high as Diet Coke. What remains unknown is how much, if any, cannibalization Coke
Zero may have had on other Coke products by stealing from its sibling brands. As such,
looking at the switching rates within the brand, especially for a defined pre- and post-
launch period, presents an interesting research opportunity for both marketing
managers and academic scholars.

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Corresponding author
19
Jagdish Sheth can be contacted at: jagdish.sheth@emory.edu

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