Introduction to Cola Wars There are two well known beverage companies, Coco-Cola and Pepsi.

They have competed considerably and distributed the beverage market profit for several decades. In the open market, it is difficult to exactly tell which one is the winner within the perfect competition, since both companies use different style of promotion and product to expend their markets. The competitive environment of the carbonated soft drinks started about three decades ago. In the beginning of 1960 Coco Cola was dominating the market but this dominance was significantly challenged by Pepsi- Cola. This challenge by Pepsi was declared as Cola Wars. During this competitive war a variety of products were introduced from both sides. Lot of $ amount was spent on celebrity advertising and even coke changed its formula. The strategic changes occur due to Pepsi's challenge to the dominance of Coca Cola. In spite of the fact that Pepsi Cola attacked on the dominance of Coca Cola in bottled soft drink, both Pepsi-Cola and Coca-Cola have benefited from this battle due to stimulated continuous growth of the industry. Questions to answer
1) Why historically, has the soft drink industry been so profitable?

Barriers to Entry
a. Bottling Network b. Advertise spend c. Brand Image / Loyalty d. Retail Distribution e. Fear of retaliation

Power of Suppliers is less since most of the RM needed to produce concentrate are eessentially basic commodities like Color, flavor, caffeine or additives, sugar, packaging. Power of buyers is high as is demonstrated through the differing profitability in segments like food stores, Fountain, vending, hotels etc. Substitutes are available like tea, coffee, juice, beer etc. , but this is countered by the CSD market players by huge advertising, brand equity, and making their product easily available for consumers, which most substitutes cannot match. Also soft drink companies diversify business by offering substitutes themselves to shield themselves from competition. The CSD industry can be classified as a Duopoly with Pepsi and Coke as the firms competing. Industry is largely consolidated with two major players and a few smaller competitors like Cadbury Schweppes, making the companies interdependent.

This is also known as Porters Five Forces Analysis used to study industry structure

2) Why concentrate business is highly profitable compared to the bottling business

Higher number of bottlers when compared to the concentrate producers which fosters competition and reduces margins in the bottling business Huge capital costs to set up an efficient plant for the bottlers while the capital costs in concentrate business are minimal Costs for distribution and production account for around 65% of sales for bottlers while in the concentrate business its around 17% Most of the brand equity created in the business remains with concentrate producers Muscle power of Concentrate producers high as demonstrated with imposing territorial limits on bottlers

3) Why coke & Pepsi chose for vertical integration

With the decrease in the number of bottlers from 2000 in 1970 to less than 300 in 2000, the concentrate producers were concerned about the bottlers clout and started acquiring stakes in the bottling business. They could offer attractive packaging to the end consumer. To preempt new competition from entering business if they control the bottling.

4) Effect of competition between Coke and Pepsi on industry profits

However during the early 1990s bottlers of Coke and Pepsi employed low priced strategies in the supermarket channel in order to compete with store brands, this had a negative effect on the profitability of the bottlers. Net profit as a percentage of sales for bottlers during this period was in the low single digits. Pepsi and Coke were however able to maintain the profitability through sustained growth in Frito Lay & other business and

International sales respectively. The bottling companies however in the late 90s decided to abandon the price war, which was not doing industry any good by raising the prices.

The volumes increased from 3090 million cases in 1970 to 9,950 million cases in 2000 which is 29 % of total beverage consumed. Also with foray into BRIC economies, the consumption would increase in the coming periods. Also Pepsi and Coke mainly over the years competed on differentiation and advertising rather than on pricing except for a period in the 1990s. Thus the rivalry between Cole & Pepsi has benefitted the overall size & profits of the industry

5) Can Coke and Pepsi sustain their profits in the wake of flattening demand and

growing popularity of non-carbonated drinks Yes Coke can Pepsi can sustain their profits in the industry because of the following reasons

The industry structure for several decades has been kept intact with no new threats from new competition and no major changes appear on the radar line This industry does not have a great deal of threat from disruptive forces in technology. Coke and Pepsi have been in the business long enough to accumulate great amount of brand equity which can sustain them for a long time and allow them to use the brand equity when they diversify their business more easily by leveraging the brand. Globalization has provided a boost to the people from the emerging economies to move up the economic ladder. This opens up huge opportunity for these firms Per capita consumption in the emerging economies is very small compared to the US market so there is huge potential for growth. Coke and Pepsi can diversify into noncarbonated drinks to counter the flattening demand in the carbonated drinks. This will provide diversification options and provide an opportunity to grow.

SWOT of CSD Industry Strength Consumer craving Weakness Range of products not varied enough Opportunities Estabblish facts & spread through Threat Health Issues

campaigns Availability of new Large & growing Markets Introduction of New flavours & exciting packaging Saturation in certain markets Introduce Healthy options in existing segments Replace Alcoholic drinks legislations (E.g. School guidelines etc.) Environment aspects especially water in countries like India where water is scarce commodity Increasing Costs for Distribution & Advertising & other costs Growing consumption of competing products, coffee, juices, tea etc.

Low Costs of Production & good profitability Non- Alcoholic

Replace tea & cofee