C A S E A N A LY S IS

C O LA W A R S C O N TIN U E:
C O K E A N D P EP S I IN 2010

Dr. Prema Basargekar

 What is the type of market structure we
are discussing? What are its
characteristics?
Type ofM arket

Oligopoly
Few players
High scale of operations
Very high cross elasticity
High interdependence on each other
Stickiness in prices
Price & Non-Price competition
 If this has been such a profitable
industry, why so few firms
successfully entered this business
over the last century?
What are the entry barriers?
Barriers to entry

First-mover advantage: Brand creation, can

become part of national culture
Economies of scale advantage
Scale of economies for advertisement
Exhibit 8
Limited spots of sale: super markets, shops,
hotels, etc. New comers need to displace
existing players to move in an open channel
Exclusive franchise system build by both the
companies very hard for new comer to
manufacture and distribute
 If the substitutes like water, coffee,
fruit juices, etc are freely or cheaply
available, how can Pepsi & Coke
charge as much as $2 to $3 per
serving?
Threat ofsubstitutes

Substitutes may not be easily available.

Focus on impulse buying very clearly
understood by Woodruff CEO Coke
Relating the product with lifestyle & not
just how you quench your thirst
Addiction factor repeat customer, per
day consumption (8 cans per day in USA)
Relating it to status symbol in foreign
countries where average consumption is
low
 How did the Coca-Cola evolve over
100 years? How did it create
monopoly power in the initial years?
Evolution ofCoca-cola as a m onopoly

Coca-Cola:
1886 soda fountain
1891 acquired by Asa Candler; Merchandise 7X formula
put under guard in an Atlanta bank vault Monopoly creation
1910 370 franchise scaling-up
1919 company went public
Fought against many companies over trade-mark
infringements
Created a brand which will associate with happy times,
festivals, nationalism
WW-II company promoted brand through army & US govt.
Subsidized resources
US Govt helped company to set up plants abroad
 How did Pepsi gave a threat to Coca-
Cola?
Em ergence ofPepsi
1893- Pepsi-Cola was invented
Initially struggled to capture market share bankruptcy
Used opportunity in great depression to lower the prices &
started playing a price war Twice as much for a nickel, too
Expanded bottling network & captured 10 % of market share
as against 47 % of Coke.
Selective discounting in distribution outlets
Motivated bottlers bottler size, concentrate pricing
1950: Beat Coke strategy Alfred Steele
Focus on take-home sales through supermarkets rather than
big customers like restaurants, etc.
Created a niche segment Pepsi generation Young at
heart
Consolidation of bottlers to reduce overhead costs
 Why did Enrico, former CEO of Pepsi
make a statement that without Coke,
Pepsi would have a tough time and
without Pepsi Coke would not have
so much success..?
Interdependence

To create a market awareness,

popularity, creating its own culture
To innovate new products/ packages/
delivery systems
To go international
To increase efficiency in operations
To constantly look in to different business
opportunities
Smart competition helped both the
companies
 What was the impact of their war on
the overall industry?
Im pact on the industry

Small CSD players started losing grounds Fall

in market share
Mergers and acquisition with the small firms
Market was driven from Monopolistic
competition to Oligopoly
Coke and Pepsi keen on controlling bottlers
and expanding their share
Few companies producing high number of
diversified products
Non-price war became more prominent than
price-war.
 What is the nature of the competition
between the two companies? Price
war and/or non price war?
Price and/or N on-price w ar
Initially Pepsi won some market share with price war
Later on non-price war became more important.
Non price war affecting demand side:
Introduction of new versions of cola, non-cola flavors
Pepsi challenge of blind taste to beat Coke 1979
crossed market share in food store market
Diversification to non-CSD products
Huge spend on advertisements, promotions, sponsorships
Development of Diet coke
Non-price war affecting supply side:
Renegotiation with bottlers
Changing sugar syrups lower priced alternatives
 In what manner both the companies
had to change with changing
business environment?
Changing strategies to adapt to the tim es

1990s change in consumption pattern, rising

concern about obesity, nutrition, unhealthy food
Introduction of new healthier products such as
low cal soda, juices, fruit based beverages,
increasing the share of snacks in the portfolio -
Pepsi more aggressive than Coke
Identification of natural sweeteners
Going international China, India, Asia, Eastern
Europe Coke took a lead
Introducing products to tailor the local needs,
tastes, culture
 Who are the main stakeholders of
both the companies? How did they
gain or lose?
M ain stakeholders

Customers:
Main beneficiaries
Higher variety
Lower prices compared to WPI, CPI
More addiction
Moving slowly towards healthier options
Competitors:
Mostly could not compete with the giants
Remained local/ regional brands
Remained in low value business mineral water,
etc
M ain stakeholders
Concentrate producers: Pepsi & Coke

CPs sold syrup & concentrate to franchised or company

owned bottlers.
Major costs R & D, new products, advertisements &
support to bottlers
Tried to capture more & more control over bottlers,
suppliers
Restructured bottling business to squeeze their margins
Gross margin of 78 % & operating profit margins of 32
%.
Controlled more than 70 % of market share in US market
M ain stakeholders
Bottlers:
Initially had a good business major say in pricing,
advertisement, promotions
Also could carry other competitors brands
Heavy investment in plant, transportation, warehousing,
canning lines, etc.
Operating margins very low to 8 %.
Restructuring of bottling business- resale, negotiation, M
& A affected the bottling business adversely
Took away right to negotiate with fast food restaurants
No of bottlers fell steadily from 2000 to 300 between
1970 to 2009
Slowly reduced investment in infrastructure
M ain stakeholders
Retail Channels:
Supermarkets became influential in negotiating
their terms Wal-Mart
Fountain sale, fast food restaurants: Berger King,
etc. higher influence to get bigger discounts
Suppliers to CPs and Bottlers:
Had limited power
Though bottlers bought from suppliers, Coke &
Pepsi negotiated with suppliers creating more
buying power
Higher competition amongst suppliers resulted in
lower profit margins
 How can you apply Porters Five
Forces Model to analyse the industry
and its outcomes?
Porters Five Forces M odel

Barriers to entry very high, strong

brands, heavy investment, tight
franchise network
Threat of substitutes: reasonably less as
it is related as lifestyle product more
associated with young population which
is readily available everywhere
Threat of suppliers: can manufactures
and bottle manufacturers do not have
any power to negotiate
Porters Five Forces M odel

Threat of buyers:

A. Immediate buyer bottler limited power due

to tight franchise agreements and close
associations with CPs to develop products,
promote products, negotiate with suppliers, etc.

B. Final customers highly fragmented customers,

no switching cost but substitutes may not be
available very easily, brand will create customer
loyalty
Porters Five Forces M odel
Rivalry:

More of a type of Duopoly 72 % of market share

High degree of perceived differentiation
Price and non-price wars
Competition for shelf space, advertising, discounting on
downstream products
Cooperation/ implicit understanding war within bounds?
No discounts on upstream product i.e on concentrate
prices
Immediate imitation of each other (diet cola, flavoured
CSDs, bottled water, franchise agreements)
M arket share

Exhibit 2
1970 Coke 35 %, Pepsi 20 %
1980 Coke 36 %, Pepsi 28 %
1990 Coke 41 %, Pepsi 32 %
2000 Coke 44 %, Pepsi 31 %
2009 Coke 42 %, Pepsi 30 %
 What are the positive & negative
implications for the economy?
Positive im plications

Innovations:
Low diet cola, non-csd drinks, different
versions, higher customization,
diversification towards healthier products
Relatively lower prices due to price-war
between two companies
Higher investment in bottling plants,
distribution, R & D, manpower having
overall positive impact on the economy
GDP, employment, etc.
N egative im pact

Smaller players/ brands losing out

Too many resources used for
promotion, advertisement
Superficial differences to capture the
attention of the customer
Strong entry barriers are not helpful for
healthy competition for new entrants
Few oligarchs may influence Govt
policies in their favour
Sum m ary

How entry barriers affect industry

structure and create oligopoly
How firms create and exercise
market power
How different stakeholders are
affected by the industry structure
and the price and non-price war
between the players