Cola Wars Continue: Coke and Pepsi in 2006

War over $66bn CSD industry lasted from 1975-mid1990s

Presented by Group C:
• Deepika Pundir
• Geeta Chopra
• Jasmeet Bhatia
• Mohit Goel
• Samdarsh Nayyar
• Varun Kukreja
• Vivek Balokhra
Economics of the US Carbonated Soft Drink
(CSD) Industry
• Americans consumed 23 gallons of CSDs annually in 1970
• Consumption grew by 3% per year over the next 3 decades
• Increasing availability of CSDs and introduction of diet and
flavored varieties
• Non-cola CSDs were introduced
Production & Distribution of CSD
1. Concentrate producers
2. Bottlers
3. Retail channels
4. Suppliers
1. Concentrate Producer
• Blended raw material ingredients, packaged the mixture,
shipped those container to the bottler
• Key production investment areas like machinery, overhead and
labor
• A typical manufacturing plant cost - $25 million to $50 million
• Customer Development Agreements (CDA) with retailers like
Wal-Mart
• Significant costs were spent 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
2. Bottlers
• Purchased concentrate
• Added carbonated water and
high-fructose corn syrup
• Bottled or canned the
resulting CSD product
• Delivered it to customer
account
2. Bottlers
• Bottling process is capital intensive.
• Packaging accounted for 40% to 45% of cost of sales and same
for concentrate and sweeteners for 5% to 10%.
• Coke and Pepsi bottlers offered “direct store door” delivery.
• Under Cooperative merchandizing agreements retailers agreed
to promotional activities for sales of soft drinks
 3. Retail Channels
In 2004, distribution of CSDs in U.S. was through:
• Super Markets (32.9%)
• Fountain outlets(23.4%)
• Vending Machines(14.5%)
• Mass Merchandisers(11.8%)
• Convenience Stores &Gas Stations(7.9%)
• Other outlets(9.5%)
4. Suppliers
• Coke and Pepsi were among the Metal Can industry’s largest
customers.
• Major Can producers- Ball, Rexam, Crown Cork & Seal
Evolution of Coke
• Formulated in 1886 by John Pemberton, a pharmacist in Atlanta,
Georgia
• Sold it at a drug store soda fountains as “ a potion for mental and
physical disorders”
• In 1891, Asa Candler acquired the formula, established a sales
force and began brand advertising
• The formula for Coca-Cola syrup known as “Merchandise 7X”
remained a secret
• The rest is history
Evolution of Pepsi
• Invented in 1893 in New Bern, North Carolina by pharmacist
Caleb Bradham
• By 1910 built a network of 270 bottlers
• Declared bankruptcy in 1923 and again in 1932
• Business began to grow during the Great Depression
• Pepsi lowered price of its 12 –oz bottle to a Nickel – the same
price Coke charged for its 6.5-oz bottle
The Cola War Begins
Marketing Campaign
“Beat Coke” “American’s preferred taste”

“Pepsi Generation” “No wonder Coke refreshes best”

“Young At Heart”
Year 1960s – the Armageddon
CSD
Teem (1960) Fanta (1960)
Mountain Dew (1964) Sprite (1961)
Diet Pepsi (1964) Low calorie cola Tab (1963)
Non CSD
Frito Lays Minute Maid (fruit juice)
Duncan foods (coffee, tea, hot
chocolate)
Belmont Springs water
The Pepsi Challenge
Blind taste test
Eroded Coke’s Market share
Rolled out blind taste campaign
nation wide
Rebates
Retail price cuts
Advertisements that questions
tests’ validity
1978 – Re-negotiation of
contract with franchisee bottlers
Leadership
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)
1980 – Roberto Goizueta
Most valuable Brand
Use of lower priced corn syrup against
sugar
Double spending on ads 1981-84
Sold non-CSD business
Introduced Diet Coke (1982)
Expansions
Acquired – Pizza hut (1978), Toco Bell
(1986), KFC (1986)
Merged with Frito Lay to form PepsiCo
Pepsi purchased Quaker Oats
(Gatorade) in 2000
Exclusive deals with Burger king,
McDonalds
Purchased Minute Maid, Duncan
Foods, Belmont Springs water
Acquired – Planet Java coffee drink
brand (2001)
Acquired - Mad River juices and tea
1996-2004: Reversal of Fortune
Pepsi flourished
Acquisition of Quaker oats (2000)
3% growth in 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
U.S. Market share for Pepsi and Coke
• 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%
No longer designing of marketing course Reluctant to diversify
– established as total beverage company
Diet Pepsi as flagship brand - Diet Pepsi,
Pepsi One, Diet Coke with Splenda
 Evolving Structures and Strategies
• System profitability
• Price war (1990s)
• Low-cost strategy by the bottlers
• Incidence pricing
• Retailers resist price increases (Wal-Mart)
• Coke’s difficult relationship with bottlers like CCE was termed as “Dysfunctional”
 Internationalizing the Cola Wars
• Next largest market: Mexico, Brazil, Germany, China and the
United Kingdom, Asia and Eastern Europe
• American: Chinese - 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
• World’s Market Share: Coke 51.4% and Pepsi 21.8%
SWOT Analysis: Pepsi
• Enjoys a High-Profile Global Presence • Carbonates Market is in Decline
• Owns the World’s 2nd Best-Selling Soft Drinks • Pepsi is Strongest in North America
Brand • They Only Target Young People
• Constant Product Innovation
• Aggressive Marketing Strategies
• A Broad Portfolio of Products
Strength Weakness
Opportunity Threat

• Increased Consumer Concerns in comparison • Obesity and Health Concerns

to bottled water • Increased Marketing and Innovation
• Growth in Healthier Beverages Spending by Coke
• Growth in Tea and Asian Beverages • Restriction to only North America as target
• Growth in the Functional Drinks Industry market
SWOT Analysis: Coke
• Enjoys a High-Profile Global Presence
• Fourth amongst the top five leading brands
• Broad-based bottling strategy
• 47% of global volume sales in carbonates
Strength
Opportunity
• 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
• Carbonates Market is in Decline
• Over-complexity of relationship with bottlers
in North America
• Inefficient execution of business
Weakness
Threat
• 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 Western Europe
Thank You