Cola Wars Continue: Coke and Pepsi in 2006 By Christopher Pappas, Joseph Rampe, Sagar Churi, Bradley Bigelow and Chuck. Master of Business Administration 6090 Dr. Peter A. Pinto Strategy Design and Implementation Wednesday, July 29, 2009

Agenda Introduction, Strategic Issues and General Environmental Factors. External Analysis along with Opportunities and Threats. Internal Analysis along with Strengths and Weaknesses. Identification and Evaluation of Strategies, Structure, and Control. Recommendations.

Introduction, Strategic Issues and General Environmental Factors.

External Analysis along with Opportunities and Threats.

Internal Analysis along with Strengths and Weaknesses.

Identification and Evaluation of Strategies, Structure, and Control.

Recommendations.

Introduction

Coca-Cola’s History In 1886, John Pemperton, a pharmacist from Atlanta, formulated Coca-Cola. He sold Coca-Cola at 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 of Coca-Cola In 1899, Candler granted Coca-Cola’s first bottling franchise, for a nominal one dollar In 1919, Candler sold the company to a group of investors and it went public In 1923, Robert Woodruff became the leader and expanded and developed the company in the national and international markets During World War II, Coca-Cola bottling plants followed the movement of American troops, leading to high CSD consumption by the soldiers

In 1886, John Pemperton, a pharmacist from Atlanta, formulated Coca-Cola. He sold Coca-Cola at 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 of Coca-Cola

In 1899, Candler granted Coca-Cola’s first bottling franchise, for a nominal one dollar

In 1919, Candler sold the company to a group of investors and it went public

In 1923, Robert Woodruff became the leader and expanded and developed the company in the national and international markets

During World War II, Coca-Cola bottling plants followed the movement of American troops, leading to high CSD consumption by the soldiers

Pepsi’s History In 1893, Caleb Bradham invented Pepsi-Cola in New Bern, North Carolina Pepsi adopted a franchise bottling system as Coca-Cola, and by 1910 it had built a network of 270 bottlers In 1923 and in 1932 Pepsi declared bankruptcy Business began to pick up during Great Depression since Pepsi lowered the price compared to Coca-Cola. The price for Pepsi 12 oz was the same as Coca-Cola 6.5 oz In 1938, Coke filed suit against Pepsi, claiming that the Pepsi-Cola brand was an infringement on the Coca-Cola trademark A 1941 court ruling in Pepsi’s favor ended the suits and countersuits between them

In 1893, Caleb Bradham invented Pepsi-Cola in New Bern, North Carolina

Pepsi adopted a franchise bottling system as Coca-Cola, and by 1910 it had built a network of 270 bottlers

In 1923 and in 1932 Pepsi declared bankruptcy

Business began to pick up during Great Depression since Pepsi lowered the price compared to Coca-Cola. The price for Pepsi 12 oz was the same as Coca-Cola 6.5 oz

In 1938, Coke filed suit against Pepsi, claiming that the Pepsi-Cola brand was an infringement on the Coca-Cola trademark

A 1941 court ruling in Pepsi’s favor ended the suits and countersuits between them

Production and Distribution Concentrate Producers Bottlers Retail Channels (Super Markets, Vending Machines, Convenience stores, Gas stations) Suppliers to concentrate producers and bottlers

Concentrate Producers

Bottlers

Retail Channels (Super Markets, Vending Machines, Convenience stores, Gas stations)

Suppliers to concentrate producers and bottlers

Production and Distribution Concentrate Producers Blended raw material ingredients, packaged the mixture and shipped those to the container bottler A typical manufacturing plan costs $25 million to $50 million Significant costs were for advertising, promotion, market research, and bottler relations Coca-Cola and Pepsi claimed a combined 74.8% of the US CSD market sales Concentrate producers earn more profits than bottlers

Blended raw material ingredients, packaged the mixture and shipped those to the container bottler

A typical manufacturing plan costs $25 million to $50 million

Significant costs were for advertising, promotion, market research, and bottler relations

Coca-Cola and Pepsi claimed a combined 74.8% of the US CSD market sales

Concentrate producers earn more profits than bottlers

Production and Distribution Bottlers Cost of sale is more in bottlers than concentrate producers Added carbonated water and high-fructose corn syrup Bottled or canned was the resulting CSD product Delivered it to customer account Bottling process is capital intensive Packaging accounted for 40% to 45% of sales Coke and Pepsi bottlers offered “direct store door delivery” Cooperative merchandizing agreements are a key ingredient of soft drink sales

Cost of sale is more in bottlers than concentrate producers

Added carbonated water and high-fructose corn syrup

Bottled or canned was the resulting CSD product

Delivered it to customer account

Bottling process is capital intensive

Packaging accounted for 40% to 45% of sales

Coke and Pepsi bottlers offered “direct store door delivery”

Cooperative merchandizing agreements are a key ingredient of soft drink sales

Production and Distribution Bottler Consolidation Coke was the first concentrate producer to build a nationwide franchised bottling network and made huge investments to support its bottling network In 1985 Coke bought two of its largest bottling companies In 1986 Coke created an independent bottling subsidiary, Coca-Cola Enterprises (CCE), selling 51% of its shares to the public Coke continued to acquire independent franchised bottlers and sell them to CCE Pepsi after operating its bottlers for a decade, it shifted course and adopted Coke’s anchor bottle model In 1999, the Pepsi Bottling Group (PBG) went public and Pepsi retained a 35% equity

Coke was the first concentrate producer to build a nationwide franchised bottling network and made huge investments to support its bottling network

In 1985 Coke bought two of its largest bottling companies

In 1986 Coke created an independent bottling subsidiary, Coca-Cola Enterprises (CCE), selling 51% of its shares to the public

Coke continued to acquire independent franchised bottlers and sell them to CCE

Pepsi after operating its bottlers for a decade, it shifted course and adopted Coke’s anchor bottle model

In 1999, the Pepsi Bottling Group (PBG) went public and Pepsi retained a 35% equity

The Cola War in the 60s Coke purchased the Minute Maid (fruit juice), Dunkan Foods (coffee, tea, hot chocolate), and Belmont Springs Water. Pepsi merged with snack food giant Frito-Lay to form Pepsi-Co, hoping to achieve synergies During this period Coke focused primarily on overseas markets, basing its strategy on the assumption that domestic CSD consumption was approaching a saturation point. Pepsi meanwhile, battled Coke aggressively in the U.S. and doubled its share between 1950 and 1970.

Coke purchased the Minute Maid (fruit juice), Dunkan Foods (coffee, tea, hot chocolate), and Belmont Springs Water.

Pepsi merged with snack food giant Frito-Lay to form Pepsi-Co, hoping to achieve synergies

During this period Coke focused primarily on overseas markets, basing its strategy on the assumption that domestic CSD consumption was approaching a saturation point. Pepsi meanwhile, battled Coke aggressively in the U.S. and doubled its share between 1950 and 1970.

The Cola War in the 70s Pepsi passed Coke in food store sales for the first time, opening up a 1.4 share-point lead. Coke renegotiated its franchising bottling contact to obtain greater flexibility in pricing concentrate and syrup. Coke announced a significant concentrate price increase. Pepsi followed with a 15% price increase.

Pepsi passed Coke in food store sales for the first time, opening up a 1.4 share-point lead.

Coke renegotiated its franchising bottling contact to obtain greater flexibility in pricing concentrate and syrup.

Coke announced a significant concentrate price increase.

Pepsi followed with a 15% price increase.

The Cola War in the 80s Coke sold off most of the non-CSD businesses except Minute Maid Coke announced the change of its 99 year old formula, loosing loyal customers. Three months later Coke brought back the original formula under the name Coca-Cola Classic Coke introduced 11 new products. One of them was Diet Coke introduced in 1982 which become the most popular diet soft drink and nation’s third-largest-selling CSD Pepsi introduced 13 products Each company offered more than 10 major brands and 17 or more container types

Coke sold off most of the non-CSD businesses except Minute Maid

Coke announced the change of its 99 year old formula, loosing loyal customers. Three months later Coke brought back the original formula under the name Coca-Cola Classic

Coke introduced 11 new products. One of them was Diet Coke introduced in 1982 which become the most popular diet soft drink and nation’s third-largest-selling CSD

Pepsi introduced 13 products

Each company offered more than 10 major brands and 17 or more container types

The Cola War in recent years Soft drink industry encounters new challenges U.S. sales volume grew at a rate of 1%, while in the 1980s and early 1990s the rates were 3% to 7%. Globally the demand remained flat. While Coke struggled, Pepsi quietly flourished. In 2001 Pepsi expanded into other beverage categories. Pepsi’s North America beverage volume grew by 3% in 2004, compared with virtually flat volumes for Coke. New federal nutrition guidelines identified regular CSDs as the largest source of obesity-causing sugars in the American diet. In the U.S. non carb market overall Pepsi had a market share of 47.3% compared with Coke’s share of 27% for 2004.

Soft drink industry encounters new challenges

U.S. sales volume grew at a rate of 1%, while in the 1980s and early 1990s the rates were 3% to 7%.

Globally the demand remained flat.

While Coke struggled, Pepsi quietly flourished. In 2001 Pepsi expanded into other beverage categories.

Pepsi’s North America beverage volume grew by 3% in 2004, compared with virtually flat volumes for Coke.

New federal nutrition guidelines identified regular CSDs as the largest source of obesity-causing sugars in the American diet.

In the U.S. non carb market overall Pepsi had a market share of 47.3% compared with Coke’s share of 27% for 2004.

Expansions Exclusive deals with Burger King & McDonalds Purchased Minute Maid, Duncan Foods, & Belmont Spring Water Acquired Planet Java coffee drink brand Acquired Mad River juices and tea

Exclusive deals with Burger King & McDonalds

Purchased Minute Maid, Duncan Foods, & Belmont Spring Water

Acquired Planet Java coffee drink brand

Acquired Mad River juices and tea

Expansions Acquired Pizza Hut (1978), Taco Bell (1986), KFC (1986) Merged with Frito Lay to form PepsiCo Purchased Quaker Oats

Acquired Pizza Hut (1978), Taco Bell (1986), KFC (1986)

Merged with Frito Lay to form PepsiCo

Purchased Quaker Oats

Strategic Issues

Challenges for Coke for the 21th century In the early years of the 21 st century, growth in soft drink sales for Coke was falling short of precedent and of investors’ expectations. Could Coke boost flagging domestic CSD sales? Would newly popular beverages provide Coke with new and profitable revenue streams? Was Coke era of sustained growth and profitability coming to a close? Did the changes under way represent simply another step forward in the evolution of Coke?

In the early years of the 21 st century, growth in soft drink sales for Coke was falling short of precedent and of investors’ expectations.

Could Coke boost flagging domestic CSD sales?

Would newly popular beverages provide Coke with new and profitable revenue streams?

Was Coke era of sustained growth and profitability coming to a close?

Did the changes under way represent simply another step forward in the evolution of Coke?

External Analysis General Environmental Factors Industry Analysis – Porter’s Model Competitor analysis

General Environmental Factors

Industry Analysis – Porter’s Model

Competitor analysis

Components of the General Environment Demographic Segment Population growth in countries like India, China, Brazil, etc, could lead to explosive growth potential for those markets. As baby boomers become older, decrease in the demand of cola products in the United States market may occur. Technological Segment Technology innovations may affect the production process in all aspects, such as the bottling process, which involves specialized, high-speed lines. Hot-fill, reverse-osmosis, or other specialized equipment is necessary to bottle the non-carbonated beverages that have higher profit margins than the carbonated soft drinks (CSD).

Demographic Segment

Population growth in countries like India, China, Brazil, etc, could lead to explosive growth potential for those markets.

As baby boomers become older, decrease in the demand of cola products in the United States market may occur.

Technological Segment

Technology innovations may affect the production process in all aspects, such as the bottling process, which involves specialized, high-speed lines.

Hot-fill, reverse-osmosis, or other specialized equipment is necessary to bottle the non-carbonated beverages that have higher profit margins than the carbonated soft drinks (CSD).

Components of the General Environment (continue) Sociocultural Segment Consumer trends shift towards healthier beverages. The consumer shift from diet soda, to lemon line, to tea based drinks, and to other popular non carbonated beverages. An increasing trend in teen consumption of CSDs. Metal and Plastic containers commonly used by bottlers are recyclable and are viewed as environmental friendly. Marketing to international markets is challenging since cultural differences must taken into consideration.

Sociocultural Segment

Consumer trends shift towards healthier beverages. The consumer shift from diet soda, to lemon line, to tea based drinks, and to other popular non carbonated beverages.

An increasing trend in teen consumption of CSDs.

Metal and Plastic containers commonly used by bottlers are recyclable and are viewed as environmental friendly.

Marketing to international markets is challenging since cultural differences must taken into consideration.

Components of the General Environment (continue) Political and Legal Segment Soft Drink Interbrand Competition Act of 1980 secured the right of Concentrate Producers (CPs) to grant exclusive territories to bottlers. Anti-trust legal suit against Coca-Cola by Pepsi over fountain drink monopolization in the domestic market was dismissed in 2000. Pressure from the scientific community for the FDA to research the affects of caffeine consumption and to enforce caffeine labels warning of the dangers of caffeine consumption. Obstacles in international operations included political instability, regulations, price controls, advertising restrictions, foreign exchange controls and lack of infrastructure.

Political and Legal Segment

Soft Drink Interbrand Competition Act of 1980 secured the right of Concentrate Producers (CPs) to grant exclusive territories to bottlers.

Anti-trust legal suit against Coca-Cola by Pepsi over fountain drink monopolization in the domestic market was dismissed in 2000.

Pressure from the scientific community for the FDA to research the affects of caffeine consumption and to enforce caffeine labels warning of the dangers of caffeine consumption.

Obstacles in international operations included political instability, regulations, price controls, advertising restrictions, foreign exchange controls and lack of infrastructure.

Components of the General Environment (continue) Economic Segment The current weak economic environment has affected the sales of Cola beverages. The revenue from international sales is exposed to currency fluctuations, which are particularly adverse with a stronger U.S. Dollar (USD). Profits are also vulnerable to the volatile costs for the raw materials used to the production of the beverages. For example, price fluctuations of corn syrup, the aluminum used for the production of the cans, the plastic used for the production of the bottles, etc.

Economic Segment

The current weak economic environment has affected the sales of Cola beverages.

The revenue from international sales is exposed to currency fluctuations, which are particularly adverse with a stronger U.S. Dollar (USD).

Profits are also vulnerable to the volatile costs for the raw materials used to the production of the beverages. For example, price fluctuations of corn syrup, the aluminum used for the production of the cans, the plastic used for the production of the bottles, etc.

Porter’s Model Industry: Bottled and Canned Soft Drinks and Carbonated Waters SIC Code 2086

Bargaining Power of Suppliers Concentrate producers require few inputs Caramel coloring, phosphoric/ citric acid, natural flavors, caffeine Bottlers require: Packaging: Cans, plastic bottles, glass bottles Sweeteners: High fructose corn syrup and sugar, artificial sweeteners

Concentrate producers require few inputs

Caramel coloring, phosphoric/ citric acid, natural flavors, caffeine

Bottlers require:

Packaging: Cans, plastic bottles, glass bottles

Sweeteners: High fructose corn syrup and sugar, artificial sweeteners

Bargaining Power of Suppliers ctd. Majority of carbonated soft drinks (CSDs) packaged in cans (56%) Cans are commodity, 2-3 manufacturers compete for contract Coke and Pepsi among metal can industry’s largest customers Plastic prices going up Plastic bottles represent 42% of CSD sales 20 oz. bottles represent 36.7% of CSD sales volume Power is currently low to moderate- slightly increasing due to rising plastic prices

Majority of carbonated soft drinks (CSDs) packaged in cans (56%)

Cans are commodity, 2-3 manufacturers compete for contract

Coke and Pepsi among metal can industry’s largest customers

Plastic prices going up

Plastic bottles represent 42% of CSD sales

20 oz. bottles represent 36.7% of CSD sales volume

Power is currently low to moderate- slightly increasing due to rising plastic prices

Bargaining Power of Buyers Distribution of CSDs is as follows:

Distribution of CSDs is as follows:

Bargaining Power of Buyers ctd. Most mass merchandisers have private label CSDs Intense competition for shelf space due to expanding array of products and packaging options Intense competition for fountain accounts CSD companies usually sacrifice profit to land and keep these accounts Power is currently moderate, increasing in future Competition for shelf space and fountain accounts

Most mass merchandisers have private label CSDs

Intense competition for shelf space due to expanding array of products and packaging options

Intense competition for fountain accounts

CSD companies usually sacrifice profit to land and keep these accounts

Power is currently moderate, increasing in future

Competition for shelf space and fountain accounts

Threat of Substitutes In 2004, proportion of Americans who considered cola “too fattening” increased to 59% in 2004 from 48% in 2003, according to Morgan Stanley survey Bottled water and non-carbonated drink popularity is rising In 2004, CSD volume in US grew by 1%, while non-carbonated drinks grew by 7.6% and bottled water grew by 18.8%

In 2004, proportion of Americans who considered cola “too fattening” increased to 59% in 2004 from 48% in 2003, according to Morgan Stanley survey

Bottled water and non-carbonated drink popularity is rising

In 2004, CSD volume in US grew by 1%, while non-carbonated drinks grew by 7.6% and bottled water grew by 18.8%

Threat of Substitutes ctd. Pepsi owns Gatorade, Lipton, Tropicana, and Aquafina Coke owns Powerade, Nestea, Minute Maid, and Dasani Energy drinks and coffee represent other threatening substitutes Starbucks, Red Bull, 5 Hour Energy, etc. Threat of substitutes currently moderate to high, increasing in future Due to shifting consumer demands

Pepsi owns Gatorade, Lipton, Tropicana, and Aquafina

Coke owns Powerade, Nestea, Minute Maid, and Dasani

Energy drinks and coffee represent other threatening substitutes

Starbucks, Red Bull, 5 Hour Energy, etc.

Threat of substitutes currently moderate to high, increasing in future

Due to shifting consumer demands

Barriers to Entry High brand loyalty Coke, Pepsi, Cadburry Schweppes control 89.3% of the soft drink market

High brand loyalty

Coke, Pepsi, Cadburry Schweppes control 89.3% of the soft drink market

Barriers to Entry ctd. Concentrate manufacturing involves little capital investment in machinery, overhead, and labor Bottling, however, is very capital intensive Access to distribution is also limited Barriers to entry are currently high, increasing in future Capital requirements, brand loyalty, distribution

Concentrate manufacturing involves little capital investment in machinery, overhead, and labor

Bottling, however, is very capital intensive

Access to distribution is also limited

Barriers to entry are currently high, increasing in future

Capital requirements, brand loyalty, distribution

Rivalry Among Established Companies Declining consumer demand for CSDs leads to increased rivalry Responses to changing demand means established companies compete on innovation and marketing Ex. Coke Side of Life

Declining consumer demand for CSDs leads to increased rivalry

Responses to changing demand means established companies compete on innovation and marketing

Ex. Coke Side of Life

Rivalry ctd. Battles for acquisitions and fast food franchises Ex. SoBe, Subway, Quiznos Battles for packaging innovation Ex. Coke Fridge Pack, Pepsi Fridge Mate Battles for international sales Coke dominates Western Europe and Latin America, Pepsi dominates Middle East and Southeast Asia Intensity of rivalry is currently high, increasing in future Battles over acquisitions, marketing, innovation, international market

Battles for acquisitions and fast food franchises

Ex. SoBe, Subway, Quiznos

Battles for packaging innovation

Ex. Coke Fridge Pack, Pepsi Fridge Mate

Battles for international sales

Coke dominates Western Europe and Latin America, Pepsi dominates Middle East and Southeast Asia

Intensity of rivalry is currently high, increasing in future

Battles over acquisitions, marketing, innovation, international market

Industry Analysis Carbonated Soft Drink Industry Now Future Effect (for current companies) Power of Suppliers Low-Moderate Increasing Negative Power of Buyers Moderate Increasing Negative Threat of Substitutes Moderate-High Increasing Negative Barriers to Entry High Increasing Positive Rivalry High Increasing Neutral

Product Life Cycle

SWOT- Opportunities International Market High brand loyalty Possibility of backward or horizontal integration Exclusive contracts (business, campuses, etc.) Non-carbonated drink market

International Market

High brand loyalty

Possibility of backward or horizontal integration

Exclusive contracts (business, campuses, etc.)

Non-carbonated drink market

SWOT- Threats Politics New federal nutrition guidelines identified regular CSDs as largest source of obesity-causing sugars in American diet US Congressmen have recently discussed raising taxes on soft drinks to help pay for health care reforms Economic downturn Weakening demand in USA Flex-news-food.com

Politics

New federal nutrition guidelines identified regular CSDs as largest source of obesity-causing sugars in American diet

US Congressmen have recently discussed raising taxes on soft drinks to help pay for health care reforms

Economic downturn

Weakening demand in USA

Industry Attractiveness Current industry occupants- still attractive Brand loyalty, high barriers to entry, capital base provides ability to adapt to meet changing consumer demands, international market potential Potential entrants- not attractive High capital requirements, access to distribution, brand loyalty

Current industry occupants- still attractive

Brand loyalty, high barriers to entry, capital base provides ability to adapt to meet changing consumer demands, international market potential

Potential entrants- not attractive

High capital requirements, access to distribution, brand loyalty

Internal Analysis Cash Flow Analysis Industry Benchmarking Evaluation of Capabilities

Cash Flow Analysis

Industry Benchmarking

Evaluation of Capabilities

Cash Flow Analysis Coke Pepsi Year Net Income Changes in Working Capital Free cash Flow Net Income Changes in working capital Free cash flow 1999 2,431 5,361 (2,930) 2,050 284 1,766 2000 2,177 6,158 (3,981) 2,183 186 1,997 2001 3,969 6,140 (2,171) 2,662 (494) 3,156 2002 3,050 6,235 (3,185) 3,313 154 3,159 2003 4,347 7,438 (3,091) 3,568 1,372 2,196 2004 4,847 9,650 (4,803) 4,212 (839) 5,051 2005 4,872 7,609 (2,737) 4,078 1,222 2,856 2006 5,080 6,147 (1,067) 5,642 128 5,514 2007 5,981 10,153 (4,172) 5,658 (379) 6,037

Sources and Uses of Funds Coke Pepsi 2000 - 2004 2004 - 2008 2000 - 2004 2004 - 2008 Sources Uses Sources Uses Sources Uses Sources Uses Cash and Equiv -- 4,888 2,006 -- -- 416 -- 784 Short-Term Investments 12 -- -- 217 -- 1,699 1,952 -- Accts Rec -- 414 -- 919 -- 1,200 -- 1,684 Inventory -- 354 -- 767 -- 636 -- 981 Other Current Assets 170 -- -- 185 -- 84 -- 670 Total Current Assets -- 5,474 -- 82 -- 4,035 -- 2,167 Net PP&E -- 1,923 -- 2,235 -- 2,711 -- 3,514 Intangibles -- 1,919 -- 8,669 -- 4,864 2,365 -- Other Long-Term Assets -- 1,177 1,794 -- 1,962 -- -- 4,691 Total Assets -- 10,493 -- 9,192 -- 9,648 -- 8,007 Accts Payable 378 -- -- 2,913 1,784 -- 2,674 -- Short-Term Debt 1,205 -- 510 -- 982 -- -- 685 Taxes Payable 67 -- -- 415 51 -- 46 -- Accrued Liabilities -- -- 4,835 -- -- -- -- -- Other Short-Term Liabilities -- -- -- -- -- -- -- -- Total Current Liabilities 1,650 -- 2,017 -- 2,817 -- 2,035 -- Long-Term Debt 322 -- 1,624 -- 51 -- 5,461 -- Other Long-Term Liabilities 1,902 -- 1,014 -- 506 -- 1,790 -- Total Liabilities 3,874 -- 4,655 -- 3,374 -- 9,286 -- Total Equity 6,619 -- 4,537 -- 6,274 -- -- 1,279 Total Liabilities & Equity 10,493 -- 9,192 -- 9,648 -- 8,007 --

Industry Benchmarking: Solvency * Industry : SIC 2086 – Bottled and canned soft drinks and carbonated waters

Industry Benchmarking: Efficiency * Industry : SIC 2086 – Bottled and canned soft drinks and carbonated waters

Industry Benchmarking: Profitability * Industry : SIC 2086 – Bottled and canned soft drinks and carbonated waters

Recent 5 yrs comparison

Evaluation of Capabilities No one is having clear sustainable competitive advantage. Capability Valuable Rare Costly to Imitate Non substitutable Competitive Consequences Performance Implications Coke Distribution Channel Y Y/N Y/N N Competitive Parity Average Returns Brand Y Y/N Y Y/N Competitive Advantage Above Average Returns Quality Y Y/N Y/N N Competitive Parity Average Returns Customer Responsiveness Y Y Y/N Y/N Competitive Advantage Above Average Returns Operational Effeciency Y N N N Competitive Disadvantage Below Average Returns Adapt to customer taste Y Y/N Y/N N Competitive Advantage Above Average Returns Pepsi Distribution Channel Y Y/N Y/N N Competitive Parity Average Returns Brand Y Y/N Y/N N Competitive Parity Average Returns Quality Y Y/N Y/N Y/N Competitive Advantage Above Average Returns Customer Responsiveness Y Y/N Y/N N Competitive Parity Average Returns Operational Effeciency Y N N N Competitive Disadvantage Below Average Returns Adapt to customer taste Y Y/N Y/N N Competitive Advantage Above Average Returns

Summary of Internal Analysis Both Coke and Pepsi are industry leaders in terms of profitability. Coke is having edge over Pepsi. Although Pepsi is having slight edge over Coke; both the firms are below industry average in terms of efficiency. Coke and Pepsi are industry leaders but no one is having clear sustainable competitive advantage.

Both Coke and Pepsi are industry leaders in terms of profitability. Coke is having edge over Pepsi.

Although Pepsi is having slight edge over Coke; both the firms are below industry average in terms of efficiency.

Coke and Pepsi are industry leaders but no one is having clear sustainable competitive advantage.

SWOT - Strengths & Weaknesses Strengths Strong Distribution Channel Established Brand Variety in Product Range Quick adaption to customer taste High customer responsiveness Weaknesses Strong competition from Pepsi Inefficient operations Unexpected quality standards.

Strengths

Strong Distribution Channel

Established Brand

Variety in Product Range

Quick adaption to customer taste

High customer responsiveness

Weaknesses

Strong competition from Pepsi

Inefficient operations

Unexpected quality standards.

Corporate & SBU level Strategies

Strategies, Structure, and Control Positioning Strategy- Coke Cost Leadership Differentiation Focused Low Cost Focused Differentiation

Positioning Strategy- Coke

Strategies, Structure, and Control Value Creating Activities- Differentiation (Coke) Production Process Mkt. Brand Bottlers Promoting Brands- shared mkt. activities Production- highly secret Contracts- BK and McDonalds Supporting bottling network- purchasing Margin

Value Creating Activities- Differentiation (Coke)

Strategies, Structure, and Control Domestic Matrix- Coke Cash Cow Dog ?? Mkt. share Mkt. growth

Domestic Matrix- Coke

Strategies, Structure, and Control International Matrix- Coke Cash Cow Dog ?? Mkt. share Mkt. Growth

International Matrix- Coke

Strategies, Structure, and Control General Strategies- Coke - Promote brands - Gain market share - Grow (esp. internationally) - Enhance and be committed to its bottler relationships - Compete with Pepsi on non-carbonated beverages

General Strategies- Coke

- Promote brands

- Gain market share

- Grow (esp. internationally)

- Enhance and be committed to its bottler relationships

- Compete with Pepsi on non-carbonated beverages

Recommendations

Recommendations Coke Pepsi Invest where there is growth China India Russia Diversify Portfolio in North America Snack Foods Non Carbonated Beverages Use innovation to develop new products Invest where there is growth China India Russia Strengthen Brand Names of North American Portfolio Snack Foods Non Carbonated Beverages Lower cost structure to be more price competitive in North America

Invest where there is growth

China

India

Russia

Diversify Portfolio in North America

Snack Foods

Non Carbonated Beverages

Use innovation to develop new products

Invest where there is growth

China

India

Russia

Strengthen Brand Names of North American Portfolio

Snack Foods

Non Carbonated Beverages

Lower cost structure to be more price competitive in North America

Financial Impact Increase Sales by 15% a year Maintain Gross Profit and Net Income Margins Increase Sales by 15% a year Improve Gross Profit Margin to 60% Improve Net income to 18% Coke Pepsi 2005 2006 2007 2008 Sales 21,742 25,003 28,754 33,067 Gross Profit 65% 14,132 16,252 18,690 21,493 Net Income 21% 4,566 5,251 6,038 6,944 2005 2006 2007 2008 Sales 32,562 37,446 43,063 49,523 Gross Profit 18,386 21,344 25,192 29,714 Net Income 4,078 5,991 7,321 8,914

Increase Sales by 15% a year

Maintain Gross Profit and Net Income Margins

Increase Sales by 15% a year

Improve Gross Profit Margin to 60%

Improve Net income to 18%

Coke

Pepsi

Proforma Balance Sheet

How are they doing now ?

How are they doing now?

Coke’s Recent Strategy Expand international markets Coke has been opening new bottling companies in China Be health conscious Introduce New products such as Coke Zero to appeal to the young male market Develop natural low calorie sweetener rebiana Diversify into non carbonated beverages Acquired Glaceau maker of Vitamin Water Acquired Fuze maker of juices infused with vitamins Stakeholder in Honest Tea

Expand international markets

Coke has been opening new bottling companies in China

Be health conscious

Introduce New products such as Coke Zero to appeal to the young male market

Develop natural low calorie sweetener rebiana

Diversify into non carbonated beverages

Acquired Glaceau maker of Vitamin Water

Acquired Fuze maker of juices infused with vitamins

Stakeholder in Honest Tea

Pepsi’s Recent Strategy Expand international markets Started $1 billion dollar investment in China Announced a $1 billion dollar investment in Russia Expand Snack foods in Japan Lower operating costs Initiated Productivity for Growth Program Closed 6 plants in North America Trying to purchase bottling companies Diversify into other beverages and food products Acquired Sobe and is launching drinks internationally Owns Gatorade, Frito Lay, Tropicana, and Quaker

Expand international markets

Started $1 billion dollar investment in China

Announced a $1 billion dollar investment in Russia

Expand Snack foods in Japan

Lower operating costs

Initiated Productivity for Growth Program

Closed 6 plants in North America

Trying to purchase bottling companies

Diversify into other beverages and food products

Acquired Sobe and is launching drinks internationally

Owns Gatorade, Frito Lay, Tropicana, and Quaker

Earnings Per Share

Coke 2 nd Quarter Highlights Internationally case volume growth is 5% Key growth in emerging markets: India 33% China 14% Excluding restructuring charges earnings are down year to date compared to 2008 by 7% Coke blames the strong dollar for weak sales results North America case volume decreased 2% Coke Zero case volume grew 24% in the quarter delivering the 12 th consecutive double digit growth

Internationally case volume growth is 5%

Key growth in emerging markets:

India 33%

China 14%

Excluding restructuring charges earnings are down year to date compared to 2008 by 7%

Coke blames the strong dollar for weak sales results

North America case volume decreased 2%

Coke Zero case volume grew 24% in the quarter delivering the 12 th consecutive double digit growth

Pepsi 2 nd Quarter Highlights Frito Lay snack foods grew 3% volume and 8% revenue Quaker lost volume as consumers shifted to lower price offerings PepsiCo Americas Beverage volumes declined 6% in part to planned restructuring but consumers are shifting to lower priced alternatives Sobe Lifewater is the fastest growing enhanced water brand continues to have strong growth Gatorade is loosing volume as customers are price sensitive Asia Middle East Africa region beverage volumes grew 8% and snack volumes 3%

Frito Lay snack foods grew 3% volume and 8% revenue

Quaker lost volume as consumers shifted to lower price offerings

PepsiCo Americas Beverage volumes declined 6% in part to planned restructuring but consumers are shifting to lower priced alternatives

Sobe Lifewater is the fastest growing enhanced water brand continues to have strong growth

Gatorade is loosing volume as customers are price sensitive

Asia Middle East Africa region beverage volumes grew 8% and snack volumes 3%

Who’s Stock would we buy? Coke is ahead of Pepsi in the Global Markets Global Markets should provide growth for decades A weak dollar makes Coke a winner, mitigates inflation concerns China holds $800 billion in US Treasuries Federal Reserve pumped $1.6 trillion into banks to avoid a meltdown US Budget Deficit is expected to be $1.8 trillion this year

Coke is ahead of Pepsi in the Global Markets

Global Markets should provide growth for decades

A weak dollar makes Coke a winner, mitigates inflation concerns

China holds $800 billion in US Treasuries

Federal Reserve pumped $1.6 trillion into banks to avoid a meltdown

US Budget Deficit is expected to be $1.8 trillion this year

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