Cola Wars Continue
Coke & Pepsi in 2006

DILSHAN
HYE JOO LEE
Dae-Ryang-Woo
Overview
Industry  Background

Production  &  Distribution  of  CSD

Questions
1886: John
Pemberton

1893: Caleb
Bradham
Concentrate
producer

Bottler

Supplier

Retail
Channel
Concentrate	
  Producer	
  
• Key	
  produc+on	
  investment	
  areas	
  
• Manufacturing	
  plant	
  	
  
• Customer	
  D...
Bo.lers	
  
• 

Purchased	
  concentrate	
  	
  

• 

Added	
  carbonated	
  water	
  and	
  
high-­‐fructose	
  corn	
  s...
Suppliers	
  
• 

Coke	
  and	
  Pepsi	
  were	
  among	
  the	
  Metal	
  Can	
  industry’s	
  
largest	
  customers.	
  ...
Retail	
  Channels	
  
In	
  2004,	
  distribu+on	
  of	
  CSDs	
  in	
  U.S.	
  was	
  through:	
  
• 
• 

Fountain	
  ou...
Sales	
  through	
  Retail	
  Channel	
  
Supermarkets
7.90%

9.50%
Fountain Outlets
32.90%

Vending Machines

11.80%
Mass...
Suppliers	
  to	
  Concentrate	
  producers	
  &	
  Bo.lers	
  
2%
42%
56%

Metal Cans
Plastic bottle
Glass bottle
Bottlers  UP!
—  Relationship  with  the  bottlers  has  been  critical  to  

Pepsi’s  success  over  Coke
—  Coke  rai...
1.	
  Why	
  has	
  the	
  so<	
  drink	
  industry	
  been	
  so	
  
profitable?	
  	
  
Threat Of New Entrants –Low
•  Bottling  Network
-­‐  Have  franchisee  agreements  with  their  existing  bottlers  
who ...
•  Commodity Ingredients
•  Majority of the U.S. CSDs were packed in
metal cans
- Coke and Pepsi were among the largest
cu...
Bargaining  power  of  Buyer  -­‐  moderate
Fountain and
Vending, 34%

Super
markets, 31%

Convenience
and Gas, 15%
Drug s...
Supermarkets (Food stores)
- Several chain stores , Intense competition for
shelf space
Mass Merchandiser
- Have private l...
Threat of Substitutes - Low
• Large

number of substitutes were available

• Americans

drank more soda than any other
bev...
Extent of Rivalry - High
• Concentrate

Producer Industry – DUOPOLY

• Rest

of the competition too small to cause any
uph...
2.	
  Compare	
  the	
  economics	
  of	
  the	
  concentrate	
  
business	
  to	
  the	
  bo.ling	
  business:	
  why	
  ...
Bottler
• Cost of sale is more in bottlers than concentrate producers
• Bottled or canned is the resulting CSD product
• B...
3.	
  How	
  has	
  the	
  compeIIon	
  between	
  Coke	
  and	
  
Pepsi	
  affected	
  the	
  industry’s	
  profits?	
  
• ...
3.	
  How	
  has	
  the	
  compeIIon	
  between	
  Coke	
  and	
  
Pepsi	
  affected	
  the	
  industry’s	
  profits?	
  
• ...
4.	
  Can	
  Coke	
  and	
  Pepsi	
  sustain	
  their	
  profits	
  in	
  
the	
  wake	
  of	
  fla.ening	
  demand	
  and	
...
Number of competitors
• 2 major players: Coke, Pepsi
• Combine market share: 74.8%

Competitive strategy
• Focused on adve...
Exit Barriers
• Relatively low costs to exit
• Contractual agreements with bottling companies

Proprietary Information
• S...
• Initially through the early 1960s Coke was the
winner.
• But passage of the time Pepsi creates strong
hold on the market...
Thank You
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Cola wars continue coke and pepsi in 2006-1

  1. 1. Cola Wars Continue Coke & Pepsi in 2006 DILSHAN HYE JOO LEE Dae-Ryang-Woo
  2. 2. Overview Industry  Background Production  &  Distribution  of  CSD Questions
  3. 3. 1886: John Pemberton 1893: Caleb Bradham
  4. 4. Concentrate producer Bottler Supplier Retail Channel
  5. 5. Concentrate  Producer   • Key  produc+on  investment  areas   • Manufacturing  plant     • Customer  Development  Agreements  (CDA)     • Spent  for  adver+sing,  promo+on,  market  research  
  6. 6. Bo.lers   •  Purchased  concentrate     •  Added  carbonated  water  and   high-­‐fructose  corn  syrup     •  BoEled  or  canned  the  resul+ng   CSD  product   •  Delivered  it  to  customer  account  
  7. 7. Suppliers   •  Coke  and  Pepsi  were  among  the  Metal  Can  industry’s   largest  customers.   •    Major  Can  producers-­‐  Ball,  Rexam,  Crown  Cork  &  Seal  
  8. 8. Retail  Channels   In  2004,  distribu+on  of  CSDs  in  U.S.  was  through:   •  •  Fountain  outlets(23.4%)   •  Vending  Machines(14.5%)   •  Mass  Merchandisers(11.8%)     •  Convenience  Stores  &Gas  Sta+ons(7.9%)   •    Super  Markets  (32.9%)   Other  outlets(9.5%)  
  9. 9. Sales  through  Retail  Channel   Supermarkets 7.90% 9.50% Fountain Outlets 32.90% Vending Machines 11.80% Mass Merchandisers 14.50% 23.40% Convenience stores and Gas Stations Other Outlets
  10. 10. Suppliers  to  Concentrate  producers  &  Bo.lers   2% 42% 56% Metal Cans Plastic bottle Glass bottle
  11. 11. Bottlers  UP! —  Relationship  with  the  bottlers  has  been  critical  to   Pepsi’s  success  over  Coke —  Coke  raised  its  concentrate  prices  leaving  the   bottlers  a  narrower  proBit  margin  in  the  highly   price  sensitive  industry
  12. 12. 1.  Why  has  the  so<  drink  industry  been  so   profitable?    
  13. 13. Threat Of New Entrants –Low •  Bottling  Network -­‐  Have  franchisee  agreements  with  their  existing  bottlers   who  have  rights  in  a  certain  geographic  area  in  perpetuity •  Access  to  distribution  is  limited •  High  brand  loyalty •  Advertising  Spend -­‐huge  advertising  and  marketing  spend  required
  14. 14. •  Commodity Ingredients •  Majority of the U.S. CSDs were packed in metal cans - Coke and Pepsi were among the largest customers for metal can industry -  Cans are commodity, 2-3 manufacturers competed for single contract •  Plastic Bottles - 42% of CSD packaging - Bargaining power of them was low
  15. 15. Bargaining  power  of  Buyer  -­‐  moderate Fountain and Vending, 34% Super markets, 31% Convenience and Gas, 15% Drug stores, 3% Club stores, 4% Mass retailers, 4% Supercenters, 9%
  16. 16. Supermarkets (Food stores) - Several chain stores , Intense competition for shelf space Mass Merchandiser - Have private label CSDs - Extremely fragmented Fountain - Intense competition : Sacrificed profits to land and keep Fountains
  17. 17. Threat of Substitutes - Low • Large number of substitutes were available • Americans drank more soda than any other beverage with cola market share 71% in 1990 • Huge advertising, brand equity, and making easy availability of product reduced the threat of substitutes
  18. 18. Extent of Rivalry - High • Concentrate Producer Industry – DUOPOLY • Rest of the competition too small to cause any upheaval of pricing or industry structure • Strategic convergence • Head-to-Head • Coke Competition between both and Pepsi reinforced brand recognition of each other
  19. 19. 2.  Compare  the  economics  of  the  concentrate   business  to  the  bo.ling  business:  why     is  the  profitability  so  different?     Concentrate Producers •  Blend raw material ingredients, packaged the mixture and shipped those to the container bottler. •  A typical manufacturing plan costs $25 million to $ 50million. •  Significant costs were for advertising, promotion, market research and bottler relations •  Invest heavily in their trademarks and innovative marketing campaign
  20. 20. Bottler • Cost of sale is more in bottlers than concentrate producers • Bottled or canned is the resulting CSD product • Bottling process is capital - intensive plant, and involved specialized lines • Invest a lot of capital in trucks and distribution networks • Purchase major inputs: packaging in can, bottle and class , sweetener …
  21. 21. 3.  How  has  the  compeIIon  between  Coke  and   Pepsi  affected  the  industry’s  profits?   •  The war between Coca-cola and Pepsi enables them to elevate their level of innovation •  Overseas operations after 1960s. •  Tw o c o m p a n i e s c h a n g e d f r o m A m e r i c a n companies to international ones. •  Coca-cola and Pepsi share the most of the market;
  22. 22. 3.  How  has  the  compeIIon  between  Coke  and   Pepsi  affected  the  industry’s  profits?   •  Advertising budgets are significantly increased. •  The cola wars weaken the other competitors by their advantages of plants and equipments •  Many small bottlers fold •  Coca-cola and Pepsi are both able to share the market with high profits.
  23. 23. 4.  Can  Coke  and  Pepsi  sustain  their  profits  in   the  wake  of  fla.ening  demand  and  the   growing  popularity  of  non-­‐CSDs?     Alternative beverages bring increasing profitability due to the health consciousness of the consumers. •  Coca-cola and Pepsi can sustain their profits in the industry •  Adding new products allows larger margins and brings more potential opportunities. •  Shifting the advertising budget and marketing slogans to deliver the messages related to health consciousness also increase the demand of the consumers.
  24. 24. Number of competitors • 2 major players: Coke, Pepsi • Combine market share: 74.8% Competitive strategy • Focused on advertising and promotion • Main strengths from advertising campaigns Industry Growth • Average of 10% till 1990s and then demand leveled off • Diversify to address beverage need Competitor Diversity • Coke and Pepsi are very similar products • Similar changes made
  25. 25. Exit Barriers • Relatively low costs to exit • Contractual agreements with bottling companies Proprietary Information • Secret and famous cola recipe for both Coke and Pepsi • Difficult to copy by other firms Competitive Advantage • Famous, international brands • Partnered with fast food franchises as well
  26. 26. • Initially through the early 1960s Coke was the winner. • But passage of the time Pepsi creates strong hold on the market. • Coke was focused on overseas markets, while Pepsi focused on the US grocery channel. • Coke and Pepsi hold almost 75% the whole market and 25% have other local CSDs or non CSDs brands.
  27. 27. Thank You
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