Cola wars 2010


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Cola wars 2010

  1. 1. PRERNA MAKHIJANI ROLL NO. 29 PGDM-IBQ6) What are the major cost drivers for the bottlers?The cost drivers for the bottlers were as follows: 1. Bottlers had a “direct store door” arrangement, which increased the cost of transportation and labour because their own personnel did the driving, unloading and stacking. 2. Retail stores were paid by bottlers for promotional activities and discount levels. 3. The bottling process in itself was highly capital intensive requiring high speed production lines etc. 4. The other main costs were the concentrate and syrup. This cost was dependent on CSD suppliers and market price for sugar/corn syrup. 5. The bottlers heavily invested in trucks and distribution networks apart from routine expenses like packaging, labour and other overheads.Q4) How have Coke and Pepsi managed the rivalry in the CSD industry in terms ofconcentrate suppliers?Coke and Pepsi managed the rivalry in the CSD industry by following some of the belowmentioned tactics over a couple of decades: 1. Pepsi started focusing more on take-home sales to target family consumption. For this they introduced the 26-oz bottles. 2. Pepsi started with an aggressive marketing campaign called “Pepsi Generation” to promote and increase sales among the youth. 3. Pepsi also worked to modernize plants and improve store delivery. 4. Pepsi’s bottlers were concentrated and were larger than Coke’s. This gave them an advantage over Coke. 5. Pepsi used to sell concentrate at 20% lower than Coke, promising to spend the extra income on promotion after equaling Coke’s prices. 6. Both Coke and Pepsi experimented with cola and non cola flavours and new packaging options. Non returnable glass bottles were introduced along with metal cans. 7. In the 1970s Pepsi came up blind taste tests called “Pepsi Challenge” and Coke countered it with rebates and retail price cuts. 8. During this period, Coke renegotiated with its bottlers to bring in more flexibility in pricing of syrup and concentrates. 9. Coke also switched to lower priced high-fructose corn syrup later on. Pepsi followed suit. 10. Coke started with “Diet Coke” and in a couple of years Pepsi came out with a similar product.
  2. 2. PRERNA MAKHIJANI ROLL NO. 29 PGDM-IBQ5) How should Coke and Pepsi face this challenge? Recommend.Coca Cola and Pepsi should focus on growth related strategies rather than devising tactics tooutdo each other for shorter periods of time. The long term focus would not only be profitablein the future but also be highly sustainable. Some of the ways this can be done is as follows: 1. Continue expansion into emerging markets. As the buying power of consumer increases, so would the sales of these brands. 2. Both of them should start using healthy sweeteners in order to counter the claim of aerated drinks leading to obesity and other health problems. This would not take much investment and as the trend for healthy living grows consumers will be relatively insensitive towards price. 3. Have a green strategy (like environmentally friendly factories, recycle of the bottles, water cleaning systems). This will have a positive effect on customer loyalty and will help in the brand building process. 4. Continue to churn out newer products and bring about innovation in these products. Innovation to be based on geography, occasion, target demographic group and ingredients. 5. For retailing strategies, increase shelf space, install more and better equipments in the market and also expand availability into new outlets and channels.Q2) Analyze the industry attractiveness of concentrate suppliers and independent bottlers.Comment on vertical integration of CSD, bottlers and suppliers. Give a strategic rationale.Industry attractiveness for the concentrate suppliers is as follows: 1. Bargaining power of suppliers: The powers of suppliers are low for the CSD as the suppliers are fragmented. Materials like colouring, citric acid and caffeine have no differentiation. Also the switching costs to these are really low and these commodities are easily available in the market. Also there is minimalistic threat of forward integration. 2. Bargaining power of Buyers: Bottlers have very low bargaining power as both Coke and Pepsi determine the terms of the contract for pricing and other conditions. Also they have retained exclusive deals with food outlets. As a matter of fact, most voluminous bottling accounts were owned by these companies which gave them large negotiating powers. 3. Threat of substitutes: Threat of substitution is very high as there are numerous alternates to CSDs. There is a change in consumer behaviour and people are switching to healthier drinks. The switching cost for the consumer is also really low.
  3. 3. PRERNA MAKHIJANI ROLL NO. 29 PGDM-IB 4. Threat of new entry: There are high entry barriers as the investment for research, branding, advertising is very high. Also it is difficult to gain distributor access. And naturally there will be retaliation from existing dominant players in the strategic group. Therefore threat to new entry is low. 5. Threat of rivals: There is high intensity of rivalry due to slow industry growth and changing consumer tastes. Two equal sized companies competing for leadership makes the rivalry very high. Dimension of rivalry is based on price premium but more on branding.Industry attractiveness for the bottlers is as follows: 1. Bargaining power of suppliers: The strength of the suppliers is medium because CSD have consolidated small bottlers. CSD also maintain relations with multiple bottlers and vice versa. It is also true that CSD producers’ sales depend on the bottler’s competitiveness in the market. 2. Bargaining power of buyers: The strength of buyers is high as there are substitutes available. The switching costs are very low. Also that the markets in the developed nations are saturated. 3. Threat of substitutes: This threat is relatively low, as bottlers cannot be easily replaced by other marketing channels. Also fountains cannot be made available everywhere. Bottling component of sales is very high. 4. Threat of new entry: Barriers to entry are high because bottling is not really a profitable industry. Markets are saturated; it’s hard to gain distribution share/shelf space. Bottling is a very capital intensive industry. Also Coke and Pepsi have exclusive share of territories. 5. Threat of rivals: There is rivalry among bottlers of different brands rather than same brands because the territory has been exclusively divided by Coke and Pepsi. Also the exit barriers are high, which makes the rivalry intense.Non marketing forces for CSD industry: 1. Media – Big brands like Coke and Pepsi heavily depend on media to cover them positively as media is a major influencer. Any negative publicity by the media can lead to public outrage like it happened in India some years back. Therefore media is a major force. 2. NGOs/Activist Groups – Many of these activists group question the sustainability practices of major MNEs who only seek profits and do not bother about natural resources and the environment. In India, Coke was accused of using too much water for their production. Therefore, NGOs also play a major role in the CSD industry.
  4. 4. PRERNA MAKHIJANI ROLL NO. 29 PGDM-IB 3. Public – There is a widespread public opinion that cola drinks lead to obesity and diet colas are carcinogenic in nature. This may have an adverse effect on the sales of these products. 4. Government – The US govt. has banned the selling of cola drinks in school premises due to health concerns. Also governments of other countries might object on similar grounds, making entry difficult for the CSD industry. Therefore, the role of the government is also an important force for cola companies.Degree of Vertical Integration:Many of their functions overlap in the industry for instance, Concentrate Producers do somebottling, and bottlers conduct many promotional activities. The industry is already verticallyintegrated to some extent. They also deal with similar suppliers and buyers. The verticalintegration of franchise bottling networks of Coca-Cola and PepsiCo, began in 1980’s. The factthat most of the of the family-owned bottlers that Coca-Cola used, did not have the resourcesto remain competitive in the industry and it began buying up the poorly-managed bottlers,giving them new life with capital, and selling them to better-performing bottlers. By 2009 Coca-Cola Enterprises handled about 75% of Coca-Cola’s North American bottle and can volume andPepsi Bottling Group produced 56% of PepsiCo’s total volume.Q1) Analyze the CSD industry for its key economic dominant features, industry driving factors,critical success factors for the concentrate suppliers and bottlers success.Economic dominant features of the concentrate suppliers are as follows: 1. Market size and growth rate – In recent times even though the market sizes of the two concentrate suppliers was 55% in 2009. This is a fairly dominant market share but the growth has been thwarted due to reasons such as healthy lifestyle and other substitutes. 2. Number of rivals – The CSD industry is fairly consolidated with two major players, Coca Cola and Pepsi dominating the market. Others are smaller brands and private labels of large retail stores which sell on cost advantage. 3. Scope of competitive rivalry – The CSD faces more challenges from non cola products rather CSD players themselves. So the future rivalry will be a battle between non cola and cola drinks. 4. Buyer needs and requirements – The current consumers are health conscious and do not mind shelling extra for healthier products including drinks. CSD needs to watch out for that.
  5. 5. PRERNA MAKHIJANI ROLL NO. 29 PGDM-IB 5. Product innovation/differentiation – Coca cola and Pepsi have both tried to innovate and differentiate themselves on the basis of the product offerings, but haven’t been successful.Economic dominant features of the bottlers are as follows: 1. Market size and growth rate – Bottlers have been consolidated by Coke and Pepsi either by contractual agreements or franchise. This has led to the reduction of no. of bottlers to 300 in 2009. There are exclusive territory rights for bottlers and most terms are dictated by the CSD players. Therefore growth is limited. 2. Number of rivals: The number of rivals is more in terms of different brands of bottlers rather than within the same company bottlers. This is to do with exclusive territorial rights. 3. Scope of competitive rivalry – There is not much to the rivalry in bottling industry in the future unless some major innovation takes place. 4. Buyer needs and requirements – This factor is aligned with the consumption of soft drinks. So as long as there is a requirement for soft drinks, the bottlers will be needed. 5. Product innovation/differentiation – The bottlers have innovated for the last couple of decades, experimenting with different raw materials etc. More innovation would depend on R&D of these firms.Industry driving forces for the CSD industry are as follows: 1. Globalization: Increased globalization has been highly advantageous to the CSD industry as the markets in the US were reaching a saturation point. Market growth was slowing down as people were switching to substitutes. Globalization helped CSDs and bottlers alike to expand in emerging economies and be dominant players in these countries. 2. Product/Marketing Innovation: It will be important for the CSD industry to continuously innovate themselves in terms of products and image. In this industry, branding of the company becomes a game changer. 3. Changing societal concerns, attitudes and lifestyles: There has been a tremendous change in the consumer behaviour patterns. People are shifting to healthier drinks and avoiding high calorie unhealthy soft drinks. This has led to players like Pepsi and Coke to move into diet cola and non cola categories in order to cater to the changing demands of the consumer.
  6. 6. PRERNA MAKHIJANI ROLL NO. 29 PGDM-IBKey Success Factors of the CSD industry are as follows: 1. Manufacturing KSF – High utilization of fixed assets due to standardization of the products sold by CSD industry. Low-cost production efficiency which helped achieve economies of scale. 2. Distribution KSF – A strong network of wholesale distributors and dealers. Also they managed to gain ample shelf space in the retailer’s outlets. 3. Marketing SKF – Breadth of product line and product selection after both Coke and Pepsi entered into the snacks and water bottling segments too. Also clever advertising and branding helped both of them attain market share.Q3) Explain the rationale for different strategies adopted by Coke and Pepsi since inception.The major players in the CSD industry, i.e. Coke and Pepsi had intense rivalry betweenthemselves and the relationship of move and counter move cultivated the strategies of boththe companies. Both the companies took revolting steps in order to gain the market shares,which in turn increased their profits. Path dependence was seen in this case as both thecompanies took different paths to utilize the same resources and these resources gave thembarriers to imitation. To remain competitive, the companies took strategic steps like:· Pepsi entered the fast food restaurant business by acquiring Pizza Hut in 1978, Taco Bell in1986 and KFC in 1986. Coke’s counter move in this aspect was to persuade the competingchains like Wendy’s and Burger King to switch to Coke. The rationale behind taking this stepwas that each of these chains had tremendous sales account. Also, direct control over theseretail channels directly added to the profit margins in the bottling industry, giving the CSDplayers more opportunity to expand and retain market share.· Greater degree of innovation and practices like mass advertising by both the companies wasdone mainly to have a competitive edge over each other. This also helped in lowered prices forboth consumers and bottlers as well as better and attractive packaging, which would again helpin luring the consumers.· The two companies, in 1960s started experimenting with new cola, non-cola flavors andnew packaging. Coke launched Fanta (1960), Sprite (1961) and low-calorie Tab (1963). To this,Pepsi came up with Teem (1960), Mountain Dew (1964) and Diet Pepsi. Diet Coke (1982)became nation’s third largest CSD. This was done primarily to capture larger markets as well asshelf space in stores and to make the competitors’ entry difficult.· Both companies introduced non-returnable glass bottles and 12-oz metal cans in variousconfigurations. The rationale behind this being convenience for the consumers.
  7. 7. PRERNA MAKHIJANI ROLL NO. 29 PGDM-IB· Both diversified into non-CSD industries. Coke purchased Minute Maid, whereas Pepsimerged with Frito-Lay to form PepsiCo. The rationale behind this was to achieve synergiesbased on similar customer targets, delivery systems and marketing orientations.· In 1980, Coke switched from using sugar to a lower priced substitute- high fructose cornsyrup. This move was emulated by Pepsi three years later. This benefitted both the companiesas the same cost could then be used in advertising their products.· In 1986, Coke created an independent bottling subsidiary, Coca-Cola Enterprises (CCE)whereas, Pepsi created Pepsi Bottling Group (PBG) in 1999. This bottler consolidation was doneto make the smaller concentrate producers increasingly dependent on Pepsi and Coke bottlingnetworks for distribution of their products.Q7) What additional information did you get from HBR Interview of M. Kent, CEO Coca Cola?These are the following additional information obtained from the interview: 1. Coca Cola plans to double its revenue by 2020 in the saturated US market. 2. The corporate culture of Coca Cola has been rejuvenated to suit the current times. 3. Numerous sustainability initiatives have been taken by Coca Cola to improve their brand image. 4. They believe in contemporary advertising i.e. it should be a two way process. 5. Their future focus will continue to be on nonalcoholic ready-to-drink beverages. 6. Coca cola’s succession planning strategy is to look two layers below and make sure they come out with best results. 7. They see their rivalry with Pepsi as something healthy and essential for the success of their own business.