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 ChannelsIn 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 CSDTeem (1960) Fanta (1960)Mountain Dew (1964) Sprite (1961)Diet Pepsi (1964) Low calorie cola Tab (1963) Non CSDFrito Lays Minute Maid (fruit juice) Duncan foods (coffee, tea, hot chocolate) Belmont Springs water
The Pepsi ChallengeBlind taste test RebatesEroded Coke’s Market share Retail price cutsRolled out blind taste campaign Advertisements that questionsnation wide tests’ validity 1978 – Re-negotiation of contract with franchisee bottlers
Leadership2001: Steve Reinemund 1980 – Roberto Goizueta“Grow the core add some more”Launched new CSD products Most valuable Brand(Sierra Mist, Mountain Dew code red)Acquisition of Quaker Oats Use of lower priced corn syrup against sugarNet income raised by 17.6% per year Double spending on ads 1981-84ROI capital 29.3 (2003) from 9.5 (1996) Sold non-CSD business Introduced Diet Coke (1982)
ExpansionsAcquired – Pizza hut (1978), Toco Bell Exclusive deals with Burger king,(1986), KFC (1986) McDonaldsMerged with Frito Lay to form PepsiCo Purchased Minute Maid, Duncan Foods, Belmont Springs waterPepsi purchased Quaker Oats Acquired – Planet Java coffee drink(Gatorade) in 2000 brand (2001) Acquired - Mad River juices and tea
1996-2004: Reversal of FortunePepsi flourished Coke struggledAcquisition of Quaker oats (2000) Flat growth3% growth in 2004 Annual growth in net income falls to 4.2% from 18%(1990-96)Net income rose by 17.6% per year Shareholders return -26%ROI 29.3% from 9.5%(1996)Shareholders return 46%
Quest for AlternativesU.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% & Pepsi75%No longer designing of marketing course Reluctant to diversify– established as total beverage companyDiet 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 • Carbonates Market is in Decline• Fourth amongst the top five leading brands • Over-complexity of relationship with bottlers• Broad-based bottling strategy in North America• 47% of global volume sales in carbonates • Inefficient execution of business Strength Weakness Opportunity Threat• Soft drinks volumes in the Asia-Pacific region • Growing "health-conscience" society forecast to increase by over 45% • PepsiCo’s Gatorade, Tropicana and Aquafina• Brands like Minute Maid Light and Minute are stronger brands Maid Premium Heart Wise are positioned • Boycott in the Middle East well with the “Health-concerned” market • Protest against Coke in India• Use distribution strengths in Eastern Europe • Negative publicity in Western Europe and Latin America
Brand Equity According to this case Coke and Pepsi both cumulative spending on advertising. Coke and Pepsi established brand identity over a long period of time. Now these brand become culture of almost every countries and in the case of Coke become part of World Culture So this is very strong point of the these brand for establish their identity and their consumer attachment
Brand Attachment• Coke and Pepsi both establish almost for more than a century and consumers have emotional attachment with these two brands.• Consumers identify these two brands for distance, these all things are the brand strategies.• Advertisement create cozy relationship with their consumers they feel relax to use these brands.
Competitive Advantage• In these both companies they invests heavy amount which other competitor do not invest in their company.
Segment Coke and Pepsi have focus on customer segmentation, for each segment they can easily serve. They can easily search new segment for their products. Franchise system is the best way to search new segmentation, which have very strong segment. And how can they serve in those segments. Segmentation proved very easily approach for their targeted customers.
Key aspectsWho has been losing ? Smaller Brands: Because-Entry Barrier, DuopolyWho has been wining: 1950: Coke have 47% and Pepsi have 10% 1970: Coke have 35% and Pepsi have 29% 1990: Coke have 41% and Pepsi have 32% 2000:Coke have 44%Pepsi have31.4% other beverage CadburySchweppes 14.7% 2006:Coke have 43.1% Pepsi have 31.7% Cadbury Schweppes 14.5%
Key questions Could they boost flagging domestic CSD sales? Through Product innovation Aggressive marketing and promotion Packaging innovations By diversification. Innovation : e.g diet coke Would newly popular beverages provide them with new (and profitable) revenue streams? Yes Non carb and Bottled water contribution to total volume growth: Coke-100%, Pepsi-75 Because of Contamination issue, Obesity issueWas the fundamental nature of cola war changing ? Due to the obesity issue and introduction of non carbonated drinks nature change up-to some extent but still they have to focus on csd .
Conclusion 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.