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Cola Wars Continue: Coke and Pepsi in 2010
- 1. Cola wars continue: Coke and Pepsi in 2010
- 2. U.S. CSD Industry-Economics • Consumption- 23 gallons annually(1970) • Annual growth – 3% over three decades • Dominance of cola segment Market Share Cola CSD Others Market Share Cola CSD Others Cola wars continue: Coke and Pepsi in 2010
- 3. Reasons For CSD Growth • Increasing availability • Introduction of diet and flavoured varieties • Affordability of CSDs-Declining real prices • Americans’ preference to soda over any other beverage Cola wars continue: Coke and Pepsi in 2010
- 4. Production and Distribution-Major Participants • Concentrate Producers • Bottlers • Retail Channels • Suppliers Cola wars continue: Coke and Pepsi in 2010
- 5. Concentrate Producers • Blending raw material ingredients • Packaging mixture in plastic canisters • Shipping containers to bottlers • Manufacturing process- low capital investment- machinery, labor or overhead • Advertising, promotion, market research, bottler support-high costs Cola wars continue: Coke and Pepsi in 2010
- 6. Concentrate Producers • Customer Development Agreements: CDAs with retailers like Wal-Mart • Funds offered for marketing and other purposes for shelf space • Coke and Pepsi concentrate producers- 72% of the U.S. Cola wars continue: Coke and Pepsi in 2010
- 7. Bottlers • Added carbonated water and high fructose corn syrup to concentrate • Bottled and delivered • Door-to-door delivery – Pepsi and Coke bottlers • Bottling- Capital intensive, requires high speed production lines • Bottling and Canning lines-$4 million to $10 million each. Cola wars continue: Coke and Pepsi in 2010
- 8. Bottlers • Cost components • concentrate and syrup(major) • packaging • Labor and overhead • Capital in trucks and distribution networks Cola wars continue: Coke and Pepsi in 2010
- 9. Bottlers • Fall in number- Over 2000(1970) to fewer than 300(2009) • First nationwide franchised bottling network- Coke • Franchised Bottler-Exclusive geographical territory • Exception- Fountain Accounts Cola wars continue: Coke and Pepsi in 2010
- 10. Bottlers Original Coca Cola Franchise Agreement(1899): • Fixed price contract • No provision for renegotiation • Bitter legal disputes • Amended in 1921, 1978 and 1987 Cola wars continue: Coke and Pepsi in 2010
- 11. Bottlers Master Bottler Contract(1987): • Right to Coke to fix concentrate price and other terms of sales-using formula-maximum price and quarterly price adjustment as per sweetener prices • Coke under no legal obligation to assist bottlers with advertising or marketing Cola wars continue: Coke and Pepsi in 2010
- 12. Retail Channels Supermark ets Convenie nce retail Supercen tres Mass retailer s Club stores Drug stores Fountai n vending and others Share of industry volume 37% 10% 11% 2% 7% 2% 31% Index of bottling profitability Net price 1.00 2.24 1.13 1.10 0.93 1.23 2.09 Variable Profit 1.00 1.24 1.24 1.39 1.37 1.68 1.56
- 13. Retail Channels • CSD accounted for $12 billion (4% total store sales) • Shelf space • Impulse purchases • Pepsi – retail outlets • Coke – fountain
- 15. Fountain sales • Investment in service dispensers, point of sale advertising • 2009 – Coke (69%), Pepsi (20%), DPS(11%) • National accounts – Coke, DPS • Local accounts - Pepsi
- 16. Concentrate producers & Bottlers • Concentrate - Few inputs • Bottlers – Packaging, sweeteners • CSDs were packed in cans (56%), plastic bottles (42%), glass bottles (2%) • Cans – attractive packaging material • PET bottles – larger and varied bottle sizes
- 17. Coke and Pepsi – over the years 1886-1899 1900-1929 1930-1959 1960-1973 Cola wars continue: Coke and Pepsi in 2010 1886- John Pemberton created the original formula 1898- Brodham creates Pepsi • Robert Woodruff named CEO • Bottling plants in Europe and Asia • Pioneers the open top coolers, vending machines • Franchises open in 24 states • Goes bankrupt- 1923 • Bought by Craven holdings • Established market share- 2nd largest • Walter Mack appointed as President • Adopts new logo- blue, white and red • Selling in cans • Market leader-47% • First price increase- Price raised from a nickel to a dime • Diversifies offerings (Mountain Dew) • Merges with Frito-Lay (PepsiCo) & expands into the snack food business • Diversifies offerings (Sprite, Tab) • Remains #1 in national cola sales
- 18. Coke wars begin Cola wars continue: Coke and Pepsi in 2010 Alfred Steele “Beat Coke” 1950 • Pepsi Generation- ”Young at heart” • Margin narrowed • Modernize plants and delivery of bottlers 1963 1970s • Increases concentrate prices • New variety introduced • New flavours
- 19. Cola wars continue: Coke and Pepsi in 2010 COLA War Years 1974-1999 2000-2010 • Low calorie beverages • Supplies all Taco Bell, KFCs and most Pizza Huts • Snack food lines very profitable • The “Pepsi Challenge” • Pepsi Lite • Fast-food business • Outpaces Coke in food store sales • High-fructose corn syrup replaces sugar • Pepsi Bottling Company goes public • Low calorie beverages • Subway account, retains exclusive deals with Burger King and McDonalds • Holds big lead over Pepsi in cola market • High-fructose corn syrup replaces sugar • Diet Coke introduced, boosts profits • New Coke fails, Coca Cola Classic returns • Coca Cola Enterprises established • Maintains lead in cola market share
- 20. Adapting to the times • Late 90s – CSD consumption began to fizzle(Exhibit 1:- CSD-47.4 in 2008 and 46% in 2009) • Americans became health conscious-obesity • Coke – Freestyle soda machine, extensive marketing • Pepsi – Rebranding plan: The power of one, promoting the overall portfolio-snack and beverage company Cola wars continue: Coke and Pepsi in 2010
- 21. Alternatives • Diet sodas-Coca Cola Zero, double digit growth • Alternative sweeteners – natural sugar, Stevia- a zero calorie sweetner • Juices, energy drinks, tea-based drinks, bottled water (Non carbs- Mkt Share-17%) • Pepsi – a “total beverage company” outsold coke’s rival non carb products Cola wars continue: Coke and Pepsi in 2010
- 22. Bottled Water • $14 billion bottled water category • 20% of sales in the US non-alcoholic refreshment beverage segment • Pepsi – Aquafina; Coke – Dasani • Price sensitive customers sought cheaper alternatives • PET bottles criticized • Coke’s mkt share 15% in 2009 (down from 22% in 2004) Cola wars continue: Coke and Pepsi in 2010
- 23. Coca-Cola Worldwide market • Invested about $2 billion in china • Served in 200 countries • 80% of sales from international market
- 24. Pepsi Worldwide market • Depended on the US for half of its sales • Focused on emerging markets like Asia, Middle East and Africa • In Russia, Pepsi paid $1.4 billion for 76% stake in Russia’s largest juice producer
- 25. Evolving structures and strategies • Price wars(1990) 60.57 75.91 83.48 92.11 103.22 110.23 109.88 00 20 40 60 80 100 120 1988 1994 1998 2002 2006 2008 2009 Consumer Price Index 10.79 8.48 7.63 7.57 7.47 7.66 7.98 00 2 4 6 8 10 12 1988 1994 1998 2002 2006 2008 2009 Retail Price Per Case Exhibit 5
- 26. Evolving structures and strategies • Low-cost strategy by bottlers • Coke’s difficult relationship with bottlers like CCE was termed as “Dysfunctional” • Incidence pricing • Retailer resist price increase(Wal-Mart)
- 27. Future of the Cola wars Fundamental shift in the Cola wars Or One more round of 100 year rivalry
- 28. Why historically has the soft drinks industry been so profitable? • Low power Bargaining power of supplier • Locked in bottlers • Low power to consumers Bargaining power of buyers • Lots of substitutes, but advertising and widespread distribution limit their impact. • consumers prefers soft drink over any other beverage Threat of substitutes • Barrier to entry since high costs involved(advertising, reputation) • Bottling process was capital intensive- high speed production lines Threat of new entrants • Secret ingredients, similar products, competition over promotion and advertising, brand loyal customersIndustry rivalry Cola wars continue: Coke and Pepsi in 2010
- 29. Concentrate Producer Bottler Dollars per case Percent of net sales Dollars per case Percent of net sales Net sales 0.98 100% 4.63 100% COGS 0.22 22% 2.67 58% Gross Profit 0.76 78% 1.97 42% Direct marketing exp 0.21 21% 0.45 10% Selling & delivery exp 0 0% 0.85 18% Admin exp 0.24 25% 0.31 6% Operating income 0.3 32% 0.36 8% Concentrate producers v/s bottlers
- 30. 0 2 4 6 8 10 12 1988 1994 1998 2002 2006 2008 2009 Casessold Retail price Concentrate price Concentrate producers v/s bottlers
- 31. • The cola war enabled Coca-cola and Pepsi to elevate their innovation level. • Coke was the first concentrate producer to build a nationwide franchise bottling network, that Pepsi and Cadbury Schweppes followed suit. • Franchise agreements with both Coke and Pepsi allowed bottlers to handle the non-cola brands of other concentrate producers. • Bottlers could not carry directly competing brands. • Throughout the 1980s, the growth of Coke and Pepsi put a squeeze on smaller concentrate producers Effect on Industry’s Profits
- 32. Effect on Industry’s Profits • Shelf space were declined and shuffled from one to another for small brands. • Small players find it difficult to sustain in this business. – In a five year span, Dr Pepper was sold several times, Canada Dry twice, Sunkist once, Shasta one, and A&W once. – Phillip Morris acquired Seven-UP in 1978 for a big premium, but racked up huge losses in the early 1980s, and then left the CSD business in 1985. Cola wars continue: Coke and Pepsi in 2010
- 33. Effect on Industry’s Profits • New players relied on strategic acquisition to have foothold in the market – In 1990s, through a series of strategic acquisitions, Cadbury Schweppes became the third-largest concentrate product. – Coke has a world market share of 51.4%, Pepsi has 21.8% and Cadbury Schweppes has 6% Cola wars continue: Coke and Pepsi in 2010
- 34. Flattening Demand – Sustaining Profit 0 1000 2000 3000 4000 5000 6000 2002 2004 2006 2007 2008 2009 Unitcasevolume(inmillions) Packaged Water Juice Sports drinks Tea-based drinks Energy drinks Cola wars continue: Coke and Pepsi in 2010
- 35. Flattening Demand – Sustaining Profit 35 35 35 35 25 35 30 60 60 70 65 35 45 70 0 10 20 30 40 50 60 70 80 Coffee based Tea based Energy Sports Juice Water CSD Grossmargin% Retailer's GM Brand's GM Cola wars continue: Coke and Pepsi in 2010
- 36. Cola wars continue: Coke and Pepsi in 2010