The document analyzes the competition between Coca-Cola and Pepsi in the carbonated soft drink (CSD) industry, illustrating how both companies adapted to changing consumer preferences and market conditions over a century. Key issues highlighted include market saturation in the U.S., challenges with bottling operations, and the necessity for innovation and global expansion. Recommendations focus on streamlining business operations, restructuring bottling relationships, and diversifying product offerings to improve profitability and market reach beyond traditional CSDs.

1. Running Head: WEEK 7 – CASE STUDY ANALYSIS: THE COLA WARS – VINODHINI GUHESAN
Week 7 – Case Study Analysis: The Cola Wars
By Vinodhini Guhesan
University of Maryland University College
AMBA 650 Section 7621
February 18, 2014
Author note: This paper was prepared for AMBA 650: Marketing Management and
Innovation, taught by Professor Chadwick.

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Introduction
The carbonated soft drink (CSD) industry was replete with fierce competition
among cola producers led by Coca Cola and Pepsi. The CSD organizations gained
market share in the U.S. and in global markets extending their brands’ recognition and
capturing sales from new markets. The shift in consumer beverage preference and the
expansion into global markets proved to uncover new opportunities for growth and
profitability. In addition the changes in the organizational structure of business for these
companies have allowed them to sustain growth beyond CSD’s.
Presentation of the Facts Surrounding the Case
The infamous Cola Wars have raged on for over a century, fueling innovation
and diversification of the carbonated soft drink (CSD) organizations. The CSD industry
in the U.S. began in the 1890’s with the introduction of Coca Cola followed by Pepsi.
Adding to the competition other CSD’s entering the market included Dr. Pepper, Royal
Crown and 7UP. By the latter part of the 20th century CSD’s were the most widely
purchased beverages in the U.S. Of this colas dominated the CSD’s sales.
In the U.S. the competition between the two main CSD rivals of Coke and Pepsi
proved to demonstrate each carving out their profits through differing sales channels.
Coca Cola dominated the fountain sales via the distribution of its products in retailers
that sold CSD’s by the glass while Pepsi succeeded in grocery store sales where
retailers sold CSD’s by the bottle or can.

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A change in Americans’ health conscious attitudes in the 1960’s prompted the
need for lower calorie foods and beverages. CSD’s with their high sweetener calories
therefore did not fit the needs of consumers, thus leading to a decline in CSD sales. In
addition, in the early 2000’s decline in sales of CSD’s occurred after reports of obesity in
children was linked to consumption of sweeteners such as those in CSD’s. Both legal
and political battles eventually led to CSD vending machines being removed and sale of
CSD’s being prohibited entirely from certain public schools in states including New York
and California (Yoffie, 2009, p. 11).
CSD’s are composed of a flavored concentrate, sweetening ingredient and
carbonated water. General practice among the concentrate producers, such as Coca
Cola, was to create the concentrate, engage in advertising and market research as well
as work with the bottling companies to keep operations streamlined and within the
regulatory guidelines (Yoffie, 2009, p. 2). Bottling companies purchased the
concentrate with or without sweetener; added sweetener if the concentrate lacked it and
mixed in carbonated water to produce the saleable CSD. In addition the bottlers
packaged and distributed the CSD’s as well as engaged in marketing and pricing control
with the smaller retail stores.
Coca Cola’s stringent bottling franchise agreement restricted high profitability for
its bottlers when raw materials prices increased and included a non-compete clause
preventing bottlers from packaging and selling competing brands. Both Pepsi and
Cadbury Schweppes also franchised bottling companies but did not take as stringent a
stance on pricing. Pepsi was flexible on renegotiation of prices with bottlers by following

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the consumer price index in guiding its pricing strategy. In addition, anti-trust legal
battles ensued for the concentrate producers in restricting territorial rights to bottling
companies leading to noncompetition.
CSD producers expanded their brands into new global markets prior to CSD
market saturation in the U.S. Coke and Pepsi extended their flagship brands globally
during World War II. Although sales of CSD’s was still greater in the U.S. than in global
markets, the extension of their brands into new markets provided brand recognition and
ample opportunity for growth and profitability.
Identification of the Key Issue(s)
The Cola Wars demonstrated the fierce battle over market share in the U.S.
among its CSD producers led by the two main rivals, Coca Cola and Pepsi. The main
issues they confronted included the lack of sustained growth in the U.S. CSD market,
lack of efficiency and flexibility in their packaging and distribution operations through the
bottling franchisees, ability to adapt to changing consumer needs and wants beyond
CSD’s and leveraging expansion into global markets to sustain and increase
profitability.
In the beginning the cola wars entailed the sales of CSD’s and how that impacted
market share and profitability for the major CSD brands including Coca Cola and Pepsi.
The numerous brands of CSD’s including Royal Crown, Dr. Pepper and smaller regional
brands carved away market share and posed a competitive threat to market leaders

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Coke and Pepsi. As a result of competing CSD’s causing market saturation in the U.S.
the year to year growth in profits for Coca Cola and Pepsi began to lessen.
Fluctuations in the consumption of CSD’s in the U.S. caused a decline in
profitability for CSD producers. This decline reflected changes in consumers’ wants and
needs for lower calorie CSD’s, non CSD beverages and beverages with health benefits.
Although CSD’s remained the most highly consumed beverage, consumers need for
variety in beverages increased. Beverages including fruit juices, coffees, teas, bottled
water, and energy drinks became popular options in direct competition to CSD’s.
The Cola Wars were not restricted merely to the U.S. Both Coca Cola and
PepsiCo waged battles on a global landscape as they extended their flagship brands
internationally. The saturation of the CSD market in the U.S. led to limited incremental
growth. As Coca Cola and PepsiCo had already extended their flagship brands
overseas into new markets, they increased focus globally. The “cola wars” were no
longer about how much market share Coca Cola and PepsiCo could garner in the U.S.
with CSD’s but about the overall organizations’ market shares internationally and how
this would increase their profitability.
Road blocks prevailed in relationships CSD producers had with their bottling
franchisees. High operational costs, inflexible machine capacity and limited control with
packaging, pricing, marketing and distribution through bottling companies caused CSD
producers, especially Coca Cola, to have stunted opportunity for growth. In addition
bottling companies could not adapt to increased turnover from CSD to non CSD

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production. Packaging and pricing adaptability was also limited with the bottling
companies.
Listing Alternative Courses of Action That Could Be Taken
Alternative courses of action could be taken by the CSD producers to regain
market share in the U.S. and sustain growth. Streamlining the business to remain
aligned with organizational strategic goals would allow for reduction in operational costs,
retain more control over marketing, packaging, distribution and pricing and improve
profitability in the U.S. and abroad. Innovation, product differentiation and business
diversification could allow CSD organizations to extend their business into new market
segments in the U.S. and into global markets, to reach underserved market segments
and to augment profitability in CSD saturated markets. Expansion into global markets
could offset loss of sustained growth in the U.S.
Evaluation of Alternative Courses of Action
Focus on the strategic goals of the organization and streamlining the business to
meet those goals could lead to opportunities for greater profitability. Unloading products
that did not have sustained growth or did not align with the company’s strategic goals
provided opportunity for increasing monetary focus on stronger brands. Restructuring
the business model of the bottling companies that the CSD organizations worked with
could give the CSD producer greater control in bottling and distribution operations to
improve the supply chain and reduce operational costs. Marketing and negotiation of
relationships with retailers also could improve with the new business model for bottling
companies. Coca Cola made a pivotal move by buying flailing bottling franchisees,

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rebuilding them and either retaining them or selling them to successful bottling
franchisees. In addition it formed a new business entity, Coca Cola Enterprises (CCE)
to segregate the bottling business from its main organization as well as sell CCE stock
to offset the debt. Pepsi and Cadbury Schweppes followed Coca Cola’s lead. With the
three main CSD companies having financial and management control over their bottling
entities, their marketing and distribution processes were strengthened, their packaging
and pricing strategy became more flexible, their supply chain improved, operational
costs were reduced and revenue increased through their respective bottling
subsidiaries.
Modifications to packaging the product in a variety of sizes and accordingly
adjusting pricing to meet the packaging modifications aided the CSD organizations
better target specific market segments. In selling larger sized bottles of CSD’s both
Coca Cola and Pepsi were able to better target the family consumer segment.
Individual cans and bottles provided packaging and pricing suitable for individual sales
via convenience stores, vending machines and gas stations. Profit margins with this
pricing and packaging strategy would therefore be greater. The disadvantage of
producing numerous packaging sizes was the inability of bottlers to manage the
capacity on their machinery in a timely manner and store the pallets prior to distribution.
Innovation, product differentiation and business diversification could provide new
opportunities for sustaining growth in the U.S. and extending reach into new markets.
In the U.S. the issue of CSD market saturation could be overcome if the CSD producers
engaged in innovation to create new non CSD beverages. Consumer needs had

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changed alluding to the adaptability of CSD organizations to produce low calorie CSD’s,
juices, energy drinks, bottled water, teas and coffees. These new products could not
only solicit revenue growth in the CSD saturated markets in the U.S. but also reach
underserved market segments in the U.S. and new market segments abroad. The
disadvantage to having an array of non CSD’s was that bottlers could not efficiently
produce both CSD and non CSD beverages simultaneously with their current machinery
and processes.
CSD companies such as Coca Cola and PepsiCo diversified their businesses by
acquiring fast food restaurants and snack food producers, gaining exclusive fountain
rights and purchasing non CSD beverage companies. This allowed them to supplement
their profitability with new revenue streams and distribution channels. It also opened
partnership opportunities with companies internationally to have a stronger foothold in
certain markets. For instance Coca Cola partnered with Danone to market and
distribute its bottled water products in the U.S. (Yoffie, 2009, p. 12). PepsiCo
purchased fast food restaurants KFC, Taco Bell and Pizza Hut to gain exclusive
fountain sales’ rights. Diversification also allowed the CSD organizations to leverage
profitability in other areas to offset the lack of significant growth in the U.S. CSD market.
Recommendation of the Best Course of Action
In evaluation of the best course of action it can be seen that streamlining the
business of CSD organizations to be aligned with the organization’s strategic goals
would prove to be most advantageous in gaining market share and profitability in the
U.S. and abroad. The main factor of this streamlining process is to restructure the

9. WEEK 7 – CASE STUDY ANALYSIS: THE COLA WARS - VINODHINI GUHESAN 9
relationship with its bottling franchisees. This will allow for greater control over the
packaging, distribution and marketing as well as reduce operational costs. In turn there
will be more flexibility in increasing the capacity of the bottling companies to facilitate a
greater variety of packaging and pricing to suit different target segments. For instance
larger take home containers can be marketed directly to family segments through the
grocery store/super market distribution channels as these garner 31% of beverage
sales by bottling profitability as seen in Exhibit 6 (Yoffie, 2009, p. 21). In addition it
would also allow the flexibility to utilize vending machines as a profitable distribution
channel as Coca Cola had success via vending machine sales in Japan. The profit
margins are greater with greater flexibility in packaging and pricing as well in the U.S.
and in global markets. Finally efficiency of operations and improvement of machinery
will allow bottling companies the capacity to package more varieties of beverages. With
greater varieties of beverages CSD companies can satisfy needs of consumers in
several different consumer segments in the U.S. and in global markets. For instance
machinery changes at the bottling facilities will improve capacity to package an array of
fruit juices, coffee, tea, bottled water and CSD’s to supply Japanese consumers with
coffee and tea drinks and U.S. consumers with low calorie CSD’s, bottled water and
fruit juices. The marketing capabilities, innovation, product differentiation and reach into
unlimited market segments is unrestricted if the CSD organization’s streamline their
business to align with their organizational strategic goals.

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Conclusion
The cola wars are no longer about CSD producers battling for market share
solely with CSD sales. In order to be profitable CSD organizations must show growth
beyond CSD products. By streamlining the organization’s business to be aligned with
its strategic goals especially with respect to its bottling companies, it will produce value
to the consumer within any market segment domestic or international. That value can
best be achieved by the organization’s ability to adapt its products to meet customer
needs and wants. In addition the organization can continuously evolve so that it is not
impacted detrimentally by loss in any one market segment or decline in one product
line. The profitability of the CSD organization will not only be in sales of CSD’s but
other beverages and foods as these organizations expand into new markets.

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References
Yoffie, D.B. (2009, April 16). Cola wars continue: Coke and Pepsi in 2006. Harvard
Business School.