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Cola wars continue coke and pepsi in 2006-1
The document discusses the ongoing competition between Coca-Cola and Pepsi in the carbonated soft drink industry. It provides background on the industry structure, noting that Coke and Pepsi dominate as concentrate producers while bottling operations are carried out by other companies. The intense rivalry between Coke and Pepsi has driven up advertising spending and innovation, strengthening their brands while weakening smaller competitors. Despite declining demand for sugary drinks, Coke and Pepsi may be able to sustain profits by diversifying their product lines and marketing to address health consciousness.
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Cola wars continue coke and pepsi in 2006-1
- 1. Cola Wars Continue Coke& Pepsi in 2006 DILSHAN HYE JOO LEE Dae-Ryang-Woo
- 2. Overview Industry Background Production & Distribution of CSD Questions
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- 5. Concentrate Producer • Key produc+on investment areas • Manufacturing plant • Customer Development Agreements (CDA) • Spent for adver+sing, promo+on, market research
- 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. Suppliers • Coke and Pepsi were among the Metal Can industry’s largest customers. • Major Can producers-‐ Ball, Rexam, Crown Cork & Seal
- 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. 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. Suppliers to Concentrate producers & Bo.lers 2% 42% 56% Metal Cans Plastic bottle Glass bottle
- 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. 1. Why has the so< drink industry been so profitable?
- 13. Threat Of NewEntrants –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. • 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. 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. Supermarkets (Food stores) - Severalchain 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. 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. 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. 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. Bottler • Cost of saleis 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. 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. 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. 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. Number of competitors • 2major 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. Exit Barriers • Relatively lowcosts 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. • Initially through theearly 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.
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