The document analyzes the strategic rivalry between Coca-Cola and Pepsi in the cola industry and its implications. It finds that: 1) consolidation has made it difficult for smaller competitors to compete and exposed the large firms to antitrust issues; 2) bottlers face slim margins and declining growth; and 3) while international markets provide most profits, health concerns and changing consumer preferences threaten domestic performance. It recommends companies innovate health-focused products, refocus on advertising, and use game theory to understand competition.
Cola Wars have continues till date. This presentation presents an analysis of the case Cola wars continues in 2006.
Find out what we have to say about the classic case of competition.
Presentation on Cola Wars between Coke and Pepsi
(Presented in Marketing Planning and Implementation-1 Course at MDI Gurgaon)
P.S- Please feel free to share your views in comments.
Cola Wars have continues till date. This presentation presents an analysis of the case Cola wars continues in 2006.
Find out what we have to say about the classic case of competition.
Presentation on Cola Wars between Coke and Pepsi
(Presented in Marketing Planning and Implementation-1 Course at MDI Gurgaon)
P.S- Please feel free to share your views in comments.
The carbonated soft drink (CSD's) industry was dominated by Coca Cola and Pepsi vying for market share. 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.
An industry analysis by Porters Five Forces reveals that the soft dr.pdfalokkesh1
An industry analysis by Porters Five Forces reveals that the soft drink industry has historically
been favorable for positive profitability, as exemplified by Pepsi and Cokes financial outcomes.
Soft drink industry is very profitable, more so for the concentrate producers than the bottler\'s.
This is surprising considering the fact that product sold is a commodity which can even be
produced easily. There are several reasons for this, using the five forces analysis we can clearly
demonstrate how each force contributes the profitability of the industry.
Threat of new entrants
Entering bottling, meanwhile, would require substantial capital investment, which would deter
entry.
although the CP industry is not very capital intensive, other barriers would prevent entry.
Through their DSD practices, these companies had intimate relationships with their retail
channels and would be able to defend their positions effectively through discounting or other
tactics.
It would be nearly impossible for either a new CP or a new bottler to enter the industry. New CPs
would need to overcome the tremendous marketing muscle and market presence of Coke, Pepsi,
and a few others, who had established brand names that were as much as a century old.
Companies that have a door to door distribution channel in place like snack companies could
choose to diversify into soda industry
Switching costs are low for consumers who risk very little by trying new brands or
Beverages
Barriers to entry are relatively high, though, with large advertising budgets and competitive
brand loyalty to big players like Coca-Cola and Pepsi
The drinks with high growth and high hype are non-carbonated beverages such as juice drinks,
sports drinks, tea-based drinks, dairy-based drinks, and especially bottled water
Bargaining power of buyers
through five principal channels: food stores, convenience and gas, fountain, vending, and mass
merchandisers (primary part of \"Other\" in \"Cola Wars…\" case)
Bottlers own a manufacturing and sales operation in an exclusive geographic territory, with
rights granted in perpetuity by the franchiser, subject to termination only in the event of default
by the bottler
1980 Soft Drink Interbrand Competition Act preserved the right of CPs to grant exclusive
territories to their bottlers, giving less bargaining power to Bottler\'s buyers because there is no
alternative supplier
Bottlers are locked into contracts that grant CPs the right to set prices and other terms of sale
Bottlers are allowed to handle the non-cola brands of other Cps at their discretion
Bottlers are also given freedom in choosing whether or not to carry new beverages introduced by
the CPs but cannot carry directly competitive brands
Competition for brand shelf space in retail channels gives some bargaining power back to buyers
Threat of substitute products
Through the early 1960s, soft drinks were synonymous with \"colas\" in the mind of consumers.
In the 1980s and 1990s Coffee, tea, water, juices.
Our major goal is to help you achieve your academic goals. We are commited to helping you get top grades in your academic papers.We desire to help you come up with great essays that meet your lecturer's expectations.Contact us now at http://www.premiumessays.net/
The carbonated soft drink (CSD's) industry was dominated by Coca Cola and Pepsi vying for market share. 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.
An industry analysis by Porters Five Forces reveals that the soft dr.pdfalokkesh1
An industry analysis by Porters Five Forces reveals that the soft drink industry has historically
been favorable for positive profitability, as exemplified by Pepsi and Cokes financial outcomes.
Soft drink industry is very profitable, more so for the concentrate producers than the bottler\'s.
This is surprising considering the fact that product sold is a commodity which can even be
produced easily. There are several reasons for this, using the five forces analysis we can clearly
demonstrate how each force contributes the profitability of the industry.
Threat of new entrants
Entering bottling, meanwhile, would require substantial capital investment, which would deter
entry.
although the CP industry is not very capital intensive, other barriers would prevent entry.
Through their DSD practices, these companies had intimate relationships with their retail
channels and would be able to defend their positions effectively through discounting or other
tactics.
It would be nearly impossible for either a new CP or a new bottler to enter the industry. New CPs
would need to overcome the tremendous marketing muscle and market presence of Coke, Pepsi,
and a few others, who had established brand names that were as much as a century old.
Companies that have a door to door distribution channel in place like snack companies could
choose to diversify into soda industry
Switching costs are low for consumers who risk very little by trying new brands or
Beverages
Barriers to entry are relatively high, though, with large advertising budgets and competitive
brand loyalty to big players like Coca-Cola and Pepsi
The drinks with high growth and high hype are non-carbonated beverages such as juice drinks,
sports drinks, tea-based drinks, dairy-based drinks, and especially bottled water
Bargaining power of buyers
through five principal channels: food stores, convenience and gas, fountain, vending, and mass
merchandisers (primary part of \"Other\" in \"Cola Wars…\" case)
Bottlers own a manufacturing and sales operation in an exclusive geographic territory, with
rights granted in perpetuity by the franchiser, subject to termination only in the event of default
by the bottler
1980 Soft Drink Interbrand Competition Act preserved the right of CPs to grant exclusive
territories to their bottlers, giving less bargaining power to Bottler\'s buyers because there is no
alternative supplier
Bottlers are locked into contracts that grant CPs the right to set prices and other terms of sale
Bottlers are allowed to handle the non-cola brands of other Cps at their discretion
Bottlers are also given freedom in choosing whether or not to carry new beverages introduced by
the CPs but cannot carry directly competitive brands
Competition for brand shelf space in retail channels gives some bargaining power back to buyers
Threat of substitute products
Through the early 1960s, soft drinks were synonymous with \"colas\" in the mind of consumers.
In the 1980s and 1990s Coffee, tea, water, juices.
Our major goal is to help you achieve your academic goals. We are commited to helping you get top grades in your academic papers.We desire to help you come up with great essays that meet your lecturer's expectations.Contact us now at http://www.premiumessays.net/
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Colawars
1. MGT 682
February 18, 2003
Cola Wars Continue: Coke and Pepsi in the Twenty-First Century
I. Case issue: Implications of strategic rivalry on cola industry's structure and
performance (See Exhibits 1 & 2 for analysis)
A. Implications on structure of cola industry
1. Bottlers have been consolidated by concentrate producers (CP), placing smaller CPs
at the mercy of Pepsi and Coca-Cola's distribution systems (See Exhibit 3)
a. Making it tougher for smaller CPs like Cott Corporation to compete and
leaving them open to the threat of acquisition
b. Exposing Coca-Cola and Pepsi to the risk of anti-trust legal or regulatory
action with bottlers’ exclusive territories and policies that forbid carrying
competing cola products
2. Bottlers' profitability is in danger with slim margins and declining growth (See Exhibit
4)
a. CP should come to bottler’s aide with financial assistance, concentrate price
breaks or increased marketing to preserve industry structure
b. Bottlers will have to upgrade their technology to handle expanded product
lines (See Exhibit 2)
c. Bottlers should consider diversifying into snack food distribution through
alliances or CP acquisitions like Pepsi’s Frito-Lay division
B. Implications on performance of cola industry
1. CSDs made up a substantial share of 2000 US Liquid Consumption (See Exhibit 4),
but this doesn’t make them immune to risk
a. Declining stock prices show a corrected over-valuation of companies (See
Exhibit 4)
b. Declining growth rates for carbonated soft drinks and increasing non-
carbonated beverage growth rates further threaten industry performance
(See Exhibit 4)
2. International markets are an important source of revenue (See Exhibit 3), and
improvements in world economies are forecasted
3. Growing health concerns for caffeine and sugar consumption threatens industry
performance
a. Alternative sweetener research and development
b. Center for Science in the Public Interest (CSPI) continues to petition the FDA
to study the effects of caffeine on people (See Exhibit 3)
c. Risk of additional state taxes (See Exhibit 3)
d. Develop and diversify into healthier beverages and snacks
4. Demand for carbonated soft drinks is elastic so there's not a lot of room for price
variation
II. Lessons learned/industry recommendations
A. Industry should be proactive about growing health concerns in US Market
1. Should continue to lobby FDA to prevent caffeine-warning labels
2. Should promote exercise through sponsoring competitive sports tournaments
B. Companies need to refocus energies on advertising to rejuvenate industry and to fuel
product demand both domestically and abroad (See Exhibit 3)
C. Cola industry leaders, Coca-Cola and Pepsi, should practice game theory to better
understand their competitive market environment (See Exhibit 3)
2. Exhibit One – An Analysis of the Cola Industry Using Porter’s Five Forces Model (p 80)
Potential Competitors:
Companies that have a door to door distribution channel in place like snack companies
could choose to diversify into soda industry
Switching costs are low for consumers who risk very little by trying new brands or
beverages
Barriers to entry are relatively high, though, with large advertising budgets and
competitive brand loyalty to big players like Coca-Cola and Pepsi
The drinks with high growth and high hype are non-carbonated beverages such as juice
drinks, sports drinks, tea-based drinks, dairy-based drinks, and especially bottled water
The Bargaining Power of Suppliers:
Concentrate producers (CPs) negotiate directly with bottlers’ major suppliers –
particularly sweetener and packaging suppliers – to encourage reliable supply, faster
delivery, and lower prices
Coca-Cola and Pepsi are among the metal can industry’s largest customers and
maintain relationships with more than one supplier, giving these suppliers less
bargaining power due to the availability of alternative suppliers
Metal cans make up the majority of the bottlers’ packaged product (60%), followed by
plastic bottles (38%) and glass bottles (2%)
The Bargaining Power of Buyers:
Bottlers own a manufacturing and sales operation in an exclusive geographic territory,
with rights granted in perpetuity by the franchiser, subject to termination only in the event
of default by the bottler
1980 Soft Drink Interbrand Competition Act preserved the right of CPs to grant exclusive
territories to their bottlers, giving less bargaining power to Bottler’s buyers because there
is no alternative supplier
Bottlers are locked into contracts that grant CPs the right to set prices and other terms of
sale
Bottlers are allowed to handle the non-cola brands of other Cps at their discretion
Bottlers are also given freedom in choosing whether or not to carry new beverages
introduced by the CPs but cannot carry directly competitive brands
Competition for brand shelf space in retail channels gives some bargaining power back
to buyers
Threat of Substitute Products:
Threat from substitute products are probably second in importance to the cola industry
only to the rivalry among established firms: coffee cafes, tap water, milkshakes, fruit
juice, hot tea, hot chocolate, chocolate milk and so on
Rivalry Among Established Companies:
Industry is largely consolidated with two major players and a few smaller competitors like
Cadbury Schweppes, making the companies interdependent
International demand for carbonated soft drinks is growing, but domestic demand is
slowing down substantially
Exit barriers are high for bottlers with expensive equipment, moderate for concentrate
producers
Advertising budgets are high, customers are influenced by brand perceptions
Source: Hill, Charles W. and Gareth R. Jones. Strategic Management Theory. Boston:
Houghton Mifflin Company, 2001
“Cola Wars Continue: Coke and Pepsi in the Twenty-First Century.” Harvard Business School,
July 30, 2002
3. Exhibit Two – Macroenvironment Analysis (p 92)
Technological Environment:
Innovations in computerized technology could affect the bottling process, which involves
specialized, high-speed lines
Hot-fill, reverse-osmosis, or other specialized equipment is necessary to bottle the non-
carbonated beverages that have higher profit margins than the carbonated soft drinks
(CSD)
Social Environment:
Consumer trends shifting away from original product lines for health reasons– from diet
soda, to lemon-line, to tea-based drinks, to other popular non-carbonated beverages
An increasing trend in teen consumption of CSDs
Metal and Plastic containers commonly used by bottlers are recyclable are viewed as
environmentally friendly
Cultural differences across international markets are challenging when it comes to daily
operations and marketing cola industry products
Demographic Environment:
Explosive population growth in foreign countries like China translates into explosive
growth potential for those markets
Aging baby boomer population in United States may lead to a decrease in cola product
demand
Political and Legal Environment:
Soft Drink Interbrand Competition Act of 1980 secured the right of Concentrate
Producers (CPs) to grant exclusive territories to bottlers
Anti-trust legal suit against Coca-Cola by Pepsi over fountain drink monopolization in the
domestic market was dismissed in 2000
Pressure from the scientific community for the FDA to research the affects of caffeine
consumption and to enforce caffeine labels warning of the dangers of caffeine
consumption
Obstacles in international operations included political instability, regulations, price
controls, advertising restrictions, foreign exchange controls and lack of infrastructure
“Cola Wars Continue: Coke and Pepsi in the Twenty-First Century.” Harvard Business School,
July 30, 2002
Hill, Charles W. and Gareth R. Jones. Strategic Management Theory. Boston: Houghton Mifflin
Company, 2001
4. Exhibit Three – Supporting Quotes
I.A.1. "The bottler consolidation of the 1990s made smaller concentrate producers increasingly
dependent on the Pepsi and Coke bottling network to distribute their products (10)"
“Cola Wars Continue: Coke and Pepsi in the Twenty-First Century.” Harvard Business School,
July 30, 2002
I.B.2. "It would be easy to conclude that the Atlanta-based soft drink giant is on the ropes in
overseas markets, which provide 63% of sales and 75% profits. But the worst may be over."
Spiegel, Peter. "Foreign Fizz." Forbes.com August 23, 1999
<http://www.forbes.com/global/1999/0823/0216019a.html>
I.B.3.b. "Joining CSPI in support of the petition were 34 scientists and ten health and consumer
groups. The supporters include prominent scientists from Johns Hopkins, Yale, Harvard, Duke,
University of Michigan, University of California (Berkeley), and other universities, as well as the
Association of State and Territorial Public Health Nutrition Directors, National Women's Health
Network, Boston Women's Health Book Collective, and Society for Nutrition Education."
"Label Caffeine Content of Foods, Scientists Tell FDA" Center for Science in the Public Interest
July 31, 1997. <http://www.cspinet.org/new/caffeine.htm>
I.B.3.c. "Perhaps 'Liquid Candy's' most controversial recommendation is that states tax soda
pop to help fund major campaigns to improve diets, build bike paths and recreation centers, and
support physical-education programs in schools. Arkansas takes in $40 million annually from its
two-cent-per-can tax. Tennessee, Washington state and West Virginia also tax soda, while
industry lobbying has won repeals in New York, North Caroline and several other states."
"Soft Drinks Undermining Americans' Health: Teens consuming Twice as Much 'Liquid Candy'
as Milk." Center for Science in the Public Interest October 21, 1998.
<http://www.cspinet.org/new/soda_10_21_98.htm>
II.B. "The company's core brand – the bubbly, brown, sugar water that provides the bulk of the
profits to Coke and it bottlers – is in trouble. The growth of the drink abroad, where the
company earns three-quarters of its income, has slowed; in the U.S., sales peaked in 1998 and
have been flat since. Blame poor marketing."
Sellers, Patricia. "Who's In Charge Here?" Fortune.com December 9, 2001.
<http://www.fortune.com/fortune/print/0,15935,370035,00.html?>
II.C. "Since the process itself forces managers to think explicitly about the incentives and likely
moves of other players, it can generate a breakthrough in strategic insight even when the game
can't be modeled explicitly. Qualitative role-playing exercises and structured game theory may
generate enough insight to lead to a change of direction on new-entry, capacity addition, pricing
and other fundamental strategic decisions (95)."
Courtney, Hugh G. "Games Managers Should Play." World Economic Affairs Autumn 1997: 91-
96.
5. Exhibit Four – The Financial Analysis
I.A.2. Profit Margins of Industry Concentrate Producers and Bottlers
25
20 Coca-Cola
Coca-Cola Bottlers
15
Pepsi
10 Pepsi Bottlers
Cadburry Schweppes
5
0
Profit Margin
“Stocks: Company Information: Snapshot Report.” Updated February 15, 2003
<http://www.marketguide.com>
I.A.2. Declining Carbonated Soft Drink Consumption
55
54
53
52 Gallons per
51 capita
50
49
48
1994 1995 1996 1998 1999 2000
I.B.1. U.S. Carbonated Soft Drink Market % of Volume in 2000
Carbonated Soft Drinks
Beer
Milk
Coffee
Bottled Water
Juices
Tea
Tap Water and Other
“Cola Wars Continue: Coke and Pepsi in the Twenty-First Century.” Harvard Business School,
July 30, 2002
6. Exhibit Four – The Financial Analysis Continued
I.B.1.a. Coca-Cola’s Declining Stock Price
I.B.1.a Pepsi’s Declining Stock Price
February 19, 2003 <http://www.marketguide.com>
7. Exhibit Four – The Financial Analysis Continued
I.B.1.b. Growth of Non-carbonated Beverages
14
12
10
Bottled Water
8
Juices
6
Tea
4
2
0
1994 1995 1996 1998 1999 2000
“Cola Wars Continue: Coke and Pepsi in the Twenty-First Century.” Harvard Business School,
July 30, 2002