Cola Wars Continue: Coke and Pepsi in 2006War over $66bn CSD industry lasted from 1975-mid1990s

Presented by Group C:• Deepika Pundir• Geeta Chopra• Jasmeet Bhatia• Mohit Goel• Samdarsh Nayyar• Varun Kukreja• Vivek Balokhra

• 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

Economics of the US Economics of the US Carbonated Soft Drink Carbonated Soft Drink (CSD) Industry(CSD) Industry

Production & Production & Distribution of CSDDistribution of CSD1. Concentrate producers

2. Bottlers

3. Retail channels

4. Suppliers

1. Concentrate 1. Concentrate ProducerProducer• 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. Bott2. Bottlerslers• Purchased concentrate

• Added carbonated water and

high-fructose corn syrup

• Bottled or canned the

resulting CSD product

• Delivered it to customer

account

2. Bott2. Bottlerslers• 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 3. Retail ChannelsChannelsIn 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. Supp4. Suppliersliers• Coke and Pepsi were among the Metal Can industry’s largest

customers.

• Major Can producers- Ball, Rexam, Crown Cork & Seal

Evolution Evolution of Cokeof 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 Evolution of Pepsiof 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 The Cola War BeginsWar Begins

Marketing Campaign “Beat Coke” “American’s preferred taste”

“Pepsi Generation” “No wonder Coke refreshes best”“Young At Heart”

Year 1960s – Year 1960s – the Armageddonthe ArmageddonCSD

Teem (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 The Pepsi ChallengeChallengeBlind taste test RebatesEroded Coke’s Market share Retail price cutsRolled out blind taste campaign nation wide

Advertisements that questions tests’ validity1978 – Re-negotiation of contract with franchisee bottlers

LeaderLeadershipship2001: Steve Reinemund“Grow the core add some more”

1980 – Roberto Goizueta

Launched new CSD products (Sierra Mist, Mountain Dew code red)

Most valuable Brand

Acquisition of Quaker Oats Use of lower priced corn syrup against sugar

Net 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)

ExpanExpansionssionsAcquired – Pizza hut (1978), Toco Bell (1986), KFC (1986)

Exclusive deals with Burger king, McDonalds

Merged with Frito Lay to form PepsiCo Purchased Minute Maid, Duncan Foods, Belmont Springs water

Pepsi purchased Quaker Oats (Gatorade) in 2000

Acquired – Planet Java coffee drink brand (2001)Acquired - Mad River juices and tea

1996-2004: 1996-2004: Reversal of FortuneReversal 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 Quest for AlternativesAlternativesU.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% & Pepsi 75%

No longer designing of marketing course – established as total beverage company

Reluctant to diversify

Diet Pepsi as flagship brand - Diet Pepsi, Pepsi One, Diet Coke with Splenda

Evolving Structures Evolving Structures and Strategiesand 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 Internationalizing thethe Cola WarsCola 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 SWOT Analysis: Analysis: PepsiPepsi• Enjoys a High-Profile Global Presence• Owns the World’s 2nd Best-Selling Soft Drinks

Brand• Constant Product Innovation• Aggressive Marketing Strategies • A Broad Portfolio of Products

Strength Weakness

Opportunity Threat

• Carbonates Market is in Decline• Pepsi is Strongest in North America• They Only Target Young People

• Increased Consumer Concerns in comparison to bottled water

• Growth in Healthier Beverages• Growth in Tea and Asian Beverages• Growth in the Functional Drinks Industry

• Obesity and Health Concerns• Increased Marketing and Innovation

Spending by Coke• Restriction to only North America as target

market

SWOTSWOT Analysis: Analysis: Coke Coke• Enjoys a High-Profile Global Presence• Fourth amongst the top five leading brands• Broad-based bottling strategy• 47% of global volume sales in carbonates

Strength Weakness

Opportunity Threat

• Carbonates Market is in Decline• Over-complexity of relationship with bottlers

in North America• Inefficient execution of business

• Soft drinks volumes in the Asia-Pacific region forecast to increase by over 45%

• Brands like Minute Maid Light and Minute Maid Premium Heart Wise are positioned well with the “Health-concerned” market

• Use distribution strengths in Eastern Europe and Latin America

• Growing "health-conscience" society• PepsiCo’s Gatorade, Tropicana and Aquafina

are stronger brands• Boycott in the Middle East• Protest against Coke in India• Negative publicity in Western Europe

ThankThank You You