10 February 2011
Cola Wars Continue: Coke and Pepsi in 2006 Individual Case Memo
Since 1970, when Americans consumed 23 gallons of CSDs annually, consumption of
CSDs has grown by an average of three percent per year. The two main reasons for the
substantial and steady growth are the increase of CSDs and the creation of diet and flavored
products. As stated in the case, although there are alternatives to the consumption of soda,
Americans have continued to drink more soda than any other beverage. The following will be a
'five forces' analysis of the Cola industry, and to a lesser extent, the bottler industry, through the
viewpoints of the two largest players in the CSD industry, Coca-Cola and Pepsi-Cola.
The first force is the threat of new entrants. I do not see a major risk of new entrants in
the Cola industry for Coca-Cola and Pepsi-Cola. There has been the emergence of Cadbury
Schweppes as the third leading market share in the CSD industry but they are a distant third. As
mentioned in the case, the number of U.S. soft drink bottlers has substantially decreased from
more than 2,000 in 1970, when Americans were consuming only 23 gallons of CSDs annually, to
fewer than 300 in 2004, when the industry was peaking in the United States. There are many
barriers to entry for new entrants. Not only do they have to compete with market share that CocaCola and Pepsi-Cola dominate, but they have much less income to dish out for advertising and
public bottling. There have already been many imitations of Coca-Cola and Coke has fought
trademark infringements in court, eliminating new competitors by winning such cases and also
patenting such products as the 6.5-oz bottle whose unique 'skirt' design became an American
image, an icon.
In terms of bottling, Coca-Cola Enterprises (CCE) and Pepsi Bottling Group (PBG) have
emerged as two of the top bottling companies within their respective industry and have become
the standard for the bottler industry. As will be discussed in the following force, the threat of
suppliers, Coca-Cola Enterprises and Pepsi Bottling Group are vital to Coke and Pepsi's success
as they bottle the majority of the company’s products, especially in North America. The threat of
new entrants is minimal since CCE and PBG are so large that any bottler company looking for
entrance is more than likely to be bought and taken over or refranchised.
The second force that will be discussed is the threat of suppliers: There is an immense
amount of bargaining power within the main bottling companies behind Coca-Cola and PepsiCola, Coca-Cola Enterprises for Coke and Pepsi Bottling Group for Pepsi. In 1986, Coke created
their independent bottling subsidiary, CCE, which became their largest bottler by 2004 and
handled an estimated 80% of Coke's North American bottle. CCE also has the ability to volume
and has logged annual sales in excess of 18 million dollars. The same has gone for Pepsi who
imitated Coke's bottler model and acquired three major bottlers in the late 1980s for more than
three billion dollars total (MEI Bottling, Grand Metropolitan's bottling operations, and General
Cinema's bottling) and by 1999, formed Pepsi Bottling Group (PBG). PBG became their main
bottler and supplier as it produced 57% of PepsiCo beverages in North America and 40%
worldwide. The creation of both company's own independent bottlers led to a drop in the total
number of bottlers. Such bottling companies, with CCE and PBG, became the powerhouse of the
bottling companies, garnering more bargaining power. This can be shown by the total number of
Pepsi bottlers dropping from more than 400 in the mid-1980s to as low as 102 after the creation
of PBG.
The one concern with bottling companies CCE and PBG having so much market share
and power of production for Coca-Cola and Pepsi-Cola is that they may be unwilling to change
their means of production in terms of advanced technology and quicker processing which in turn
may lead to higher profitability for Coke and Pepsi. Such bottling companies also had the power
to increase retail pricing, which both did in 1999 and 2000. Both CCE and PBG raised retail
pricing in supermarkets by 6% to 7% which in turn dropped consumer sales of CSDs and led to a
loss in profit. More so Coke and CCE had a, what has been considered, a 'dysfunctional'
relationship while PBG's and PepsiCo’s relationship has been fairly strong and essential for their
success. In turn, Coke faces more of a threat from their suppliers than Pepsi since PBG has
consistently posted higher net revenue-per-case-growth and larger profits than CCE.
The threat of buyers and consumer demand is the third force in the five forces analysis.
The threat of buyers is shown in my previous paragraph on threat of suppliers. Once retail prices
increased, there was a decline in consumer sales and volume which in turn led to profits to drop.
The consumer always makes their statement heard in terms of what they buy and if they are not
happy with a company's product, that company will find out when their quarterly sales reports
come in and sales/volume/profit are all down. There was a struggle to achieve pricing power, and
in the supermarket channel, retail prices rose in the mid-2000s leading a decline in store traffic
and a drop in CSD sales.
There was also the threat of consumer preference changing in the early 2000s when
obesity became a national topic. CSDs became one of the major issues and reasons for the
increased number of overweight individuals according to the New Federal Nutrition guidelines
that was issued in 2005. This led to a ban of soft drinks in schools in New York City, some in
California, and other areas. In response to such threats and years of minimal growth in CSD sales,
Coca-Cola and Pepsi-Cola responded to the buyer's demand for alternative beverages from their
sugar-filled regular soft drinks. Diet Sodas especially became a vocal point in terms of increasing
sales and the public's view of the CSD industry. In early 2005, Pepsi made Diet Pepsi their
flagship brand, an indicator of the company attempting to garner a more positive public opinion
and more so an indicator of the shift within the beverage industry.
The increased demand for diet soda is immediately shown in the figures given within the
case. In the U.S. market, diet sodas’ share of total CSD volume jumped from 24.6% in 1997 to
29.1% in 2004. This in turn made up for the decline in regular soft drink consumption. The
response to such figures led both companies to come out with even more diet and sugar-less
drinks such as Pepsi One and Diet Coke with Splenda. The threat of buyers was shown in this
case as the consumers spoke loudly of their need for alternative beverages by halting sales of soft
drinks. Coca-Cola and Pepsi-Cola successfully responded with alternative beverages that did not
only include diet soda but also non-carbonated beverages which included juices and juice drinks,
sports drinks, energy drinks, tea-based drinks, and bottled water. As shown in the figures, in
2001, non-carbs and bottled water combined to contribute to more than 100% of Coke's total
volume growth and three-fourths of Pepsi's volume growth, and by 2004, these products grew at
double the rate of other Pepsi food and beverage products.
In terms of competition with their non-CSD products, Pepsi did indeed out-sell Coke.
The 2004 volume sales of each category proved this fact: Gatorade 80.4% vs. PowerAde 18.1%;
Lipton 35.2% vs. Nestea 23.9%; Tropicana 26.8% vs. Minute Maid 14.8%. This in turn led to
Pepsi having a higher market share of 47.3% vs. Coke's 27.0%. However, in terms of bottled
water, Coke beat out Pepsi with their Coke/Dannon overall market share of 21.9% vs. Pepsi's
13.9%. However, both companies emerged as leading beverage brands in the bottled-water
category, just proving their versatility within the industry and their successful responses to
consumer needs.
The fourth force to be discussed is the threat of substitutes. Though there is some brand
loyalty in the cola industry, if the price does not fit the product, the consumer will not buy the
cola product. Although there are loyal customers to each company, many consumers of CSD
products will more often than not buy the lower priced product whether it is Coke, Pepsi,
Schweppes, or store brand. Other substitutes have been discussed in the threat of buyers and their
demand for alternative beverages. Such substitutes included diet and non-carbonated drinks, and
bottled water.
The fifth and final force of the 'five forces' analysis is the threat of rivalry. The threat of
new rivalry in the CSD industry is minimal. Immediately, from the first page of the case, with
the quotes by former CEO of Pepsi, Roger Enrico, one can understand that the Cola War
between Pepsi and Coke have made both companies even stronger and more profitable than if
there was just Pepsi or just Coke. Both companies have become dominant industry leaders
because of their rivalry amongst one another that they have increased the barriers to entry for any
new companies to emerge and sustain profitability. Cadbury Schweppes did indeed make it
successfully into the industry and became the biggest competition in the 1990s for both
companies but they were a distant third.
The Cola War between Coca-Cola and Pepsi-Cola also weakened small, independent
bottlers. As pointed out directly from the case, the pressures to spend more on advertising,
product and packaging increases, along with discounted prices, led to the demise of many
family-owned bottlers as they did not have the substantial amount of resources to stay
competitive.
Due to Cola War between Coca-Cola and Pepsi-Cola, and their ever increasing market
share within the CSD industry, the Cola industry is not an attractive industry due to the barriers
to entry mentioned above in the threat of new entrants and threat of rivalry. Many newly-formed
companies looking for entrance within the industry will have a tough time gaining any sort of
sustainable market share from Coke and/or Pepsi and their income for research and development,
advertising, bottling, and production is much more limited than either two powerhouses.
The Pepsi-Cola initiative to close the widening gap between Coke and them started with
the "Beat Coke" motto which targeted family consumption through a 26-oz bottle. This idea
helped shape Pepsi's growth in the postwar era in supermarkets and convenience stores. In 1963,
Pepsi launched its "Pepsi Generation" marketing campaign. The target audience for this
campaign was for 'the young and young at heart.' Such a marketing campaign had a substantial
impact in the Cola War as it helped slim Coca-Cola's lead to a 2-to-1 margin. Pepsi also
modernized plants of their bottlers and improved their delivery services, proving that they were
as innovative as Coke was.
Another campaign that helped Pepsi gain market share and catch-up to Coca-Cola was
their 1974 "Pepsi Challenge" in Dallas, Texas. They aimed this challenge in Dallas since Coke
was the dominant brand in the city. The idea for the challenge was to take blind taste tests
between Coke and Pepsi and which one was the preferred choice. After testing, it was shown that
it was in fact Pepsi, not Coke that was the preferred taste in a dominant Coca-Cola city. This
campaign was so successful in gaining steam on Coke that Pepsi made it a nationwide campaign.
With such successes, Pepsi was able to counter any new initiatives that Coke made such as using
alternatives to sugar and increased advertising spending.
Though potential new entrants had no shot in the CSD industry, Pepsi still waged the
Cola War against Coca-Cola and had a period of great successful in closing the gap. Pepsi was
able to gain market share and catch up to Coca-Cola due to Coke's internal difficulties and
execution failures, mainly due to their reliance on a traditional CSD-oriented model. Both
companies attempted to gain high growth and profitability in a completely new area that had not
been tapped before. This target consumer audience was the increasing health-conscience
consumer and the international markets that had not been reached yet. Both companies strived to
provide alternative beverages from their sugar-filled soft drinks that were blamed for obesity in
America. Due to Coca-Cola's reliance on a more traditional CSD-oriented model, Pepsi was able
to expose Coke's weakness by becoming more flexible and creating greater production
differentiation. They did this by acquiring both SoBe and Quaker Oats, maker of Gatorade after
both companies were to be originally acquired by Coca-Cola.
Pepsi continued to flourish and gain market share by launching new CSDs such as Sierra
Mist in 2001 and Mountain Dew Code Red in the same year. With their acquisition of Quaker
Oats, Pepsi was able to expand into other beverage categories since, as stated above, Quaker
Oats is the maker of Gatorade. The previously mentioned acquisitions and expansion of other
beverage categories led to substantial growth in the U.S. Pepsi's North American beverage
volume grew by 3% in 2004 and gained on Coca-Cola thanks in large part due to their more
diversified portfolio of products than Coke. As shown in the figures mentioned in the case, from
1996 to 2004, Coke's annual growth in net income was only 4.2% versus their 18% annual
growth from 1990 to 1997. On the other side of the competition, Pepsi-Cola's net income rose on
average of 17.6% from 1996 to 2004 and in terms of shareholders from 1997 to 2004 for both
companies, Pepsi shareholders saw a return of +46% while Coke shareholders saw a loss of 26%.
The five forces are changing due to the demand for new products. Both Coca-Cola and
Pepsi-Cola have focused on attracting consumers through more marketing and innovation of
their products. Coke has launched new advertising campaigns with new tag lines such as "The
Coke Side of Life" and both Coke and Pepsi have come out with packaging innovations (i.e.
Fridge Packs) and different size liter bottles. Because the CSD industry is fairly elastic, Coke and
Pepsi will have to continue to be innovative and continue with their product proliferation in order
to sustain their market share without losing any to one another.
One the demand for CSDs reached its highest level in the United States, both Coca-Cola
and Pepsi-Cola extended their brand into new abroad markets. The U.S. remained the largest
consumers in CSD products but international markets (Mexico, Brazil, Germany, China, and the
United Kingdom) were next in line in terms of largest markets. Both companies have targeted
markets in Asia and Eastern Europe as they strive to re-gain the sales volume lost in the United
States. Coke has been able garner Western Europe and much of Latin America while Pepsi has
been able to grasp a stranglehold in the Middle East and Southeast Asia. In terms of international
market share, Coke has been able to easily defeat Pepsi as 70% of Coke's sales and nearly 80%
of their profits come from outside of the U.S. while only one-third of Pepsi's beverage sales
come from overseas.
The international markets have shown much promise as indicators have revealed a 12%
increase in beverage volume overall in 2004 thanks in large part to the strong performances in
Asia Pacific and Europe, Middle East, and Africa divisions. The Cola War in the international
markets has allowed Coca-Cola and Pepsi-Cola to expand their revenue and to become more
innovative with new ways of packaging, creating more products, and finding new means of
selling their products.
Appendix A: U.S. Soft Drink Market Share by Case Volume (percent)
1970
1980
1990
2000
2004E
Coca-Cola
Company
34.7
35.9
41.1
44.1
43.1
Pepsi-Cola, Inc.
19.8
27.8
32.4
31.4
31.7
3.2
14.7
14.5
Cadbury
Schweppes
-
-
Appendix B: Financial Data for Coca-Cola, Pepsi-Cola, and Their Largest Bottlers (Net
profit/sales)
1975
1980
1990
2000
2004
Coca-Cola
Company
9.00%
7.70%
13.50%
10.60%
22.10%
Pepsi-Cola, Inc.
4.60%
4.40%
6.20%
10.70%
14.40%
2.40%
1.60%
3.30%
2.90%
4.20%
Coca-Cola
Enterprises
-
-
Pepsi Bottling
Group
-
-
-