Cola Wars Continue: Coke and Pepsi in 2010

1) Analyze the CSD industry for its key economic dominant features , industry driving forces, key success factors for concentrate suppliers and bottlers. For concentrate suppliers Economic dominant features: Market size: 30% of beverages Scope of competition rivalry: very low as the concentrate suppliers are few and unique Market growth rate : 3-4% growth rate Number of rivals and their relative sizes-is the industry fragmented or segmented?- industry used to be fragmented but now more concentrated, 2 big players coke and pepsi Whether and to what extent industry rivals have integrated backward and/or forward: Coke initiated and Pepsi followed the forward integration, consolidating bottlers and stated distribution The type of distribution channels to access customers : retail stores, restaurants Whether the products and service of rivals firms are highly differentiated : th product is more or less similar with rivals, somewhat different in tastes and very low differentiated Key industry participants are located in the particular cluster : US is the largest consumer and now developing countries like china and India is on target Capital requirements : $50 million- $100 million Whether industry profitability: above par.

Driving Forces: Increasing globalization of the industry : coke is operating in more than 200 countries now and getting 80% of revenue outside the home country US Changes in the long term industry growth rate : growing at only 3% and per capita consumption was 46 gallons per year in 2009 in USA which is lower than 1989 Product innovation : coke adopted new concentrate formula and allowed bottlers to add sweeteners open to the market, new products like diet coke, diet Pepsi and diversified into non carbonated products Marketing innovation : huge money spent on promotional events, shelf space allocation in retail store through CDA, direct store door delivery (DSD) Changes in the cost and efficiency : switching from sugar to fructose corn syrup in concentrate Changing societal concerns, attitude and lifestyle :health awareness increases Reduction in uncertainty and business risk: obesity and health concern are the main risk in the business Key success factors: Technology related :product innovation capability like : sprite, mountain dew etc and coke invented soda machine as well Manufacturing related : low cost production Distribution related : Taken care by bottlers otherwise they sell directly to the retailers warehouses bypassing bottlers Marketing related : implement and finance the marketing programs jointly with bottlers

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For bottlers Economic dominant features: Market size: decreasing from 2000 in 1970 to 300 in 2009 ,100 plants nationwide of coke and Pepsi each Scope of competition rivalry : very high as bottlers are more and coke and Pepsi are unique Market growth rate and position in the business : very low and taken over by concentrate suppliers Number of rivals and their relative sizes-is the industry fragmented : CCE has the major chunk in the coke and PBG and PepsiAmericas has major contribution in terms of bottlers in PepsiCo Whether and to what extent industry rivals have integrated backward and/or forward : Very inflexible industry, very high switching cost in terms of concentrate supplier The type of distribution channels to access customers The pace of technological change in both production process innovation and new product introduction Whether the products and service of rivals firms are highly differentiated Key industry participants are located in the particular cluster : no cluster, territorial rights are given Whether industry profitability is above/below par : gross margin is 40% but net profit is 8% only Capital requirement : very high, depends on volume and package type Driving Forces: Changes in who buys the products and how they use it Product innovation : franchise agreement with both coca cola and Pepsi allowed bottlers to handle non cola brands of other concentrate producers Marketing : 50 % of advertising cost is provided by concentrate suppliers only, in 2009 coke contributed $540 million in marketing support Changes in the cost and efficiency : price adjusted quarterly according to changes in sweetener pricing Growing buyer preferences for differential product instead of commodity product Regulatory influences and govt. policy changes : in 1980 in US congress enacted the soft drink interbrand competition act, which preserved the right of concentrate makers to grant exclusive territories. Reduction in uncertainty and business risk : Concentration supplier are going for forward integration which is a kind of risk for the bottlers, may be in future bottler eliminated Key success factors: Manufacturing related - High speed production lines involved Distribution related - Gaining ample space on retail outlets - Accurate delivery (direct store door) Other KSFs - Patent protection

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2) Analyze the Industry attractiveness: Barriers to Entry significant barrier to entry was brand loyalty, created largely by Robert Woodruff who began leading Coca-Cola in 1923. Woodruffs goal was to place a Coke in arms reach of desire, so he pushed for new channels through which to make Coke available, including open-top coolers in grocery stores, automatic fountain dispensers, and vending machines. Woodruff further developed brand loyalty, increasing the barrier to entering the CSD industry, through associating Coke with the United States military during World War II, promising that every man in uniform gets a bottle of Coca-Cola for five cents wherever he is and whatever it costs the company. The 2nd significant historical barrier to entering the CSD industry was the successful vertical integration of nationwide franchise bottling networks of Coca-Cola and Pepsi-Cola, beginning in 1980. The final significant historical barrier to entry was economies of scale. Large bottling and canning production facilities can cost hundreds of millions of dollars, so the established production lines of major brands like Coca-Cola and PepsiCo allowed them to continuously introduce new products within their brands, as well as new container types in which to sell them Buyer Power The buyers in the CSD industry are the various retail outlets for CSDs, including supermarkets, fountain outlets, vending machines, mass merchandisers, convenience stores, gas stations, and other outlets. Overall, there is a moderate amount of buyer power in this industry, because the buyers have significant power because they determine the shelf space and visibility of the industrys products, but their power is also limited by the significant sales of CSDs of $12 billion annually, or about 4% of total store sales in the U.S. Buyer power is also limited by the fact that CSDs are a big traffic draw for many of these outlets. The balance of power creates a moderate buyer power relationship. Supplier Power Supplier power is low for this industry because the factors of production for both the concentrate aspect of the industry and the bottling aspect of the industry are basic commodities like caramel coloring, natural flavors, and caffeine for concentrate and packaging and sweeteners for bottling, none of which require specialized suppliers. Further, Coke and Pepsi are among the metal can industrys largest customers, and it is often the case that two or three can manufacturers compete for a single contract with the companies, giving Coke and Pepsi a large advantage, and therefore creating a situation of low supplier power.

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Substitutes Historically, the threat of substitutes to the CSD industry has been low to moderate. There are many substitutes, including alcoholic beverages, coffee and tea, sports drinks, and several other beverages, as well as non-cola CSDs such as lemon/lime and root beer, but the availability and variety of CSDs make the CSD industry nearly impervious to this threat. Rivals Rivalry is extremely high in the CSD industry and has been a contributing factor to the profitability of the industry. The two primary CSD companies, Coke and Pepsi, have been engaged in cola wars for over a century, which has led to innovation in the industry ranging from new lines of products and vertical integration to marketing campaigns and novel packaging. Additionally, several rivals exist beyond Coke and Pepsi, including Dr. Pepper Snapple Group, which has seen a significant increase in U.S. soft drink market share by volume, from 11% in 1970 to 16.4% in 2009 (Exhibit 2), as well as emerging private labels and generic labels, specifically at discount retailer locations such as Wal-Mart and Target. Advertising and distribution is the major cost drivers in soft drink industry. 3) Comment on degree of vertical integration and give strategic rational. The cola war has actually weaken the small and independent bottlers, to remain in a competition there was a strong high capital need for advertising, promotion, distribution product and packaging. Much family- owned bottlers no longer had enough resources to remain competitive. Coke started buying poorly managed bottlers, in 1985 coke purchased two largest bottlers for $2.4 billion, preempting outside bidders. This acquisition placed 1/3rd of cokes volume in company owned operation. But the main problem with this buying was debt, It was increasing continuously. In 2009 Pepsi bought two of its biggest bottlers PBG and PepsiAmerica for $7.8 billion, it consolidated 80% of Pepsis North Americas beverage operation under one roof. By this integration cola companies started their own bottling procedure and distribution to retail stores. This bottler consolidation (vertical integration here) made smaller concentrate producers increasingly dependent on the Pepsi and Coke bottling networks for distribution.

4) How have coke and Pepsi managed their rivalry in CSD industry to continue to be top players over 70% market shares? The rivalry between Coke and Pepsi has played a substantial role in both companies profits. As the competition increased, and as each company made a move, the other company took resultant steps that increased profits. As a result, because Coke and Pepsi hold such a dominant share of the industry, the industrys profits have increased but it has largely benefited only these two companies. Market share in the soft drink market over the decades beginning in 1970 has seen increases for Coca-Cola and Pepsi at the expense of the other competitors. In fact, Pepsi and Coke would realize annual revenue growth of 10%, as the CSD industry grew worldwide The move and counter move relationship between Coke and Pepsi compelled each company to take steps to remain competitive. Following Pepsis entrance into the fast food industry with the Taco Bell, KFC, and Pizza Hut acquisition, Coca-Cola managed to convince market competitors such as Burger King to switch to their product. Coke retention of Burger King and McDonalds

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would be significant since each represented tremendous sales accounts. This battle over the control of retail channels directly contributed to profit margins in the bottling industry and spurred each company to take appropriate steps to not only retain market share but expand, as demonstrated by Quiznos and Subways switch to Pepsi and Coke, respectively. (4) The growth and expansion put a squeeze on other smaller concentrate producers and the profits of the industry can be characterized by the shuffling of brands. While profits were increasing, other brands were pushed aside. Phillip Morris entered the market in 1978 with the acquisition of Seven-Up only to incur substantial losses and eventually leave the industry in 1985. Furthermore, as both companies sought to acquire market share and revenue, the rivalry induced a greater degree of innovative practices to branch out in the market, create lower prices, and packaging. In addition to its flagship cola brand, Coca-Cola added Fanta (1960), Sprite (1961), and Tab (1964). Pepsi, quickly responding, developed Teem (1960), Mountain Dew, and Diet Pepsi (1964). Perhaps the most influential of these additions was Diet Coke (1982) the nations third largest CSD. (6) The flood of new brands took up shelf space and made entrance by other competitors very difficult. The industry was monopolized by two companies. The unsubtle shifts in each of these corporations strategies were in direct response to each other and in the process, made both innovative and in some cases as a result, more efficient.

5) How should Coke and Pepsi face challenge & maintain their profitability & sustainability. The barriers to entry in the beverage industry remain high, reducing the likelihood that a rival firm could easily upset the industrys duopolistic structure. Though consumer preferences have shifted, Coke and Pepsi have advantages over potential rivals that put them in the best position to adjust to the changes. Their brand equity, established infrastructures, economies of scale, and relationships with suppliers and distributors will allow them to maintain dominance. Coke and Pepsi must continue to reduce their dependence on the domestic market by expanding into new markets in Asia and Eastern Europe as well as product diversification in no carbonated drinks helped them to achieve big. Coke, which already has a strong international presence, has an early advantage in these markets because during World War II. Because Coke already has established facilities and potential consumers with knowledge of the brand in some European and Asian countries, the entrance into nearby emerging markets is eased. Should start to strengthen the value of the brand abroad with marketing efforts like the sponsorship of important local events. China and India warrant particular attention from both companies because of their growing middle classes. Coke and Pepsi should focus on introducing both existing products and new products tailored to the specific preferences of consumers in each area. This can be an opportunity for both companies to establish themselves as leading tea producers in the country, a form of diversification that can help them to weather the changes in the domestic market. Efforts should also be made to increase consumption of CSDs in countries where Coke and Pepsi already sell their products. In North American markets where demand for CSDs has flattened, there has been a corresponding increase in the consumption of other types of beverages. Sports drinks, ready-todrink teas, and energy drinks have become more popular over the past decade while the consumption of CSDs has decreased. Coke and Pepsi should continue to introduce non-CSD

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products and shift their marketing campaigns to focus on their companies as beverage producers rather than as makers of carbonated products. Coke and Pepsi should continue to acquire potential rivals before they have the scale and brand power to be true threats. Coke and Pepsi can maintain some of their profitability by introducing more diet CSD brands to remain in line with consumer trends.

6) Major cost drivers of bottlers. Distribution cost Marketing and sales cost Ingredients cost Retailer shelf space cost Packaging cost Advertising cost.

7) Write what additional information you got from HBR Interview of M. Kent, CEO Coca Cola. He talks about the growing importance of social networking that company can get in touch with their customers directly .The Idea of co creating content by interacting with customers. Today people are not buying the products rather they are buying value from a company. He also explains the fact that a company like coca cola cannot have a sustainable business without creating sustainable communities. Initiatives like water neutrality are taken in this direction. Building communities can help the company stay in business longer. He also talks about difficulties faced in international expansion with example of failed acquisition of china's juice brand, Huiyuan.

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