Cola Wars Continue: Coke and Pepsi in 2010

For more than a century, Coke and Pepsi compete for market share within the worlds
beverage market. The most intense battles were fought over the $74 billion carbonated
soft drink (CSD) industry in the United States that lasted until the mid-1990s. Coke
and Pepsis revenues grow annually, as the worldwide CSD consumption rose steadily
by an average of 3% per year. In the early 2000s, however, domestic CSD
consumption started to decline in consequence of the evolving linkage between CSDs
and health issues such as obesity. Coke and Pepsi faced new challenges regarding the
growth of non-CSD beverages accompanied by the demand of different bottling,
pricing and brand strategies to ensure sustainable growth and profitability.

General environmental analysis

Sociocultural trends: Starting in the late 1990s, the soft drink industry encountered
new challenges. A great number of consumers started to perceive high-fructose corn
syrup as unnatural and unhealthy. As a result the U.S. share of carbonated soft drink
consumption of the total beverage consumption fell down from 29% in 2000 to 25.2%
in 2009. In 2010, 53% of Americans were concerned that the ingredient posed a health
hazard. In addition to the health issues, environmentalists became more vocal in their
criticism against the use of plastic bottles (PET).
Political/Legal trends Tax policy changes: New federal nutrition guidelines, issued
in 2005, identified CSDs as the largest source of obesity-causing sugars. As of April
2010, 29 states already taxed sodas and around 12 more states were considering the
measure in order to reduce the consumption.
Global trends: As a result of U.S. CSD market saturation, Coke and Pepsi looked
abroad for new growths. Improved access to markets in Asia and Eastern Europe
stimulate new demand.

Industry Analysis
Industry structure:
An industry consists of firms offering goods or services that are close substitutes to
each other and the companies directly compete with each other. The industry structure
refers to the number and size of firms within the industry. The level of competition
rises with the number of companies. Because of the small number of firms Coke,
Pepsi and Dr. Pepper- which control a large share of 88%, the soft drink industry is a
highly consolidated/concentrated industry.

U.S. soft drink market share of concentrate producers

In 2009 Coca-Cola and Pepsi, which had a combined total market share of 72%,
significantly dominate the U.S. soft drink market and therefore there is the special
case of a duopoly market structure. The two giants are followed by Dr. Pepper
Snapple Group (16.4%) and Cott Corporation (4.9%). The Coca-Cola Company had a
total market share of 41.9%, PepsiCo, Inc. had a total market share of 29.9%.
Compared to 1970, Coke increased its market share by 7.2%, Pepsi gained even
10.1%. Nevertheless, both companies lost minimal market shares over the last years.
Other companies share the remaining 6.9%.

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SAIM College

MBA 5th Trimester

Suppliers within the carbonated soft drink industry

The production of CSDs involves three major participants: Concentrate producers
they blend raw material ingredients, package the mixture in canisters and ship it to the
bottler. Furthermore, they implement, finance and develop marketing programs jointly
with bottlers and negotiate customer development agreements (CDAs) with retailers.
They employ a large number of people who work with bottlers by supporting sales
efforts, setting standards and suggesting operational improvements. Relatively little
capital is needed for machinery, overhead and labor. Advertising, promotion, market
research, bottler support and the investment in trademarks cause the most costs.
Bottlers purchase the concentrate, ad carbonated water and high-fructose corn syrup
and then bottle or can the CSDs before deliver it to the customer accounts. The main
cost components are concentrate and syrup, but also packaging, labor, overhead,
trucks and distribution networks. Pepsi and Coke bottlers offer direct store door
delivery which involves securing shelf space, stacking, positioning the brands
trademarked label and setting up displays. The bottling business is very capital
intensive: A large bottling plant with multiple lines and automated warehousing can
cost hundreds of millions of dollars. Suppliers to Concentrate Producers and Bottlers
Concentrate producers require the concentrate, consisted of caramel coloring,
phosphoric or citric acid, natural flavors and caffeine. Bottlers purchase packaging
(cans, plastic bottles, glass bottles) and sweetener. Coke and Pepsi negotiated on
behalf of their bottling networks with the can manufacturers and by 1990 established
stable long-term relationships with these suppliers.

Market structure
As the industry structure already revealed, the soft drink industry is a highly
concentrated industry and therefore the market structure is an oligopoly Coke, Pepsi
and Dr. Pepper had a market share of 88% in 2009. Actually, it can also be called a
duopoly, considering that Coke and Pepsi together had a market share of 72%. A key
characteristic of an oligopoly is that competitors are mutually interdependent; a
competitive move by one company will almost certainly affect the fortunes of other
companies in the industry and they will generally respond to the move (compare
chapter 4: competitive strategies (me-too-strategies) of Coke and Pepsi).

U.S. Liquid Consumption Trend (gallons/capita)

In 2009, the carbonated soft drink consumption had a market share of 25.2% within
the U.S. beverage industry consumption, followed by milk (11.8%), beer (11.5%) and
bottled water (11.3%).

U.S. non-alcoholic refreshment beverage volume in 2009.

The growth rate of CSD consumption is declining since 2000, while there are
increasing consumption trends such as for ready-to-drink tea, energy drinks and
bottled water. In 2009, CSDs accounted for 63% of U.S. non-alcoholic refreshment
beverages volume (down from 81% in 2000), the remaining volume was made up of
bottled water at 20% (up from 7%) and non-carbs at 17% (up from 13%).
U.S. soft drink market share soft drink brands
The three most important brands of Coke are Coca-Cola (17%, total market share of
15.3% of the total non-alcoholic beverage market), Diet Coke (9.9%) and Sprite/Diet
Sprite (6.1%). The three main brands of Pepsi are Pepsi-Cola (9.9%, total market

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share of 8.8% of the total nonalcoholic beverage market), Mountain Dew (6.7%) and
Diet Pepsi (5.6%). Dr. Pepper is the most important brand of the same-named third
largest CSD producer, with a market share of 8.3%.

Marketing channels
In 2009, CSDs accounted 4% ($12 billion) of total store sales in the U.S. and were a
big traffic draw for supermarkets. While branded CSDs were delivered directly to the
stores, where the bottlers fought for shelf space in order to ensure visibility, encourage
impulse purchases and place coolers at checkout counters, the private-label CSDs
were usually delivered to a retailers warehouse so that the retailer is responsible for
storage, transportation, merchandising and stocking the shelves which means
additional costs. In 2009, the distribution of CSDs took place through supermarkets
(29.1%), fountain outlets (23.1%), vending machines (12.5%), mass merchandisers,
which formed an increasingly important channel (16.7%), convenience stores and gas
stations (10.8%) and other outlets (7.8%) such as grocery stores and drug chains.
While Pepsi had focused on sales through retail outlets, Coke expanded in its fountain
sales that covered restaurants, cafeterias and any other outlet that served soft drinks by
the glass using fountain-type dispensers. Another important channel was the scope of
fast food restaurants. While Pepsi supplies Pizza Hut, Taco Bell, KFC and Quiznos,
Coke continued to lead the channel with a 69% share of national pouring rights by
supplying Wendys, Burger King, McDonalds and Subway.

Porters five forces

Porter's five forces analysis is a framework for industry analysis and business strategy
development. The five forces altogether reveals the attractiveness of a market
(industry profitability). Attractiveness in this framework refers to the generally overall
industry profitability, which does not imply that every firm in the industry will gain
the same profitability. Companies are able to apply their core competencies, business
model or network to achieve a profit above the industry average. Porters five forces
analysis regarding to the concentrate producers:
a) The intensity of competitive rivalry
The industry is almost dominated by Coke and Pepsi, which have the majority of the
market share. Competition is comparatively low. Although there were price wars,
Coke and Pepsi are competing on advertising and differentiation rather than on
pricing, which resulted in higher profits. Coke and Pepsi are presented nearly all over
the world, so that the scope of competition is globally.
b) The threat of the entry of new competitors
Customer Loyalty & Brand Image: Pepsi, Coke and their bottlers spend huge amount
of money on advertisement and marketing, which resulted in high brand equity and
strong loyal customers base all over the world. Cokes advertising spending for its
brand Coca-Cola was $234 million in 2009; Pepsis advertising spending for its brand
Pepsi-Cola was $136 million in 2009. This makes it exceptionally hard for a new
competitor to struggle with the current market and expand visibility. Retail
distribution: Coke and Pepsi provide margins up to 30% for their retailers. This makes
it very difficult for new players to persuade retailers to distribute their products.
Bottling network: In this industry manufacturers have franchise contracts with their
bottlers, which have privileges in a definite geographic area. Bottlers are not allowed
to take new competing brands for similar products, so it is very difficult for new
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SAIM College

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players to distribute its brands. The alternative is to build an own bottling plant, but
therefore huge amount of money is needed (a large plant can cost hundreds of
millions of dollars).
Retaliation: Well-established players such as Coke and Pepsi will struggle against new
entrants by price wars or new product lines.
c) The threat of substitute products
The industry is faced with enormous substitutes such as water, tea, juices, coffee etc.
Consumers can easily shift between the substitute products. The only way is to
differentiate by promotional activities. Massive advertising, brand equity and brand
loyalty is needed.
d) The bargaining power of customers (buyers)
The most important buyers for the soft drink industry are supermarkets, fountain
outlets, vending machines, mass merchandisers and convenience stores with different
bargaining power to pay different prices. Fast food restaurants have a very high
bargaining power because they order in bulks, while convenience stores have no
bargaining power and therefore have to pay superior prices. The rapid growth of mass
merchandisers such as Wal-Mart poses a new threat of profitability for Coke and
Pepsi because consolidation within the retail sector means price pressure. End
consumers have high power because it is the consumer who decides which product
will be bought. Consumers attitude changes force the producers to create new flavors
or change products.
e) The bargaining power of suppliers
The most important raw materials for producing soft drinks, such as carbonated water,
flavor, sweetener and packaging, are easily available and relatively cheap.
Manufacturers can easily shift between suppliers. Suppliers of these materials have no
bargaining power of pricing and therefore are relatively weak.
SWOT-Analysis
The SWOT-Analysis provides information that is helpful in matching the companys
resources and capabilities to the competitive environment in which it operates. It is
most helpful in strategy formulation and selection.

Coke:
Cokes strengths are based on its strong brand loyalty all over the world - the
company serves more than 200 countries. It is the dominant market leader of the
global soft drink industry. Its variety of beverages (CSDs, non-carbs, water) are sold
through lots of marketing channels such as restaurants, supermarkets and vending
machines, which means that they are nearly everywhere available. Coke primarily
competes on advertising and spent over $200 million in 2009, just to promote its
brand Coca-Cola. Market surveys on brand loyalty indicated that more consumers
preferred Coke over Pepsi as their favorite CSD brand towards 2010. It has enormous
distribution and production facilities since the bottler consolidation in 2010 Coke
has 90% of its North America business under its control. Coke has a strong financial
position with an international operating profit (sales) of 34.6%.
Strategic implication: Maintain the brand loyalty and market leadership by
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SAIM College

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advertising, sponsorship, promotional activities and high product quality. Due to the
strong financial position it is possible to invest in engineering progress for production
facilities. Cokes weaknesses: In 1985, the change of its 99 years formula leaded in
declining shares and a backlash which results in worsening the image. Another
weakness is its high dependency on the beverage market as its portfolio is restricted to
beverages.
Strategic implication: Make widespread market research before launching new
products. Dont rebrand well-established brands like Coke to avoid another
uncertainty of consumers and bad image effect. Try to achieve synergies by including
other products such as snacks to your portfolio your worldwide brand awareness
will be useful and lead to further growth. Opportunities: Since the CSD consumption
is in decline, the biggest opportunities are to diversify into the non-carbonated drinks
such as coffee, water or juices. The U.S. bottled water consumption highly increased
from 1.2 gallons/capita in 1975 up to 20.6 in 2009. This is a grand opportunity to
increase sales by its water brand Dasani. Coke is building up its market presence in
China, which offers high potential for growth.
Strategic implications: Invest into the water category. The market share of 15%
(2009) is improvable. Consumers are more price-sensitive and the brand loyalty
towards water is lower compared to CSDs, which suggest to lower prices for Dasani.
Threats: The beverage industry offers a huge number of substitutes such as beer,
coffee, juices, tea etc. Since the consumer lifestyle is changing and they are becoming
more health conscious the demand is shifting towards non-carbonated products.
Government regulations may have negative impact, too. Cokes 2009 annual report
identified obesity and health concerns as the number one risk factor to its business.
Regarding to competitors, Pepsi is the strongest one competing aggressively with
advertising.
Strategic implication: Meet your customers satisfaction of needs by offering
healthier products. Offering healthier products also avoid governmental regulations
such as (even higher) soda taxes. Use different marketing campaigns to promote
different brands. For example Coke related to enjoyment, fun and lifestyle, healthier
products like juices and water related to sports and health.

Pepsi:
Pepsis strengths: Pepsi has high brand awareness and is recognized all over the world
and the worlds second best-selling soft-drink company with its brand Pepsi. Other
top brands are Mountain Dew (CSD), Gatorade (non-carb), Aquafina (water), Sierra
Mist (CSD) and Lipton (non-carb). Pepsi is strong in diversification by its broad
product portfolio. Apart from all kind of beverages (CSD, non-carbs, water) Pepsi
merged with the snack-food giant Frito-Lay to achieve synergies. Pepsi is competing
with aggressive marketing strategies, for example Beat Coke, Twice as much for a
nickel, too or Pepsi Challenge to prove better taste.
Strategic implication: Maintain the successful marketing campaigns and worldwide
brand loyalty. Investment for the water category is needed to enlarge the market share
(2009: 11%). Pepsis weaknesses are the overdependence on U.S.-markets Pepsi
depends on the U.S. for roughly half of its total sales, which means that Pepsi can be
negatively affected by cyclical development or maybe labor strikes. Targeting only the
young can see another weakness.
Strategic implication: Plan new market entries where it is useful. Try to capture
higher market share in China and India because of its large, growing middle-class
population. Create special marketing campaigns to grab the attention of older people.
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SAIM College

MBA 5th Trimester

Simultaneously expanding into new markets and broadening the product base can see
Pepsis opportunities. PepsiCo is seeking to address one of its potential weaknesses:
the dependency on the U.S. markets by acquiring Russias leading Juice Company,
Lebedyansky to meet the changing lifestyles of its consumers. Its international
expansion and high investments in China and India reduce Pepsis dependence on US
sales. Regarding to the growing bottled water market Pepsi can gain a big market
share by its brand Aquafina.
Strategic implication: Tailored products for China/India will ensure successful sales.
Pepsi is faced with the threats of declining CSD sales and potential negative impact of
government regulations - government health initiatives may push the obesity and
health concerns and therefore have negative impact, such like warning labels on
bottles. Another threat is the intense competition with Coke, its primary competitor.
Intense competition may influence pricing, advertising and sales promotion.
Strategic implication: Try to avoid negative headlines of CSDs by investing in
healthier beverages, which may have a positive image effect, too. Maintain aggressive
marketing campaigns in order to avoid decreasing market share compared to coke.

Judgment:
Customers, in particular mass merchandisers and substitutes constitute threats, while
there is no threat of the entry of new competitors or bargaining power of suppliers.
Substitutes are rather unthreatening since Coke and Pepsi both have broad product
portfolios, offering diet sodas, water, juices or tea-based drinks. As Coke and Pepsi
are the dominant players within the industry, the intensity of competitive rivalry is
rather low. Both companies have well-established brands and high profitability. Mass
merchandisers are the only force because of their high bargaining power to exert
pricing pressure. Altogether, the beverage industry is highly attractive for Coke and
Pepsi.

Akshay Agrawal

SAIM College

MBA 5th Trimester