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Yoffie D B & Kim R.

Cola Wars Continue: Coke and Pepsi in 2010


Why, historically, has the soft drink industry been so profitable?

1.Economic condition: In 1970s, the consumption of CSD on an average was 22.7 gallons annually. In 2000, consumption reached
to 53.0 gallons annually, continuous growth by an average of 3% per year over the period. With the change on the food habits
and the declining price there was a significant increase in the consumption of CSDs.
2.Integrated Production: The production of the Soft drink industry broadly consists of two main segments - Concentrate producer
and the bottlers. These two segments are dependent on each other on various aspect like sharing costs of procurement,
production, marketing and distribution. As a result, they have often engaged in activities like advertising and promotion to serve
the same customers which create vertical integration to some extent.
3.Low bargaining power of Suppliers: Coke and Pepsi depends on the supplier in Sugar and packaging. Sugar is available from
many sources in open market and also if its expensive, the firm can switch to corn syrup which intents that bargaining power of
suppliers of sweeteners is low. In case of packaging, cola industry uses cans and bottles. Many companies compete for the
contract with bottler which further reduced the suppliers demand by negotiating the contract.
4. Distribution: Companies invested on distribution channel as to make it effective & vertically integrated. The CSDs sold to
consumers through five principal channels - food stores, convenience and gas, fountain, vending, and mass merchandisers.
Companies made huge investment in cola fountains, automatic vending machines and discounting schemes for mass
merchandisers. Also, companies also have pouring rights with Burger king, KFC, and gas station chains through contracts
guaranteeing exclusive rights.
5.Rivalry among competitors: CSD was profitable especially for Coke and Pepsi as they are the two major players, control almost
70% of the Market share. They almost created a kind of duopoly market with low product prices, perfect setup of the business,
with vertical integration pattern. With the huge marketing campaigns and the discounting schemes they created strong brand
names with unbelievable customer loyalty and help to pull each other and made overall industry profitable.


Compare the economics of the concentrate business with that of the bottling business. Why is the profitability so different?
In 1970, Americans consumed 23 gallons of CSDs annually. The growth of 3% per year over the next 3 decades (refer Exhibit 1)
attributed to availability increase of CSDs and introduction of diet and flavored varieties. In Exhibit 4, we see the gross profit and
operating profit of concentrate producer is as high as 78% and 32% but the bottlers being capital intensive could only garner 42%
and 8% respectively. Also, the concentrate price is on a rise from 1988 to 2009 often more than the inflation (refer Exhibit 5)
which in turn affected the bottlers as their main cost components were concentrate and syrup. But the retail pricing was with
bottlers while concentrate makers preserved the right to grant exclusive territories under Soft Drink Interbrand Competition Act.


How has the competition between Coke and Pepsi affected the industrys profits?
With the Cola Wars, The cola giants Coca-Cola and Pepsi have brought about a revolutionary change in soft drink industry. The
rivalry has affected the profits in positive manner. Both companies compete for the top spot have managed to create high quality
products for CSDs, Juice, Non-CSDs, bottle water. They diversified themselves to packaged foods and drinks to increase the
customer base and industry. Over the years, the competition has shown a push-pull effect on profits because one companys
innovation/distinct move inspires the other company to rise to the new level of competition and make decisions to act according
to it as to gain maximum market share against competitor. The war between Coke and Pepsi not only enable them to expand
revenue, but also broaden their base of innovation in form of products, distribution channel, marketing campaign, Discounting
schemes which overall bring up the soft drink industry.


How can Coke and Pepsi sustain their profits in the wake of flattening demand and the growing popularity of non-CSDs?
To curb the hit to the growth of CSDs, both have to devise strategies to shift focus towards healthier beverage options keeping
the customer demand in focus. In Exhibit 9 and 10, non-CSDs have showed a sharp rise through 2002 to 2009 in 4 out of five
beverages. Sales increase should come as a result of customers association with brand image, personal connection and nostalgia.
A go-to plan could be to replace high-fructose corn syrup by sugar to address the need of healthier option. Operation of bottlers
kept under check for cost minimization.


Update the case.

For 2016, Coca-cola is #62 and Pepsi #44 in Fortune 500. Coke's biggest brands - 15 of them have reached $1 billion or more in
retail sales. Though Pepsi's beverage brands may not be as strong, its snack food business is enormous. Battle of the brands has
continued through the years and is evident in their Ads war. Coke announced recently that sales of "still" beverages including
water and Minute Maid had increased 7% .Its packaged water volume increased in the double digits in the first quarter of
2016,outpacing increases in other healthier ready-to-drink options, sports drinks (7%) and tea (2%).Meanwhile, PepsiCo CEO
Indra Nooyi said nutritious items such as fruits, water, and unsweetened tea also now make up 25% of the company's sales

http://beta.fortune.com/fortune500/coca-cola-62; http://beta.fortune.com/fortune500/pepsico-44

30th Dec 2016

Submitted by: Group 7 - 0167/53 0169/53 0177/53 0181/53 0221/53

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