Q6) What are the major cost drivers for the bottlers?

The cost drivers for the bottlers were as follows:

1 Bottlers had a direct store door arrangement, which increased the cost of
transportation and labour because their own personnel did the driving, unloading and
stacking.
2 Retail stores were paid by bottlers for promotional activities and discount levels.
3 The bottling process in itself was highly capital intensive requiring high speed
production lines etc.
4 The other main costs were the concentrate and syrup. This cost was dependent on
CSD suppliers and market price for sugar/corn syrup.
5 The bottlers heavily invested in trucks and distribution networks apart from routine
expenses like packaging, labour and other overheads.

Q4) How have Coke and Pepsi managed the rivalry in the CSD industry in terms of
concentrate suppliers?

Coke and Pepsi managed the rivalry in the CSD industry by following some of the below
mentioned tactics over a couple of decades:

1 Pepsi started focusing more on take-home sales to target family consumption. For this
they introduced the 26-oz bottles.
2 Pepsi started with an aggressive marketing campaign called Pepsi Generation to
promote and increase sales among the youth.
3 Pepsi also worked to modernize plants and improve store delivery.
4 Pepsis bottlers were concentrated and were larger than Cokes. This gave them an
advantage over Coke.
5 Pepsi used to sell concentrate at 20% lower than Coke, promising to spend the extra
income on promotion after equaling Cokes prices.
6 Both Coke and Pepsi experimented with cola and non cola flavours and new
packaging options. Non returnable glass bottles were introduced along with metal
cans.
7 In the 1970s Pepsi came up blind taste tests called Pepsi Challenge and Coke
countered it with rebates and retail price cuts.
8 During this period, Coke renegotiated with its bottlers to bring in more flexibility in
pricing of syrup and concentrates.
9 Coke also switched to lower priced high-fructose corn syrup later on. Pepsi followed
suit.
10 Coke started with Diet Coke and in a couple of years Pepsi came out with a similar
product.

Q5) How should Coke and Pepsi face this challenge? Recommend.

Coca Cola and Pepsi should focus on growth related strategies rather than devising tactics to
outdo each other for shorter periods of time. The long term focus would not only be
profitable in the future but also be highly sustainable. Some of the ways this can be done is as
follows:
 1 Continue expansion into emerging markets. As the buying power of consumer
increases, so would the sales of these brands.
2 Both of them should start using healthy sweeteners in order to counter the claim of
aerated drinks leading to obesity and other health problems. This would not take much
investment and as the trend for healthy living grows consumers will be relatively
insensitive towards price.
3 Have a green strategy (like environmentally friendly factories, recycle of the bottles,
water cleaning systems). This will have a positive effect on customer loyalty and will
help in the brand building process.
4 Continue to churn out newer products and bring about innovation in these products.
Innovation to be based on geography, occasion, target demographic group and
ingredients.
5 For retailing strategies, increase shelf space, install more and better equipments in the
market and also expand availability into new outlets and channels.

Q2) Analyze the industry attractiveness of concentrate suppliers and independent

bottlers. Comment on vertical integration of CSD, bottlers and suppliers. Give a
strategic rationale.

Industry attractiveness for the concentrate suppliers is as follows:

1 Bargaining power of suppliers: The powers of suppliers are low for the CSD as the
suppliers are fragmented. Materials like colouring, citric acid and caffeine have no
differentiation. Also the switching costs to these are really low and these commodities
are easily available in the market. Also there is minimalistic threat of forward
integration.
2 Bargaining power of Buyers: Bottlers have very low bargaining power as both Coke
and Pepsi determine the terms of the contract for pricing and other conditions. Also
they have retained exclusive deals with food outlets. As a matter of fact, most
voluminous bottling accounts were owned by these companies which gave them large
negotiating powers.
3 Threat of substitutes: Threat of substitution is very high as there are numerous
alternates to CSDs. There is a change in consumer behaviour and people are switching
to healthier drinks. The switching cost for the consumer is also really low.
4 Threat of new entry: There are high entry barriers as the investment for research,
branding, advertising is very high. Also it is difficult to gain distributor access. And
naturally there will be retaliation from existing dominant players in the strategic
group. Therefore threat to new entry is low.
5 Threat of rivals: There is high intensity of rivalry due to slow industry growth and
changing consumer tastes. Two equal sized companies competing for leadership
makes the rivalry very high. Dimension of rivalry is based on price premium but more
on branding.

Industry attractiveness for the bottlers is as follows:

 1 Bargaining power of suppliers: The strength of the suppliers is medium because
CSD have consolidated small bottlers. CSD also maintain relations with multiple
bottlers and vice versa. It is also true that CSD producers sales depend on the
bottlers competitiveness in the market.
2 Bargaining power of buyers: The strength of buyers is high as there are substitutes
available. The switching costs are very low. Also that the markets in the developed
nations are saturated.
3 Threat of substitutes: This threat is relatively low, as bottlers cannot be easily
replaced by other marketing channels. Also fountains cannot be made available
everywhere. Bottling component of sales is very high.
4 Threat of new entry: Barriers to entry are high because bottling is not really a
profitable industry. Markets are saturated; its hard to gain distribution share/shelf
space. Bottling is a very capital intensive industry. Also Coke and Pepsi have
exclusive share of territories.
5 Threat of rivals: There is rivalry among bottlers of different brands rather than same
brands because the territory has been exclusively divided by Coke and Pepsi. Also the
exit barriers are high, which makes the rivalry intense.

Non marketing forces for CSD industry:

1 Media Big brands like Coke and Pepsi heavily depend on media to cover them
positively as media is a major influencer. Any negative publicity by the media can
lead to public outrage like it happened in India some years back. Therefore media is a
major force.
2 NGOs/Activist Groups Many of these activists group question the sustainability
practices of major MNEs who only seek profits and do not bother about natural
resources and the environment. In India, Coke was accused of using too much water
for their production. Therefore, NGOs also play a major role in the CSD industry.
3 Public There is a widespread public opinion that cola drinks lead to obesity and diet
colas are carcinogenic in nature. This may have an adverse effect on the sales of these
products.
4 Government The US govt. has banned the selling of cola drinks in school premises
due to health concerns. Also governments of other countries might object on similar
grounds, making entry difficult for the CSD industry. Therefore, the role of the
government is also an important force for cola companies.

Degree of Vertical Integration:

Many of their functions overlap in the industry for instance, Concentrate Producers do some
bottling, and bottlers conduct many promotional activities. The industry is already vertically
integrated to some extent. They also deal with similar suppliers and buyers. The vertical
integration of franchise bottling networks of Coca-Cola and PepsiCo, began in 1980s. The
fact that most of the of the family-owned bottlers that Coca-Cola used, did not have the
resources to remain competitive in the industry and it began buying up the poorly-managed
bottlers, giving them new life with capital, and selling them to better-performing bottlers. By
2009 Coca-Cola Enterprises handled about 75% of Coca-Colas North American bottle and
can volume and Pepsi Bottling Group produced 56% of PepsiCos total volume.

Q1) Analyze the CSD industry for its key economic dominant features, industry driving
factors, critical success factors for the concentrate suppliers and bottlers success.

Economic dominant features of the concentrate suppliers are as follows:

1 Market size and growth rate In recent times even though the market sizes of the
two concentrate suppliers was 55% in 2009. This is a fairly dominant market share
but the growth has been thwarted due to reasons such as healthy lifestyle and other
substitutes.
2 Number of rivals The CSD industry is fairly consolidated with two major players,
Coca Cola and Pepsi dominating the market. Others are smaller brands and private
labels of large retail stores which sell on cost advantage.
3 Scope of competitive rivalry The CSD faces more challenges from non cola
products rather CSD players themselves. So the future rivalry will be a battle between
non cola and cola drinks.
4 Buyer needs and requirements The current consumers are health conscious and do
not mind shelling extra for healthier products including drinks. CSD needs to watch
out for that.
5 Product innovation/differentiation Coca cola and Pepsi have both tried to
innovate and differentiate themselves on the basis of the product offerings, but
havent been successful.

Economic dominant features of the bottlers are as follows:

1 Market size and growth rate Bottlers have been consolidated by Coke and Pepsi
either by contractual agreements or franchise. This has led to the reduction of no. of
bottlers to 300 in 2009. There are exclusive territory rights for bottlers and most terms
are dictated by the CSD players. Therefore growth is limited.
2 Number of rivals: The number of rivals is more in terms of different brands of
bottlers rather than within the same company bottlers. This is to do with exclusive
territorial rights.
3 Scope of competitive rivalry There is not much to the rivalry in bottling industry in
the future unless some major innovation takes place.
4 Buyer needs and requirements This factor is aligned with the consumption of soft
drinks. So as long as there is a requirement for soft drinks, the bottlers will be needed.
5 Product innovation/differentiation The bottlers have innovated for the last couple
of decades, experimenting with different raw materials etc. More innovation would
depend on R&D of these firms.

Industry driving forces for the CSD industry are as follows:

1 Globalization: Increased globalization has been highly advantageous to the CSD

industry as the markets in the US were reaching a saturation point. Market growth
was slowing down as people were switching to substitutes. Globalization helped
 CSDs and bottlers alike to expand in emerging economies and be dominant
players in these countries.
2 Product/Marketing Innovation: It will be important for the CSD industry to
continuously innovate themselves in terms of products and image. In this industry,
branding of the company becomes a game changer.
3 Changing societal concerns, attitudes and lifestyles: There has been a
tremendous change in the consumer behaviour patterns. People are shifting to
healthier drinks and avoiding high calorie unhealthy soft drinks. This has led to
players like Pepsi and Coke to move into diet cola and non cola categories in
order to cater to the changing demands of the consumer.

Key Success Factors of the CSD industry are as follows:

1 Manufacturing KSF High utilization of fixed assets due to standardization of the

products sold by CSD industry. Low-cost production efficiency which helped achieve
economies of scale.
2 Distribution KSF A strong network of wholesale distributors and dealers. Also they
managed to gain ample shelf space in the retailers outlets.
3 Marketing SKF Breadth of product line and product selection after both Coke and
Pepsi entered into the snacks and water bottling segments too. Also clever advertising
and branding helped both of them attain market share.

Q3) Explain the rationale for different strategies adopted by Coke and Pepsi since
inception.

The major players in the CSD industry, i.e. Coke and Pepsi had intense rivalry between
themselves and the relationship of move and counter move cultivated the strategies of both
the companies. Both the companies took revolting steps in order to gain the market shares,
which in turn increased their profits. Path dependence was seen in this case as both the
companies took different paths to utilize the same resources and these resources gave them
barriers to imitation. To remain competitive, the companies took strategic steps like:

Pepsi entered the fast food restaurant business by acquiring Pizza Hut in 1978, Taco
Bell in 1986 and KFC in 1986. Cokes counter move in this aspect was to persuade the
competing chains like Wendys and Burger King to switch to Coke. The rationale behind
taking this step was that each of these chains had tremendous sales account. Also, direct
control over these retail channels directly added to the profit margins in the bottling industry,
giving the CSD players more opportunity to expand and retain market share.

Greater degree of innovation and practices like mass advertising by both the companies
was done mainly to have a competitive edge over each other. This also helped in lowered
prices for both consumers and bottlers as well as better and attractive packaging, which
would again help in luring the consumers.

The two companies, in 1960s started experimenting with new cola, non-cola flavors
and new packaging. Coke launched Fanta (1960), Sprite (1961) and low-calorie Tab (1963).
To this, Pepsi came up with Teem (1960), Mountain Dew (1964) and Diet Pepsi. Diet Coke
(1982) became nations third largest CSD. This was done primarily to capture larger markets
as well as shelf space in stores and to make the competitors entry difficult.

Both companies introduced non-returnable glass bottles and 12-oz metal cans in
various configurations. The rationale behind this being convenience for the consumers.

Both diversified into non-CSD industries. Coke purchased Minute Maid, whereas Pepsi
merged with Frito-Lay to form PepsiCo. The rationale behind this was to achieve synergies
based on similar customer targets, delivery systems and marketing orientations.

In 1980, Coke switched from using sugar to a lower priced substitute- high fructose
corn syrup. This move was emulated by Pepsi three years later. This benefitted both the
companies as the same cost could then be used in advertising their products.

In 1986, Coke created an independent bottling subsidiary, Coca-Cola Enterprises

(CCE) whereas, Pepsi created Pepsi Bottling Group (PBG) in 1999. This bottler consolidation
was done to make the smaller concentrate producers increasingly dependent on Pepsi and
Coke bottling networks for distribution of their products.

Q7) What additional information did you get from HBR Interview of M. Kent, CEO
Coca Cola?

These are the following additional information obtained from the interview:

1 Coca Cola plans to double its revenue by 2020 in the saturated US market.
2 The corporate culture of Coca Cola has been rejuvenated to suit the current times.
3 Numerous sustainability initiatives have been taken by Coca Cola to improve their
brand image.
4 They believe in contemporary advertising i.e. it should be a two way process.
5 Their future focus will continue to be on nonalcoholic ready-to-drink beverages.
6 Coca colas succession planning strategy is to look two layers below and make sure
they come out with best results.
7 They see their rivalry with Pepsi as something healthy and essential for the success of
their own business.