Americans consumed 23 gallons of CSDs annually in 1970Consumption grew by 3% per year over the next 3 decadesIncreasing availability of CSDs and introduction of diet and flavored varietiesNon-cola CSDs were introduced

Economics of the US Carbonated Soft Drink (CSD) Industry

Production & Distribution of CSDConcentrate producers Bottlers Retail channels Suppliers

1. Concentrate ProducerBlended raw material ingredients, packaged the mixture, shipped those container to the bottlerKey production investment areas like machinery, overhead and laborA typical manufacturing plant cost - $25 million to $50 millionCustomer Development Agreements (CDA) with retailers like Wal-MartSignificant costs were spent for advertising, promotion, market researchCoca-Cola and Pepsi-Cola claimed a combined 74.8% of the U.S. CSD market in sales volume in 2004

2. BottlersPurchased concentrate Added carbonated water and high-fructose corn syrup Bottled or canned the resulting CSD productDelivered it to customer account

2. BottlersBottling process is capital intensive.Packaging accounted for 40% to 45% of cost of sales and same for concentrate and sweeteners for 5% to 10%.Coke and Pepsi bottlers offered direct store door delivery.Under Cooperative merchandizing agreements retailers agreed to promotional activities for sales of soft drinks

3. Retail ChannelsIn 2004, distribution of CSDs in U.S. was through:Super Markets (32.9%)Fountain outlets(23.4%)Vending Machines(14.5%)Mass Merchandisers(11.8%) Convenience Stores &Gas Stations(7.9%)Other outlets(9.5%)

4. SuppliersCoke and Pepsi were among the Metal Can industrys largest customers.Major Can producers- Ball, Rexam, Crown Cork & Seal

Evolution of CokeFormulated in 1886 by John Pemberton, a pharmacist in Atlanta, GeorgiaSold it at a drug store soda fountains as a potion for mental and physical disordersIn 1891, Asa Candler acquired the formula, established a sales force and began brand advertising The formula for Coca-Cola syrup known as Merchandise 7X remained a secretThe rest is history

Evolution of PepsiInvented in 1893 in New Bern, North Carolina by pharmacist Caleb BradhamBy 1910 built a network of 270 bottlersDeclared bankruptcy in 1923 and again in 1932Business began to grow during the Great DepressionPepsi lowered price of its 12 oz bottle to a Nickel the same price Coke charged for its 6.5-oz bottle

The Cola War Begins

Marketing Campaign Beat CokeAmericans preferred taste Pepsi GenerationNo wonder Coke refreshes bestYoung At Heart

Year 1960s the Armageddon

CSD Teem (1960)Fanta (1960)Mountain Dew (1964)Sprite (1961)Diet Pepsi (1964)Low calorie cola Tab (1963)Non CSDFrito LaysMinute Maid (fruit juice)Duncan foods (coffee, tea, hot chocolate)Belmont Springs water

The Pepsi Challenge

Blind taste testRebatesEroded Cokes Market shareRetail price cutsRolled out blind taste campaign nation wideAdvertisements that questions tests validity1978 Re-negotiation of contract with franchisee bottlers

Leadership

2001: Steve ReinemundGrow the core add some more1980 Roberto GoizuetaLaunched new CSD products (Sierra Mist, Mountain Dew code red)Most valuable BrandAcquisition of Quaker Oats Use of lower priced corn syrup against sugarNet income raised by 17.6% per yearDouble spending on ads 1981-84ROI capital 29.3 (2003) from 9.5 (1996)Sold non-CSD businessIntroduced Diet Coke (1982)

Expansions

Acquired Pizza hut (1978), Toco Bell (1986), KFC (1986)Exclusive deals with Burger king, McDonaldsMerged with Frito Lay to form PepsiCoPurchased Minute Maid, Duncan Foods, Belmont Springs waterPepsi purchased Quaker Oats (Gatorade) in 2000Acquired Planet Java coffee drink brand (2001)Acquired - Mad River juices and tea

1996-2004: Reversal of Fortune

Pepsi flourishedCoke struggledAcquisition of Quaker oats (2000)Flat growth3% growth in 2004Annual growth in net income falls to 4.2% from 18%(1990-96)Net income rose by 17.6% per yearShareholders return -26%ROI 29.3% from 9.5%(1996)Shareholders return 46%

Quest for Alternatives

U.S. Market share for Pepsi and Coke CSD- 80%(2000) to 73.1%(2004) Diet soda-24.6%(1997) to 29.1%(2004) Bottled water 6.6%(2000) to 13.2%(2004) Non-carbs 12.6%(2000) to 13.7%(2004) Non-carbs & bottled water contribution to volume growth coke 100% & Pepsi 75%No longer designing of marketing course established as total beverage companyReluctant to diversify

Diet Pepsi as flagship brand - Diet Pepsi, Pepsi One, Diet Coke with Splenda

Evolving Structures and StrategiesSystem profitabilityPrice war (1990s)Low-cost strategy by the bottlersIncidence pricingRetailers resist price increases (Wal-Mart)Cokes difficult relationship with bottlers like CCE was termed as Dysfunctional

Internationalizing the Cola WarsNext largest market: Mexico, Brazil, Germany, China and the United Kingdom, Asia and Eastern EuropeAmerican: Chinese - 837 eight ounce cans: 21 eight ounce cansCokes dominance : Western Europe, much of Latin America, while Pepsi: Middle East and Southeast AsiaCoca-Cola became synonymous with American cultureAbout 70% of Cokes sales and about 80% of its profits came from outside the United States; only about one-third of Pepsis beverage sales took place overseasArab and Soviet exclusion of CokeWorlds Market Share: Coke 51.4% and Pepsi 21.8%

SWOT Analysis: PepsiEnjoys a High-Profile Global PresenceOwns the Worlds 2nd Best-Selling Soft Drinks BrandConstant Product InnovationAggressive Marketing Strategies A Broad Portfolio of ProductsStrengthWeaknessOpportunityThreatCarbonates Market is in DeclinePepsi is Strongest in North AmericaThey Only Target Young PeopleIncreased Consumer Concerns in comparison to bottled waterGrowth in Healthier BeveragesGrowth in Tea and Asian BeveragesGrowth in the Functional Drinks IndustryObesity and Health ConcernsIncreased Marketing and Innovation Spending by CokeRestriction to only North America as target market

SWOT Analysis: CokeEnjoys a High-Profile Global PresenceFourth amongst the top five leading brandsBroad-based bottling strategy47% of global volume sales in carbonatesStrengthWeaknessOpportunityThreatCarbonates Market is in DeclineOver-complexity of relationship with bottlers in North AmericaInefficient execution of business Soft drinks volumes in the Asia-Pacific region forecast to increase by over 45%Brands like Minute Maid Light and Minute Maid Premium Heart Wise are positioned well with the Health-concerned marketUse distribution strengths in Eastern Europe and Latin AmericaGrowing "health-conscience" societyPepsiCos Gatorade, Tropicana and Aquafina are stronger brandsBoycott in the Middle EastProtest against Coke in IndiaNegative publicity in Western Europe

According to this case Coke and Pepsi both cumulative spending on advertising.Coke and Pepsi established brand identity over a long period of time. Now these brand become culture of almost every countries and in the case of Coke become part of World Culture So this is very strong point of the these brand for establish their identity and their consumer attachment

Brand Equity

Coke and Pepsi both establish almost for more than a century and consumers have emotional attachment with these two brands.Consumers identify these two brands for distance, these all things are the brand strategies.Advertisement create cozy relationship with their consumers they feel relax to use these brands.

Brand Attachment

In these both companies they invests heavy amount which other competitor do not invest in their company.

Competitive Advantage

Coke and Pepsi have focus on customer segmentation, for each segment they can easily serve.They can easily search new segment for their products. Franchise system is the best way to search new segmentation, which have very strong segment. And how can they serve in those segments.Segmentation proved very easily approach for their targeted customers.

Segment

Who has been losing ?Smaller Brands:Because-Entry Barrier, DuopolyWho has been wining:1950: Coke have 47% and Pepsi have 10% 1970: Coke have 35% and Pepsi have 29%1990: Coke have 41% and Pepsi have 32%2000:Coke have 44%Pepsi have31.4% other beverage Cadbury Schweppes 14.7% 2006:Coke have 43.1% Pepsi have 31.7% Cadbury Schweppes 14.5% Key aspects

Could they boost flagging domestic CSD sales?Through Product innovationAggressive marketing and promotionPackaging innovations By diversification.Innovation : e.g diet coke Would newly popular beverages provide them with new (and profitable) revenue streams?YesNon carb and Bottled water contribution to total volume growth: Coke-100%, Pepsi-75Because of Contamination issue, Obesity issueWas the fundamental nature of cola war changing ?Due to the obesity issue and introduction of non carbonated drinks nature change up-to some extent but still they have to focus on csd .

Key questions

Initially through the early 1960s Coke was the winner.But passage of the time Pepsi creates strong hold on the market.Coke was focused on overseas markets, while Pepsi focused on the US grocery channel.Coke and Pepsi hold almost 75% the whole market and 25% have other local CSDs or non CSDs brands. Conclusion

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