Case Study - Coke and Pepsi War

History of Coca-Cola (Coke):

Coca-Cola was formulated by John S.Pemberton, originally as a cocawine called Pemberton‟s

French Wine Coca, and originally sold as a patent medicine for five cents a glass at soda

fountains, which were popular in America due to a contemporary view that soda water was

good for your health. Coca-Cola is the trademarked name, registered in 1893, for a popular

soft drink sold in stores, restaurants and vending machines around the world.

History of Pepsi:

Caleb Bradham, a New Bern, North Carolina pharmacist, renamed "Brad's Drink," a

carbonated soft drink he had created to serve his drugstore's fountain customers. The new

name, Pepsi-Cola, was first used on August 28, 13 years after Coca-Cola. In 1902 Bradham

applied for a trademark to the U.S. Patent Office, issued stock and began selling Pepsi

syrup. By 1923, Pepsi-Cola Company was declared bankrupt and its assets were sold to a

North Carolina concern, Craven Holding Corporation, for $30,000. Roy C. Megargel, a Wall

Street broker, bought the Pepsi trademark, business and goodwill from Craven Holding

Corporation for $35,000, forming the Pepsi-Cola Corporation and in 1932 the trademark

was registered in Argentina.

The beginning of the Cola war:

1975 heralded the „Pepsi Challenge‟, a landmark marketing strategy, which convinced

millions of consumers that the taste of Pepsi was superior to Coke. Simultaneously, Pepsi

Light, with a distinctive lemon taste, was introduced as an alternative to traditional diet

colas. In 1983 Coke launched aspartame/saccharin blend Diet Coke. In response in 1989

Pepsi-Cola introduced an exciting new flavor, Wild Cherry Pepsi. Thus Diet Pepsi's 'The

Other Challenge' campaign was based around a 54-46% lead over Diet Coke in

independently researched taste tests in Australia. It was only in 1996 that Pepsi unveiled a

revolutionary 'blue' look worldwide 'to transform the image and attitude' of one of the

world's best-known brands. 'Pepsi Blue represents a quantum leap into the future and

redefines how the Cola Wars will be fought and won in the 21st Century.'

Purpose of the case study:

Control of market share is the key issue in this case study. The situation is both Coke and

Pepsi are trying to gain market share in this beverage market, which is valued at over $30

billion a year. Just how is this done in such a competitive market is the underlying issue.

The facts are that each company is coming up with new products and ideas in order to

increase their market share. The creativity and effectiveness of each company's marketing

strategy will ultimately determine the winner with respect to sales, profits, and customer

loyalty.

Not only are these two companies constructing new ways to sell Coke and Pepsi, but they

are also thinking of ways in which to increase market share in other beverage categories.

Although the goal of both companies is exactly the same, the two companies rely on

somewhat different marketing strategies. Pepsi has always taken the lead in developing new

products, but Coke soon learned their lesson and started to do the same. Coke hired

marketing executives with good track records. Coke also implemented cross training of

managers so it would be more difficult for cliques to form within the company. On the other

hand, Pepsi has always taken more risks, acted rapidly, and was always developing new

advertising ideas.

Both companies have also relied on finding new markets, especially in foreign countries. In

the foreign markets, Coke has been more successful than Pepsi. For example, in Eastern

Europe, Pepsi has relied on a barter system that proved to fail. However, in certain

countries that allow direct comparison, Pepsi has beat Coke. In foreign markets, both

companies have followed the marketing concept by offering products that meet consumer

needs in order to gain market share. For instance, in certain countries, consumers wanted a

soft drink that was low in sugar, yet did not have a diet taste or image. Pepsi responded by

developing Pepsi Max.

These companies in trying to capture market share have relied on the development of new

products. In some cases the products have been successful. However, at other times the

new products have failed. For Coke, changing their original formula and introducing it as

“New Coke” was a major failure. The new formula hurt Coke as consumers requested

Classic Cokes‟ return. Pepsi has also had its share of failures. Some of their failures

included: Pepsi Light, Pepsi Free, Pepsi AM, and Crystal Pepsi.

One solution to increasing market share is to carefully follow consumer wants in each

country. The next step is to take fast action to develop a product that meets the

requirements for that particular region. Both companies cannot just sell one product; if they

do they will not succeed. They have to always be creating and updating their marketing

plans and products. The companies must be willing to accommodate their “target markets”.

Gaining market share occurs when a company stays one-step ahead of the competition by

knowing what the consumer wants.

Lucrative Markets and the Strategies adopted by the Cola giants:

Chinese Market:

The Chinese soft drink market is one of the fastest growing and both the cola makers have

tailored their strategies to make the most of this boom.

Coca-Cola‟s long time strategy has been to make its product inexpensive, widely available

and tasty. As far as taste is concerned, the company had to develop various drinks tailored

to Chinese palates. During the China International Beverage Festival held in September,

Coca-Cola invited Chinese folk artists to make paper-cuts and mold clay dolls, so as to

better combine traditional Chinese art with a foreign brand.

Pepsi also developed its market strategy according to the unique tastes of Chinese

customers. They spent huge amounts of money to invite famous singers, stars and soccer

players to promote its products. The company called this its “soccer & music” promotional

strategy.

The Chinese market presents unique problems. For example, 2,800 local soft-drink bottlers,

many of whom are state-owned, control nearly 75% of the Chinese market. Those bottlers

located in remote areas have virtual monopolies. The battle for China will take place in the

interior regions. These areas are unpenetrated as most of the foreign soft-drink producers

have set up in the booming coastal cities. China's high transportation and distribution costs

mean that plants must be located close to their markets. Otherwise, in a country of China's

size, Coca-Cola and Pepsi risk pricing their products as luxury items. In China, it is easier

and politically safer to expand through joint ventures with local bottlers. It is expected that,

in China, the company that wins the cola war will win based on the locations of their bottling

plants and the quality of the partners they choose.

Australian Market:

Pepsi has scored a marketing coup in the battle of the lemon in Australia by getting its new

Pepsi Twist product in consumers‟ hands ahead of Coca-Cola‟s planned launch of its own

lemon-flavoured cola product. When Coke announced plans to have its Diet Coke with

Lemon product on Australian supermarket shelves it served as a blow to Pepsi, whose plans

to launch into the Australian market before Coke had been hampered by production hurdles.

But in an aggressive strategy deliberately aimed at pre-empting Coke‟s entry, PepsiCo

Australia launched a major “coming soon” public relations campaign and sampling

promotion to raise awareness of its product ahead of its roll-out in stores, supermarkets and

in the route trade.

Coke and Pepsi in Russia:

In 1972, Pepsi signed an agreement with the Soviet Union, which made it the first Western

product to be sold to consumers in Russia. This gave Pepsi the first-mover advantage.

Presently, Pepsi has 23 plants in the former Soviet Union and is the leader in the soft-drink

industry in Russia. Pepsi outsells Coca-Cola by 6 to 1 and is seen as a local brand. Also,

Pepsi must counter trade its concentrate with Russia's Stolichnaya vodka since rubles are

not tradable on the world market. However, Pepsi has also had some problems. There has

not been an increase in brand loyalty for Pepsi since its advertising blitz in Russia, even

though it has produced commercials tailored to the Russian market and has sponsored

television concerts. On the positive side, Pepsi may be leading Coca-Cola due to the big

difference in price between the two colas. Coca-Cola, on the other hand, only moved into

Russia 2 years ago and is manufactured locally in Moscow and St. Petersburg under a

license. Despite investing $85 million in these two bottling plants, they do not perceive

Coca-Cola as a premium brand in the Russian market. Moreover, they see it as a "foreign"

brand in Russia.

Coke and Pepsi in Romania:

Romania is the second largest central European market after Poland, and this makes it a hot

battleground for Coca-Cola and Pepsi. When Pepsi established a bottling plant in Romania in

1965, it became the first U.S. product produced and sold in the region. Pepsi began

producing locally during the communist period and has recently decided to reorganize and

retrain its local staff. Pepsi entered into a joint venture with a local firm, Flora and

Quadrant, for its Bucharest plant, and has 5 other factories in Romania. Quadrant leases

Pepsi the equipment and handles Pepsi's distribution. In addition, Pepsi bought 500

Romanian trucks, which are also used for distribution in other countries. Moreover, Pepsi

produces its bottles locally through an investment in the glass industry. While the price of

Pepsi and Coca-Cola are the same, some consumers drink Pepsi because Pepsi sent Michael

Jackson to Romania for a concert. Another reason for drinking Pepsi is that it is slightly

sweeter than Coca-Cola and is more suited for the sweet-toothed Romanians. Lastly, some

drink Pepsi because, in the past, only top officials were allowed to drink it, but now

everyone can. Coca-Cola only began producing locally in November 1991, but it is outselling

all of its competitors. In 1992, Coca-Cola saw an increase in Romania of sales by 99.2% and

outsold Pepsi by 6 to 5. While Pepsi preferred to buy its equipment from Romania, Coca-

Cola preferred to bring equipment into Romania. Also, Coca-Cola brought 2 bottlers to

Romania. One is the Leventis Group, which is privately owned. Coca-Cola has invested

almost $25 million into 2 factories. These factories are double the size of the factory Pepsi

has in Bucharest. Moreover, Coca-Cola has a partnership with a local company, Ci-Co, in

Bucharest and Brasov. Ci-Co has planned an aggressive publicity campaign and has

sponsored local sporting and cultural events. Lastly, Romanians drink Coke because it is a

powerful western symbol, which was once forbidden.

Coke and Pepsi in The Czech Republic:

The key to success in the Czech Republic is for both Coca-Cola and Pepsi to increase the

annual consumption of soft drinks. Per capita consumption of beer, the national drink in the

Czech Republic, exceeds that of soft drinks by 3 to 1(165 liters of beer per capita of beer

versus 50 liters of soft-drinks). Both companies are trying to increase their market share

because distribution for both products is no longer as limited as it was in 1989. Coca-Cola

and Pepsi face stiff competition from domestic producers, whose products are lower-priced.

Because of this, domestic producers have a market share of about 60%. Coca-Cola and

Pepsi each have a market share between 10%-25%. Another problem in the Czech Republic

is that many people think that the same company produces Coca-Cola and Pepsi. Recently,

Pepsi opened an office in Prague. Coca-Cola, on the other hand, has been trying to convince

local shop owners to stock and circulate its product. The main apprehension may be that the

price of Coke is twice the price of locally produced colas and a little higher than Pepsi. Coca-

Cola has arrangements with 4 domestic bottling companies and acquired a new plant in

1992 in which it has invested almost $20 million. This may be one reason why Coca-Cola is

closing in on Pepsi's lead in the Czech Republic.

Coke and Pepsi in Hungary:

Traditionally, Pepsi held the lead in Hungary with a strategy of putting the infrastructure in

place, upgrading it, and then marketing to the consumer. Pepsi plans to invest $115 million,

which includes acquiring FAU, an Eastern European bottler. Because of this, Pepsi will have

greater control over distribution and quality. In May of 1993, Pepsi introduced Pepsi Light

and had outdoor and television advertising blitzes. Coca Cola, on the other hand, introduced

Coke Light in the beginning of 1993, but did not mention its product name during the first

few weeks of promotional advertising. Coca-Cola's strategy was to advertise internationally

for Central Europe. Hungarians saw the 'Always Coca-Cola' commercials, along with the rest

of the world, in April 1993. In 1992, Coca-Cola led Pepsi. In addition, Coca-Cola participates

in counter trade agreements with Hungary. Coca-Cola trades its concentrate for glass

bottles, which are exported and then sold to bottlers.

Coke and Pepsi in Poland:

Poland, with a population of 38 million people, is the biggest consumer market in central

and eastern Europe. Coca-Cola is closing in on Pepsi's lead in this country with 1992 sales of

19.5 million cases versus Pepsi's sales of 26.5 million cases. The main problems in this area

are the centralized economy, the lack of modern production facilities, a non-convertible local

currency, and poor distribution. However, since the zloty is now convertible, Coca-Cola

realizes the growth potential in Poland. After Fiat, Coca-Cola is now the second biggest

investor in Poland. Coca-Cola has developed an investment plan, which includes direct

investment and joint ventures/investments with European bottling partners. Its investments

may exceed $250 million, and it has completed the infrastructure building. Coca-Cola has

divided Poland into 8 regions with strategic sites in each of these areas. Moreover, it has

organized a distribution network to make sure its products are widely available. This

distribution network, which Coca-Cola has spent a lot of money organizing, is extremely

important to challenge Pepsi's market share and to maintain a high level of customer

service. Also, Coca-Cola, like Pepsi, signed counter trade agreements with Poland. Both

trade their concentrate for Polish beer. All of this has helped Coca-Cola to close in on Pepsi's

lead in Poland.

Coke and Pepsi in Mexico:

The Mexican government recently freed the Mexican soft drink market from nearly 40 years

of price controls in return for a commitment from bottling companies to invest nearly $4.5

billion and create nearly 55,000 jobs over the next 7 years. Naturally, Mexico has become

another battleground in the international cola wars. In Mexico, Coca-Cola and Pepsi

command 50% and 21% of the market respectively. The cola war is especially hot here

because the per capita consumption of Coca-Cola and Pepsi exceeds that of the United

States. The face off in Mexico is between Gemex, the largest Pepsi bottler outside the

United States, and Femsa, the beer and soft drink company that owns the largest Coca-Cola

franchise in the world. Femsa, however, may be at a disadvantage. Despite being part of

the conglomerate Grupo Vista, Femsa lacks financial punch because it plays only a small

part in the conglomerate's overall interests. The challenge in Mexico is to win market share

through distribution efficiency. With this in mind, each company is undertaking strategic

efforts designed to bolster their shares of the Mexican market. Pepsi is moving in on the

Coke-dominated Yucatan peninsula while Femsa, the Coca-Cola franchisee, is planning to

invest $600 million more for 3 new Coca-Cola plants next door to Gemex's Mexico City

facilities. The parent companies have joined the battles as well. Coca-Cola has made a $3

billion long-term commitment to the Mexican market, and Pepsi has countered with a $750

million investment of its own.

Coke and Pepsi in Saudi Arabia:

In Saudi Arabia, Pepsi is the market leader and has been for nearly a generation. Part of

this is due to the absence of its archrival, Coca-Cola. For nearly 25 years, Coke has been

exiled from the desert kingdom. Coca-Cola's presence in Israel meant that it was subject to

an Arab boycott. Because of this, Pepsi has an 80% share of the $1 billion Saudi soft-drink

market. Saudi Arabia is Pepsi's third largest foreign market, after Mexico and Canada. In

1993, almost 7% of Pepsi-Cola International's sales came from Saudi Arabia alone. The

environment in Saudi Arabia makes the country very conducive to soft-drink sales: alcohol

is banned, the climate is hot and dry, the population is growing at 3.5% a year, and the

Saudis' oil-based wealth "make it the most valuable market in the Middle East". Coca-Cola,

long known as "red Pepsi", has finally started to fight back. The battle for Saudi Arabia

actually began 6 years ago, when the Arab boycott collapsed and Coca-Cola began to make

inroads into the Gulf, Egypt, Lebanon, and Jordan.

The start of the Gulf War, however, temporarily stunted Coca-Cola's growth in the region.

Pepsi's 5 Saudi factories worked 24 hours a day to keep the troops refreshed. The most

significant blow to Coca-Cola's return to the desert, however, came at the end of the war,

when General Norman Schwarzkopf was shown signing the cease-fire with a can of diet

Pepsi in his hand. Coca-Cola aims to control 35% of the Saudi market by the year 2000.

Coca-Cola, which plans to pour over $100 million into the Saudi market, is focusing on

marketing to get there. Recently, it shipped some 20,000 red coolers into Saudi Arabia over

the last 9 months. Also, Coca-Cola put $1 million into sponsoring the Saudi World Cup

soccer team. This alone has doubled Coca-Cola's market share to almost 15%. America's

Reynolds Company is among the investors looking to cash in on Coca-Cola's return to Saudi

Arabia. The company is among the investors in a new factory, which, by 1996, will be

producing 1.2 billion Coca-Cola cans per year. This equates to nearly 100 cans for every

Saudi in the country. Pepsi, trying to fight off the Coca-Cola onslaught, has responded with

deep discounting.

Coke and Pepsi in India:

Coca-Cola controlled the Indian market until 1977, when the Janata Party beat the Congress

Party of then Prime Minister Indira Gandhi. To punish Coca-Cola's principal bottler, a

Congress Party stalwart and longtime Gandhi supporter, the Janata government demanded

that Coca-Cola transfer its syrup formula to an Indian subsidiary. Coca-Cola balked and

withdrew from the country. India, now left without both Coca-Cola and Pepsi, became a

protected market. In the meantime, India's two largest soft-drink producers have gotten

rich and lazy while controlling 80% of the Indian market. These domestic producers have

little incentive to expand their plants or develop the country's potentially enormous market.

Some analysts reason that the Indian market may be more lucrative than the Chinese

market. India has 850 million potential customers, 150 million of whom comprise the middle

class, with disposable income to spend on cars, VCRs, and computers. The Indian middle

class is growing at 10% per year. To obtain the license for India, Pepsi had to export $5 of

locally made products for every $1 of materials it imported, and it had to agree to help the

Indian government to initiate a second agricultural revolution. Pepsi has also had to take on

Indian partners. In the end, all parties involved seem to come out ahead: Pepsi gains access

to a potentially enormous market; Indian bottlers will get to serve a market that is

expanding rapidly because of competition; and the Indian consumer benefits from the

competition from abroad and will pay lower prices. Even before the first bottle of Pepsi hit

the shelves, local soft drink manufacturers increased the size of their bottles by 25%

without raising costs.

Conclusion:

Advertising professionals realize that the heart of any campaign is not just the product but

also the position it holds in people's minds. Thus the New Coke fiasco couldn‟t have been

predicted nor could the overwhelming response to Classic Coke.

In the interest of aligning their marketing campaigns with various sets of social values,

companies like the cola giants, may try to emphasize their reputation for ethical conduct or

the social value of their products. They might enter under-served markets, with the dual

aim of distributing goods and services to those who might not otherwise have access to

them, and at the same time finding profitable new business niches and creating good will

toward the company. Coke and Pepsi are practicing social marketing in rural India and

interior China.

International marketing can be very complex. Many issues have to be resolved before a

company can even consider entering uncharted foreign waters. This becomes very evident

as one begins to study the international cola wars. Often, the company that gets into a

foreign market first usually dominates that country's market.

The concepts, which are becoming more important in every market, include color, product

attractiveness visibility, and display quality. In addition, availability (meeting local demand

by increasing production locally), acceptability (building brand equity), and affordability

(pricing higher than local brands, but adapting to local conditions) are the key factors.