Cola Wars Continue:Coke and Pepsi in 2006

Presented by:

Group 1January 22, 2015

Industry Background

CAGR of last 34 years – 2.5%

Economics of Concentrate Business

Cost of Sales

ConcentrateProducer Bottler

Concentrate ProducersBlended, packaged and shipped

Advertising, promotion, market research and bottler relations

Little capital investment in machinery, overhead, or labor

Major investments - trademarks

BottlersCapital intensive

Labor, overhead, trucks and distribution networks were other variable costs.

What were the costs?

BOTTOMLINEConcentrate producers were more profitable than bottlers

Number of bottlers had fallen steadily due to low proitability

It was important for CP to assist bottlers (by marketing support, etc)

HIGH HIGH

Barriers to Entry

Vertical Integration : Thumbs Up or Thumbs down?

• Bottlers were not wiling to cooperate in

Marketing and promotional campaigns Upgrading plant and equipment Supporting new product launches• Product and packaging proliferation

led to increased packaging costs • High discounts led to low profitability• Small family bottlers didn’t have the

resources needed to remain competitive

RESULT ?

Coca-Cola – CCE – Coke’s Largest Bottler in N.A. (2004)

Pepsi – PBG – 57% of pepsico beverages in N.A. (2004)

Was everything so rosy?

Small bottlers went out of business

Small concentrate producers became dependent on bottling networks for distribution of their products

Dependency of coke on a single bottler.

Competitive Rivalry

LOWHIGH

LOW

LOW

Market Share %

Year Coca-Cola PepsiCo Cadbury Schweppes

1950 47% 10% -

1970 35% 20% -

1980 36% 28% -

1990 41% 32% 3.2%

2000 44% 31% 14.7%

2004 43% 32% 14.5%

Results of the Rivalry

Despite a growth in CSD market (CAGR – 2.5%) Coca-Cola lost share to Pepsi and Cadbury Schweppes Pepsi has not been able to increase it’s market share in the last 14 years

Bottomline

Marketing Mix

PRODUCT

Coke introduced 11 and pepsi 13 products to meet the rapidly changing consumer preferences.Both Coke and Pepsi introduced new cola and non cola flavours such as Fanta, Sprite, Mountain Dew, etc.They also ventured into non-CSD such as fruit juices and mineral water to capture the health aware consumers.Coke introduced Diet coke and Coca Cola Zero while Pepsi launched Diet Pepsi as a low calorie variant of their CSDs. They launched energy drinks also.Product packaging also varied ranging from small cans meant for single use to large PET bottles meant for family usage.

PRICE

Both Coke and Pepsi discounted their retail prices to be in competition.

Bottlers followed low cost strategy to retain customer relations. Special discounts to mass merchandisers. Initially Coke followed a fixed price model but later they

established a maximum price and adjusted price quarterly according to changes in sweetener pricing.

In 2003 they switched to Incidence Pricing which varied concentrated prices based on different channels & packages.

Pepsi followed Concentrate pricing based on consumer price index.

Marketing Mix

Pepsi Focused on sales through retail stores while Coke aced in fountain sales.

Both the companies expanded their distribution network by expending in restaurant business. Pepsi acquired Pizza Hut, Taco Bell and KFC whereas Coke tied up with Burger King and McDonalds.

Marketing Mix

PLACE

PROMOTION

The general promotional strategy used by both Pepsi and Coke were retail price cuts and advertisements.Pepsi launched two very successful campaign callled Pepsi Generation and Pepsi challenge.Cokes advertisements indirectly recognised competitors with taglines such as Americans Preferred taste and No wonder coke refreshes best.

Marketing Mix

Who was the real winner??

Both Coke and Pepsi were winners of some of the battles but none was the clear winner of this war.

Coke was clearly ahead of Pepsi till 1996. Post 1996 Pepsi raced ahead.

Americans who said Cola was “too fattening” increased from 48% to 59%

-MORGAN STANLEY

Negative Health perception of CSD

WHAT COULD BE THE WAY AHEAD?

Sustaining Profits • Consumers are looking

for healthier alternatives.

• Change “unhealthy” stigma via marketing campaign

• Shift to non-carbonated beverages (keep up with demand of health conscious society)

Industry CAGR = 0.86%Industry CAGR = 0.86%