colawarscontinue cokeandpepsiin2006!1!131202100444 phpapp01
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Cola WarsTRANSCRIPT
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Cola Wars Continue Coke & Pepsi in 2006
DILSHAN HYE JOO LEE
Dae-Ryang-Woo
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Overview
Industry Background
Production & Distribution of CSD
Questions
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1886: John Pemberton
1893: Caleb Bradham
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Concentrate producer
Bottler
Supplier
Retail Channel
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Concentrate Producer
• Key produc+on investment areas
• Manufacturing plant
• Customer Development Agreements (CDA)
• Spent for adver+sing, promo+on, market research
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Bo.lers • Purchased concentrate
• Added carbonated water and
high-‐fructose corn syrup
• BoEled or canned the resul+ng
CSD product
• Delivered it to customer account
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Suppliers • Coke and Pepsi were among the Metal Can industry’s
largest customers.
• Major Can producers-‐ Ball, Rexam, Crown Cork & Seal
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Retail Channels In 2004, distribu+on 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 Sta+ons(7.9%)
• Other outlets(9.5%)
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32.90%
23.40%
14.50%
11.80%
7.90% 9.50% Supermarkets
Fountain Outlets
Vending Machines
Mass Merchandisers
Convenience stores and Gas Stations Other Outlets
Sales through Retail Channel
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Suppliers to Concentrate producers & Bo.lers
56% 42%
2%
Metal Cans Plastic bottle Glass bottle
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� Relationship with the bottlers has been critical to Pepsi’s success over Coke
� Coke raised its concentrate prices leaving the bottlers a narrower proBit margin in the highly price sensitive industry
Bottlers UP!
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1. Why has the so< drink industry been so profitable?
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Threat Of New Entrants –Low • Bottling Network -‐ Have franchisee agreements with their existing bottlers who have rights in a certain geographic area in perpetuity
• Access to distribution is limited
• High brand loyalty
• Advertising Spend -‐huge advertising and marketing spend required
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• Commodity Ingredients
• Majority of the U.S. CSDs were packed in metal cans - Coke and Pepsi were among the largest customers for metal can industry - Cans are commodity, 2-3 manufacturers
competed for single contract
• Plastic Bottles - 42% of CSD packaging - Bargaining power of them was low
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Bargaining power of Buyer -‐ moderate
Super markets, 31%
Convenience and Gas, 15%
Supercenters, 9%
Mass retailers, 4%
Club stores, 4%
Drug stores, 3%
Fountain and Vending, 34%
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Supermarkets (Food stores) - Several chain stores , Intense competition for shelf space
Mass Merchandiser
- Have private label CSDs - Extremely fragmented
Fountain
- Intense competition : Sacrificed profits to land and keep Fountains
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Threat of Substitutes - Low
• Large number of substitutes were available
• Americans drank more soda than any other beverage with cola market share 71% in 1990
• Huge advertising, brand equity, and making easy availability of product reduced the threat of substitutes
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Extent of Rivalry - High
• Concentrate Producer Industry – DUOPOLY
• Rest of the competition too small to cause any upheaval of pricing or industry structure
• Strategic convergence
• Head-to-Head Competition between both
• Coke and Pepsi reinforced brand recognition of each other
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2. Compare the economics of the concentrate business to the bo.ling business: why is the profitability so different?
Concentrate Producers • Blend raw material ingredients, packaged the mixture and shipped those to the container bottler.
• A typical manufacturing plan costs $25 million to $ 50million.
• Significant costs were for advertising, promotion, market research and bottler relations
• Invest heavily in their trademarks and innovative marketing campaign
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Bottler • Cost of sale is more in bottlers than concentrate producers
• Bottled or canned is the resulting CSD product
• Bottling process is capital - intensive plant, and involved specialized lines
• Invest a lot of capital in trucks and distribution networks
• Purchase major inputs: packaging in can, bottle and class , sweetener …
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3. How has the compeIIon between Coke and Pepsi affected the industry’s profits? • The war between Coca-cola and Pepsi enables
them to elevate their level of innovation
• Overseas operations after 1960s.
• Two companies changed from American companies to international ones.
• Coca-cola and Pepsi share the most of the market;
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3. How has the compeIIon between Coke and Pepsi affected the industry’s profits? • Advertising budgets are significantly increased.
• The cola wars weaken the other competitors by their advantages of plants and equipments
• Many small bottlers fold
• Coca-cola and Pepsi are both able to share the market with high profits.
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4. Can Coke and Pepsi sustain their profits in the wake of fla.ening demand and the growing popularity of non-‐CSDs?
Alternative beverages bring increasing profitability due to the health consciousness of the consumers.
• Coca-cola and Pepsi can sustain their profits in the industry
• Adding new products allows larger margins and brings more potential opportunities.
• Shifting the advertising budget and marketing slogans to deliver the messages related to health consciousness also increase the demand of the consumers.
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Number of competitors • 2 major players: Coke, Pepsi • Combine market share: 74.8%
Competitive strategy • Focused on advertising and promotion • Main strengths from advertising campaigns
Industry Growth • Average of 10% till 1990s and then demand leveled off • Diversify to address beverage need
Competitor Diversity • Coke and Pepsi are very similar products • Similar changes made
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Exit Barriers
• Relatively low costs to exit • Contractual agreements with bottling companies
Proprietary Information
• Secret and famous cola recipe for both Coke and Pepsi • Difficult to copy by other firms
Competitive Advantage
• Famous, international brands • Partnered with fast food franchises as well
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• 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.
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Thank You