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The Cola Wars Continues: Coke and Pepsi in the 21st Century Essay

The Cola Wars between the two industry giants Coca-Cola Company and PepsiCo continues today after over 100 years of rivalry. The competitive strategies of Coca-Cola and PepsiCo have been examined, and even though they are different, both seemed to have been successful to become the first and second companies in the soft drink industry. Coca-Cola with effective advertising, and Pepsi with effective young generation market target, have developed their marketing strategies and began to modify their pricing, bottling and brand strategies. Both companies entered international markets, however Coca-Cola were more effective and lead the markets in most countries. In the 21st centuries, with increasing demand in healthier products both companies expanded their brand portfolios and diversified to find new sources of revenues.

The five forces that drive competition were analysed to define the industry structure of the carbonate beverage industry. The rivalry among existing firms, threat of new entrants and substitute products, and bargaining power of buyers and suppliers showed that Coca-Cola and Pespi have little risks in this industry and shows positive economic benefits for the two leading brands. Therefore this is a comfortable industry for the two cola giants to be in.

The corporate missions, core competencies and competitive advantage, competitive strategies and a SWOT analysis were identified for both the Coca-Cola Company and PepsiCo. Recommendations to their future strategies, with potential fallouts, are given to Coca-Cola and PepsiCo. Both companies should constantly perform market research to know exactly what consumers want, continue innovation, creativity and adaptability to cope with the rapid changes in consumer demands. Finally, both companies should continue to diversify in the products and businesses, and entry the fast growing healthier drink and food markets to become the new leader in this industry.

I. Identify the corporate missionThe most recognisable cola brands worldwide are without any doubt Coca-Cola and Pepsi, both with an American origin and with over a century of history. Coca-Cola and Pepsi are the leaders of the cola industry, with a similar product, however they have quite different competitive strategies in terms of structure, marketing, production and delivery.

The corporate mission of the Coca-Cola Company is:”To refresh the World… in body, mind and spirit.

To Inspire Moments of Optimism… through our brands and our actions.

To Create Value and Make a Difference… everywhere in the world.”Coca-Cola also has a vision for sustainable growth by:”Maximizing return to shareowners while being mindful of our overall responsibilities.

Being a great place to work where people are inspired to be the best they can be.

Bringing to the world a portfolio of beverages that anticipate and satisfy peoples’ desires and needs.

Nurturing a winning network of partners and building mutual loyalty.

Being a responsible global citizen that makes a difference [1].”If we were to ask a Coca-Cola company’s CEO what their company is about they would reply something like “we [Coca-Cola] are the leading brand in carbonated soft drinks worldwide, by always satisfying our customers’ desires and needs in a sustainable way, while maximising our shareholders’ profits”.

The corporate mission of the PepsiCo is:”To be the world’s premier consumer product company focused on convenient foods and beverages.

To produce healthy financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities and which we operate.

To stride for honesty, fairness and integrity in everything we do.”PepsiCo’s vision is:”To be a responsible corporate citizen and contribute to the quality of life in our communities.

Have a responsibility to continually improve all aspects of the world in which we operate – environmental, social, economic – creating a better tomorrow than today.

To put into action programs and a focus on environmental stewardship, activities to benefit society, and a commitment to build shareholder value by making Pepsi a truly sustainable company [2].”A successful PepsiCo’s CEO would certainly say that “we are the world’s premier consumer product company focused on convenient foods and beverages, to satisfy our customers at all times, and produce healthy returns to shareowners, while focusing on the environment to make a better world”II. Industry structureThe five forces that drive industry competition are analysed to define the industry structure of the carbonate beverage industry.

In the soft drink industry, there are two main parts: the concentrate producers (CP) and the bottlers. These two are closely like in their activities, such as sharing costs in production, marketing and delivery of their products. They even deal with same suppliers and customers. Coca-Cola even passes on contracts with sugar suppliers to their bottlers.

Both the CP and the bottlers are profitable in this industry. In 2000, CPs earned 35% pre-tax profits on their sales, while bottlers shower lower profit with only 9% gained on their sales (Table 1).

Table 1. Comparative Costs of a typical US concentrate producer and bottler.

Concentrate ProducerBottler$ per case% of sales$ per case% of salesNet sales0.711005.80100Cost of sales0.12173.7765Gross profit0.59832.0335Selling and delivery0.0121.2221Advertisement and marketing0.28390.122General and administration0.0680.234Pre-tax profit0.25350.529(Source: Yoffie, 2004[8])The industry – rivalry among existing firms:The industry is mainly shared between Coca-Cola and PepsiCo with almost 75% of the world’s soft drink market in 2004 (with 43.1% and 31.7% respectively), and followed by Cadbury-Schweppes, the industry’s number 3 player with 14.5% market share [3]. Together these three companies account for over 90% of the industry sales. This industry could be hence defined as an oligopoly – an industry with a small number of large firms producing similar products – resulting in positive profits for the large companies. Therefore there has been a lot of rivalry between Coca-Cola and PepsiCo, commonly known as the ‘Cola Wars’ to differentiate their product and gain market share.

Today, with new health-conscience customers, Coca-Cola and PepsiCo had to increase their product portfolio to suit customer wants and needs. Both companies have invested in other non-carbonated products such as juices, teas, energy/sport drinks and even bottled water. As one of the Pepsi’s CEO once said “if people are going to drink tap water, they should drink Pepsi tap water”.

The rivalry between Coca-Cola and PepsiCo, does not only include price wars (to gain market share from low brand loyalty customers, and to build barriers of entry to other substitute products), but it also involved taste contests (The Pepsi Challenge), and huge expenditures in effective marketing campaigns. Marketing strategies, such as effective advertisement (TV and radio commercials, billboards…), sponsoring major sporting events (The World Cup), and arranging exclusive marketing agreements with TV stars such as Britney Spears (Pepsi) and Harry Potter (Coca-Cola). Both companies have successfully sold their products despite different selling techniques used when it comes to advertising on television. The Coca-Cola Company effectively uses specific moments, such as Christmas, that appeal to every generation and relates their product to catchy slogans like “always Coca-cola” and “Enjoy”, placing them at the top of the soft drink industry. Pepsi uses other excellent strategies, such as celebrity appearances, to mainly target the younger generation. Even though they both us different marketing strategies, both firms are successfully publicized their products worldwide.

Both firms with mastery in marketing skills even modified their bottling, packaging, pricing and brand strategies to gain further market share. Price cuts are easily and quickly matched by competitors, and once they are matched they generally lower the revenues for the industry, especially with low elasticity of demand such as with the soft drinks. Advertising battles, on the other hand, may well expand demand and expand the level of product differentiation in the industry for the benefit of the firms [4], however they concur high capital expenditures. As the world wide wed popularity increases, Coca-Cola and Pepsi continue to make efforts to create effective websites to advertise their products. Pepsi aims to lure the young and energetic, with their trendy website by including pop music and great prices to win, whereas the Coca-Cola website is more formal and appeal to any generation. Finally, both attempt to be a responsible corporate citizen by being present in local social activities around the world and produce their products in a sustainable fashion.

Potential entrants – threat of new entrants:It would be very difficult for a new entrant to succeed in this industry. Due to the market share, capital and marketing power, and brand recognition of Coca-Cola and Pepsi, the barriers of entry are very high. Even though there is little capital expenditure to produce concentrate (CP), through price discounting, lawsuits and other retaliation tactics from Coca-Cola and PepsiCo would run them out of business.

In the Middle-East some local drinks such as Mecca-Cola have entered the market using anti-American slogans directed at Coca-Cola, but these don not pose a real threat to Coca-Cola other than lose most of the Saudi Arabian soft drink market to Pepsi.

Buyers – bargaining power of customers:The main distributing channels of Coca-Cola and Pepsi are through food stores (35%), fountain outlets (23%) vending machines (14%), convenience stores (9%) and other outlets such as mass merchandisers (20%).

Supermarkets are the main distribution channels. Coca-Cola and Pepsi fought for retail shelf space to ensure prime visibility and accessibility, giving the supermarkets some bargaining power. Moreover supermarkets do buy in bulk, and consumers expect to pay less through this channel, giving the supermarkets some power. Probably buyers have a greater power over Pepsi, since Coca-Cola was found a more important consumer brand for retailers.

Fountain sales were the least effective profitable channel and were said to be “paid sampling” with pre-tax earnings of 2%. Fast food restaurants were able to make exclusive contract rights with Coca-Cola and Pepsi, giving them a strong customer power and able to buy their product at bargain prices.

Vending machines had the highest returns since they have no consumer bargain, so the prices are higher. Convenience stores also showed the high returns of $0.69 per case in 2000 (TABLE 2 – Exhibit 7?), explaining that most probably they had little consumer power over the cola giants.

Table 2. US CSD Retail Outlets, 2000Food StoresConvenience StoresFountainVendingOtherTotal% industry volume34.8%8.5%23.1%13.5%20.1%100%Coca-Cola36.1%35.7%65%50%35.5%44.1%Pepsi32.2%41.5%21%40%33.3%31.4%Other brands31.7%22.9%14%10%31.2%24.5%Net Price$3.53$5.35$3.18$8.48$3.42$4.24NOPBT$0.23$0.69$0.09$0.97$0.33$0.36(Source: Yoffie, 2004[8])Suppliers – bargaining power of suppliers:The inputs to produce Coca-cola and Pepsi include ingredients (mainly sugar, but also food acid, caramel colouring and caffeine) and packaging. Sugar can be easily found in the open market, as there are many sugar producers and sugar substitutes (corn syrup). Therefore sugar suppliers have not much power on Coca-Cola and Pepsi, because they could easily change supplier or substitute it by corn syrup or artificial sweeteners (aspartame).

Aluminium cans today are very inexpensive and there are many suppliers competing for contracts with the cola bottlers, therefore their power is also small. Plastic bottles and especially glass bottles are also inexpensive with many suppliers, again both producers with a low supplier power. Furthermore, with Coca-Cola and Pepsi making contracts on behalf of their bottlers, they are able to bulk buy reducing the prices and the power of suppliers.

Substitutes – threat of substitute product:During the 1990s there was an increase in the demand for no-carbs drinks and other soft drinks such as teas, juices, sport drinks and bottled water, so Coca-Cola and PepsiCo had to increase their brand portfolios through innovation, acquisition and alliances. The non-carbs or more healthy drinks sales – and especially bottled water – have rapidly increased in the last 5 years. By getting in early into the healthier drinks, these substitutes became less of a threat.

Other cola substitutes such as local generic brands also exist although with very different strategies (eg: me-too products, little advertising, lower price) [5]. And even though they take a little slide of the soft drink industry they pose no real threat to Coca-Cola and Pepsi.

In conclusion, the five forces analysis showed that there is little risk in the soft drink industry and it shows positive economic benefits for the two leading brands Coca-Cola and Pepsi.

III. SWOT analysisCoca-cola SWOTStrengths:- Brand recognition and the world’s famous trademark. The Coca-Cola brand name is widely regarded as the world’s most valuable brand with an estimated value of $70million [6].

– World’s leading soft drink producer. They are the #1 firm in the soft drink industry, with over 1 billion drinks sold daily resulting in healthy revenues.

– Strong and effective marketing campaigns. They have mastery at marketing, advertising, production design that reaches all generations worldwide.

– Wide non-alcoholic beverage portfolio. Coca-Cola extended their product range with products such as Aquarius, Burn, Dasani, Fresca, Cappy, Coke Zero, Minute Maid, Powerade, Bonaqua, Simple Orange, Diet Coke, Nestea and more [1].

– Extremely efficient product supply and delivery to customers. Real strength in direct-store delivery and helping retailers sell those products to consumers.

Weaknesses:- Never saw Pepsi as a threat. Now Coca-Cola is constantly reacting to Pepsi’s changes to the rules of the soft drink industry.

– Constant negotiations with bottlers. They also purchased many bottlers, but the industry has not been very profitable for bottlers in past few years.

Opportunities:- Expanding to other markets other than soft-drinks. They have already started, but they should increase their non-carbs market share. For example the juice Minute Maid Company is constantly growing, and is able to acquire or ally with other leading non-carbs drink producers. This is a good opportunity to move into the near future where consumers are becoming more health conscious.

– Expanding to new fast growing markets such as Asia-Pacific (in particular China and India), Europe, and Africa/Middle East.

– Make exclusive contracts with new ‘healthier’ fast food restaurants such as Subway to sell their non-carbs drinks.

– Get involved in local events worldwide and “think local”.

Threats:- The new trend of consuming healthier products. Consumers are becoming more health conscience and the demand for healthier drinks is rapidly increasing.

– An all American icon, the American way of life. Lose customer preference,
ie Saudi Arabia (this is not about whether American foreign policy is right or wrong, it’s about the fact that Coke loses customer preference) [7].

PepsiCo SWOTStrengths:- Brand recognition and worldwide known trademark.

– The world’s second soft drink producer. High market share, with high revenues. The PepsiCo is very wealthy with high capital.

– Effective marketing. Innovative advertisement that targets the younger generation and attacks the ‘old-fashioned’ Coca-Cola.

– Early entrance to substitute products (juices, teas, sport drinks, bottled water) and snack food complements (FritoLay).

– Posses an innovative and creative team. The goals set are challenging yet achievable (“Beat Coke”) and they have a clear mission.

– Wide non-alcoholic beverage portfolio. Coca-Cola extended their product range with products such as Pepsi (Twist, One, Lime, Vanilla, Cherry…), Aquafina, Lipton Tea, Mountain Dew, Amp Energy, Mirinda, Starbucks Double Shot, Milk Chillers and more [2].

Weaknesses:- Pepsi is the second choice cola, and it seems to be a ‘lower’ quality soft drink.

– Pepsi must compete with the most powerful cola brand: Coca-Cola.

Opportunities:- Expand to growing International markets such as Asia-Pacific (in particular China and India), Europe, and Africa/Middle East. The high market share in Saudi Arabia can become the gateway to gain the Middle East soft drink industry.

– Expand to a healthier product market by increasing their non-carbs portfolio. Continue to supply non-cars drinks to the market, where consumers are becoming more health conscious.

– Merging with small growing local fast food restaurants.

– Use “The Challenger” theme to appeal to the young generation, instead of the ‘olde-fashioned’ Coca-Cola. Continue to lure the younger generation through cool pop music, music starts and clever advertisement.

– The use of new packaging with lighter, ecologic materials. To get involved in and encourage recycling, conservation and programs for sustainable production.

Threats:- The major threat is Coca-Cola. Always be prepared that every strategic move Pepsi makes, there will be retaliation from Coca-Cola.

– The new trend of consuming healthier products. Consumers are becoming more health conscience and the demand for healthier drinks is rapidly increasing.

IV. Core competencies and competitive advantageCoca-Cola and PepsiCo offer a similar range of products and are very successful at marketing, selling and delivering them, however both have different core competencies and competitive advantages.

Coca-Cola:- The main core competency is their bran building ability to gives them a competitive advantage. A competitive advantage of Coca-Cola is their unique secret recipe which cannot be matched by any other producer concentrate. Their product is the ‘original’, ‘the real one’ which they have been able to get stuck in the head of many people worldwide through mastery in marketing.

Another core competency of Coca-Cola as well as their unparalleled brand-building experience is their unique geographic knowledge and fast transfer of knowledge among operating units [5]. Their commitment to effective marketing and innovation in creating brands and products is extremely important for this company. Coca-Cola have creatively integrated their all-American product into the lives of people everywhere, even in countries which are very traditional such as India, patriotic such as China or even primitive such as Papua New Guinea.

A very important competitive advantage is their brand recognition and their financial strength. This gives some security to Coca-Cola and a psychological advantage over other soft drink firms.

PepsiCo:PepsiCo has a core competency of producing and supplying beverages and snack foods. They are very experienced and effective, becoming USA’s leader in snack food producers and second in the soft drink industry. They have a strong brand recognition and financial strength. This can be used to further market their drink, for differentiation and brand recognition.

PepsiCo has a head start in diversification of their core product (Pepsicola) to snack foods (FritoLay and Quaker Foods) and healthier soft drinks. They have the knowledge in diversification of products, and even of business type, giving them a competitive advantage.

Another core competency and competitive advantage is their knowledge of innovative advertisement that captures the minds of the younger generations. The use of pop music and music stars gives an advantage to Pepsi when it comes to the youth soft drink industry.

Finally since PepsiCo is a smaller company than Coca-Cola, this gives them a competitive advantage as they are can adapt to changes quicker in the soft drink industry.

Therefore the Coca-Cola Company and PepsiCo should concentrate on their core competencies to build competitive advantages and broaden their opportunities for business.

V. Strategy recommendationsThere are some strategy recommendations to sustain the profits of Coca-Cola and PepsiCo with a flattening demand and the growing popularity of non-carbonated drinks. Throughout history, Coca-Cola and PepsiCo have been battling to sell their cola drinks, with different strategies, which eventually lead them to the two major soft drink companies they are today.

The Coca-Cola Company has such a brand recognition that they should definitely use it in their strategy to further develop their core cola product as well as other beverage products. Coca-Cola learned from PepsiCo, and hired marketing executives with good track records, implemented cross-training of managers and started to take more risks, act more rapidly and develop new production and marketing ideas. Therefore Coca-Cola should continue their effective marketing, which focuses on special moments in life that appeal to all generations at once, and show the world they provide a life-style rather than just a drink. Their strategy has been to primarily rely on their classic cola product and target all generations in the market.

The following two recommendations are given to Coca-Cola:1) Remain loyal to their classic Coca-Cola product.

Coca-Cola should remain loyal to the classic Coca-Cola – the ‘real thing’ – closest to the original recipe as possible. The so much talked about secret recipe, gives an advantage to Coca-Cola because nobody, not even Pepsi, can bring out the same taste. With the financial strength of Coca-Cola, they can invest in modern technological advances to develop a sweetener that contains no sugars and which is all natural (not unhealthy), but without losing the real taste. They can then market the ‘new’ drink to the more health conscience consumers.

They should even bring back their classic glass Coca-Cola bottle that we all love. By investing in developing a type of glass for their bottles which is light, thin and strong, this would represent the classic Coca-Cola in the modern world. They should also phase out drinks with low returns such as Lime Coke or Vanilla Coke.

They should show their customers that they believe their Coca-Cola is better than any other cola available. This will cause a gain in market share from Pepsi and other substitutes, due to the brand recognition, competitive prices and quality.

2) Expand in the non-carbs (healthy) drink industry.

As it is observed, there is a growing popularity for non-carbs drinks such as teas, juices, sport/energy drinks, milk drinks and bottled water, and it seems to continue in the future. Coca-Cola must know exactly what the customers want (consumer surveys and feedback systems) and broaden and develop their product portfolio to satisfy the customers. They should do this at a local scale due to taste differences (for example in Indonesia they have very sweet diet diets), to ensure they supply all customers with what they really want. They should be more creative, flexible and innovative than PepsiCo and be the one to make the first move and change the rules of the game.

They should definitively change their image to a healthier beverage image, by providing non-carbs drinks internationally, and try to gain market share and recognition in this industry. By continuously innovating their products, they are able to learn and change. They should change their target market from an ‘everyone’ audience to a more specific target of health conscious consumers.

PepsiCo have been much better at providing what consumers want (by even modifying their products), and have created products for the more health conscience consumers long before Coca-Cola. Their strategy has been to bring to the market new innovative beverages, provide what the consumer wants, and target the young markets to take over Coca-Cola’s market share.

The following two recommendations are given to PepsiCo:1) Extend their diversification strategy in the beverage industry.

In the beverage sector, PepsiCo should further increase their brand portfolio, and especially in the increasingly demanded healthier drinks. They must exactly know what the consumer’s wants, needs and future expectations are, and supply them. They should merge or acquire with other growing healthy companies (for example Boost Juice in Australia), such as they did with Lipton Tea, a well known tea producer company. This way they can gain the healthier drinks market. They should also constantly innovate their beverages and supply gaps in the beverage industry, such as their new product DMX which is in between a soda and an energy drink. To market the new innovative drinks they should continue to use their creative and aggressive advertisement to target the young generation for the carbonated drinks, and target the health conscience consumers for the healthier drinks.

2) Extend their diversification in snack food and restaurants.

They must continue to develop this sector of the company (FritoLay and Quacker Foods which bring 33% and 5% of the total PepsiCo 2004 revenues respectively), and expand to ‘smart’ choices (healthy products). Maybe even develop a new healthy fast-food restaurant chain (with their knowledge in fast food restaurants), and flood it with their own healthier drinks exclusive to PepsiCo. They should also perform constant market research to know what consumers in this market want, and then supply it.

Finally, PepsiCo´s international business strategy must be changed as they have not much global market share when compared to Coca-Cola. So they should always use innovative ways to expand in the global market, this will increase brand awareness and maximise their opportunities.

VI. Potential falloutWith every strategy there is potential fallout or problems. Here are some solutions to possible issues while executing their recommended strategies for Coca-Cola and Pepsi.

Coca-Cola Company:1) Remain loyal to their classic Coca-Cola product.

The potential fallout of remaining loyal to the original cola beverage is that customers may eventually switch to healthy drinks altogether, minimizing the soda consumption and industry. It is unlikely that all sodas will disappear from the markets as they are and have been such popular drinks, however it is likely that the soda consumption is decreased as the healthy drink consumption increases. For this purpose, Coca-Cola should know if their soda sales are profitable and have an exit strategy in case of low returns. If this is the case, Coca-Cola’s exit strategy should be to focus on their healthier drinks production, while all structures and delivery systems for sodas can be changed to healthier beverage alternatives such as juices, sport/energy drinks, teas and bottled water.

2) Expand in the non-carbs (healthy) drink industry.

The non-carbs or healthy drink industry has been rapidly increasing and this trend should continue in the future. This coupled with the new ‘being healthy’ fad which is currently being observed in most developed countries, where consumers do not want carbonated and sweet drinks and switch to products such as teas, juices and bottled water. Therefore when comparing the slow growth of carbonated drinks (3-4% p.a.) with the fast growing market for healthier drinks (>13% p.a.), it is logical that Coca-Cola market their products effectively and floods the market with their healthier alternatives to gain and control the healthy beverage markets. Their important knowledge in delivery and supply can be applied to the healthy drinks to ensure their products are found everywhere for consumers.

PepsiCo:1) Extend their diversification strategy in the beverage industry.

PepsiCo should continue to provide all types of beverages; however they should focus on the healthier choices such as teas, juices, sport/energy drinks, milk drinks and bottled water. Since they have a wide range of alternatives, they don’t have such a high risk like producing a single product. In case of a market decrease of one type of drink, such as sodas, PepsiCo is able to receive revenues from alternative drink sources. Their effective advertisement and delivery systems should be also applied to their new healthier drinks.

They should also constantly research the beverage markets at local and international levels and learn what the consumer preferences are to be the first one to supply them. For this they must remain creative, innovative, and flexible, to be able to adapt to those rapid changes in their environment. In the worst case scenario, if the beverage market disappears (which is very unlikely), PepsiCo can exit this industry and focus on their snack and restaurant businesses, while looking for further opportunities for growth.

2) Extend their diversification in snack food and restaurants.

Diversity in business and products offered to customers is very important. It was a smart move by PepsiCo to invest in snack foods and fast food restaurants, which are obviously complements of their core product the cola drink. Another advantage is that if there is a crash in the soft drink industry, PepsiCo would have alternative revenue streams. However, with increase demand of healthier products, it may seem that both the carbonated soft drink industry and the snack food/fast food restaurant market will show a decline, while the healthier drink and food markets will grow. If this is the case, PepsiCo can focus on developing their healthier drink to strengthen their healthy brands.

Also they should do the same with their food industry and change to become a healthy food supplier though innovative measures, merging or acquiring a fast growing establish company. PepsiCo should continually scan the environment, to search for fast growing industries in which to invest to promote further company growth.

References[1].

The Coca-Cola Company (www.coca-cola..com)[2]. The PepsiCo. (www.pepsico.com)[3]. Bathnagar, P. (2005). “Coke, Pepsi losing the fizz”. CNN Money (http://money.cnn.com/2005/03/07/news/fortune500/cokepepsi_sales/)[4]. Note on the Structural Analysis of Industries. Harvard Business School. Rev. June 30, 1983.

[5]. Lessard, D. (2003). Frameworks of global strategy analysis. J. of strategic management education, 1(1): 81-92.

[6]. Dube, JP. (2004). Product differentiation and mergers in the carbonated soft drink industry. University of Chicago Graduate School of Business.


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