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Coca-Cola and Pepsi-Cola have a long history of extreme competition given that 1950. Besides the CSD (carbonated soda) usage increase, it brought both Coke and Pepsi delighted in considerable profits development. In 2004, CSD has 52.3% of overall United States Liquid Usage. Coke and Pepsi had 22.1% and 14.4% in Net profit/sales respectively.
There are 4 major participants associated with the production and circulation of CSDs: 1. Focus Producers (Coke, Pepsi, and others)). They blended raw product ingredients, packaged the mixture, and delivered to the bottlers. They have a great deal of workers located in bottler website to support sales efforts, set standards, and recommend operational enhancements.
They negotiated with the bottlers’ suppliers to accomplish dependable supply, quick delivery, and low rates. 2. Bottlers (CCE, PBG, and others). They acquired concentrate, added carbonated water and sweetener, bottled or canned the item, and delivered it to clients. The variety of bottlers had actually fallen from more than 2000 in 1970 to fewer than 300 in 2004, particularly after Coke and Pepsi did bottler debt consolidation and spin-off as part of plan to refranchise bottling operation.
Coke developed Coca-Cola Business (CCE) and Pepsi formed Pepsi Bottling Group (PBG) as their primary bottlers.
3. Retail Channels. They include grocery store (32.9%), fountain machines (23.4%), vending makers (14.5%), mass merchandisers (11.8%), corner store and gas stations (7.9%), and others (9.5%). Pepsi concentrated on sales through retail outlets, and Coke dominated fountain sales. Both Coke and Pepsi entered snack bar business in order to have exclusive sales territory on the dining establishment chains. 4. Providers. Concentrate manufacturers requires caramel coloring, phosphoric/citric acid, natural flavors, and caffeine from providers.
Bottlers likewise need to purchase product packaging (cans, plastic bottles and glass bottles), and sweeteners. Coke and Pepsi establish steady long-lasting relationships with their providers and their bottlers’ providers.
Chronology of the Cola Wars:
* 1950s: Pepsi introduced “Beat Coke” motto. Pepsi introduced 26-ounce bottle, targeting family consumption. Coke stayed with its 6.5-ounce bottle. * 1960s: Pepsi launched new slogan, “Pepsi Generation”. By focusing on the younger population Pepsi narrowed Coke’s lead to a 2-to-1 margin. Pepsi had larger and more modern bottling facilities. Both groups started adding new soft drink brands. * 1970s: Pepsi Challenge: Starting in Texas, Pepsi’s bottlers had public blind taste tests to prove that Pepsi tasted better. This marking stunt increased sales significantly. Pepsi gained a 1.4 points lead in food store leads. Coke countered with rebates and renegotiations with franchise bottlers. Coke response by cutting costs (used corn syrup instead of sugar), doubling advertising spending, and selling off most non-CSD business.
Diet Coke was introduced to become a phenomenal success. Coke tried to be innovative by changing its formula, but that failed miserably. Coke introduced 11 new products. Pepsi introduced 13 new products. Pepsi emulated most of Coke’s strategic moves. * 1980s: Coke did refranchising bottling operation and created independent bottling subsidiary, Coca-Cola Enterprise (CCE). Pepsi implemented similar anchor bottler model by forming its bottler, Pepsi Bottling Group (PBG). * 1990s: Soft drink industry faced new challenge on stagnant demand. * 2000s: Although Coke and Pepsi encountered obstacle in international operations, including antitrust regulation, price controls, advertising restrictions, foreign exchange control, lack of infrastructure, cultural differences, political instability and local competition, Coke enjoyed a world market share of 51.4% and Pepsi 21.8%.
Coke and Pepsi have been very successful and profitable due to their dominance in the soft drink market. In 2004, the Herfindahl Index (HHI) for market concentration ratio is 0.3130. H = (Coke)2 + (Pepsi)2 + (Cadbury)2 + (Cott)2 + (Others)2
= (.431)2 + (.317)2 + (.145)2 + (.55)2 + (.52)2
This index indicates high concentration with one or two strong players only. Soft drink industry has been so profitable because Americans drink more soda than other beverage. Head-to-head competition between both Coke and Pepsi reinforce brand recognition of each other. Coke and Pepsi devoted spending on marketing, advertisement, innovation, and market expansion.
It is a unique industry where Concentrate Producers and Bottlers are two different entities. Concentrate manufacturing process involved little capital investment in machinery, overhead, and labor. Other significant costs were for advertising, promotion, market research, and bottler relations. One plant could serve entire United States. In the other side, the bottling process was capital-intensive and involved high-speed production line. Bottlers also invested in trucks and distribution networks. Bottlers handled merchandising. Bottler’s could also work with other non-cola brands. From the financial data of Coke, Pepsi, CCE, and PBG, concentrate producers are far more profitable than their bottlers.
The colossal war between Coke and Pepsi really affected the soft drink industry. It shaped the industry into what it is now. The fact that those two major players has involved in the competition since the very beginning (1950s) is the advantage for them to keep dominating the market and gain brand popularity in US market and international market.
Since 1990s, Coke and Pepsi faced new challenge on flattening demand, banned the sales in some US schools, and obstacles in their international operations (regulatory challenges, cultural and any existing competition). Popularity of non-carbonated beverages has also increased. But Coke can Pepsi can sustain their profits in the industry because they are still dominant (no new threats from new competition, no new significant competitors), they have been in the industry long enough to place their brand recognized globally (easy to diversify new product by leveraging their brand), globalization has opened opportunity for them to expand their international market (especially in emerging economies), potential to growth is still high in the emerging market (consumption is still low), and they have diversified into non-carbonated drinks as well as “diet” drinks (less sugar or zero sugar beverages). In my opinion, Coke and Pepsi need to focus on emerging international market and focus on the innovation to create new products as alternative (non-carbonated, diet, and healthier).
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