Cola wars continue coke and pepsi in 2006-1

Cola Wars Continue Coke & Pepsi in 2006

DILSHAN HYE JOO LEE

Dae-Ryang-Woo

Overview

Industry  Background

Production  &  Distribution  of  CSD

Questions

1886: John Pemberton

1893: Caleb Bradham

Concentrate producer

Bottler

Supplier

Retail Channel

Concentrate  Producer  

• Key  produc+on  investment  areas  

• Manufacturing  plant    

• Customer  Development  Agreements  (CDA)    

• Spent  for  adver+sing,  promo+on,  market  research  

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  

Suppliers  •  Coke  and  Pepsi  were  among  the  Metal  Can  industry’s  

largest  customers.  

•  Major  Can  producers-­‐  Ball,  Rexam,  Crown  Cork  &  Seal    

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%)    

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  

Suppliers  to  Concentrate  producers  &  Bo.lers  

56% 42%

2%

Metal Cans Plastic bottle Glass bottle

�  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!

1.  Why  has  the  so<  drink  industry  been  so  profitable?    

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

•  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

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%

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

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

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

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

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 …

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;

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.

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.

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

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

• 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.

Thank You