• Americans consumed 23 gallons of CSDs annually in 1970 • Consumption grew by 3% per year over the next 3 decades • Increasing availability of CSDs and introduction of diet and flavored varieties • Non-cola CSDs were introduced Economics of the US Economics of the US Carbonated Carbonated Soft Drink (CSD) Industry Soft Drink (CSD) Industry
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• Americans consumed 23 gallons of CSDs annually in 1970
• Consumption grew by 3% per year over the next 3 decades
• Increasing availability of CSDs and introduction of diet and
flavored varieties
• Non-cola CSDs were introduced
Economics of the US Economics of the US Carbonated Soft Drink Carbonated Soft Drink (CSD) Industry(CSD) Industry
Production & Production & Distribution of CSDDistribution of CSD
1. Concentrate producers
2. Bottlers
3. Retail channels
4. Suppliers
1. Concentrate 1. Concentrate ProducerProducer• Blended raw material ingredients, packaged the mixture,
shipped those container to the bottler• Key production investment areas like machinery, overhead and
labor• A typical manufacturing plant cost - $25 million to $50 million• Customer Development Agreements (CDA) with retailers like
Wal-Mart• Significant costs were spent for advertising, promotion, market
research• Coca-Cola and Pepsi-Cola claimed a combined 74.8% of the U.S.
CSD market in sales volume in 2004
2. Bott2. Bottlerslers• Purchased concentrate
• Added carbonated water and
high-fructose corn syrup
• Bottled or canned the
resulting CSD product
• Delivered it to customer
account
2. Bott2. Bottlerslers• Bottling process is capital intensive.
• Packaging accounted for 40% to 45% of cost of sales and same
for concentrate and sweeteners for 5% to 10%.
• Coke and Pepsi bottlers offered “direct store door” delivery.
• Under Cooperative merchandizing agreements retailers agreed
to promotional activities for sales of soft drinks
3. Retail 3. Retail ChannelsChannelsIn 2004, distribution 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 Stations(7.9%)
• Other outlets(9.5%)
4. Supp4. Suppliersliers• Coke and Pepsi were among the Metal Can industry’s largest
customers.
• Major Can producers- Ball, Rexam, Crown Cork & Seal
Evolution Evolution of Cokeof Coke• Formulated in 1886 by John Pemberton, a pharmacist in Atlanta,
Georgia• Sold it at a drug store soda fountains as “ a potion for mental and
physical disorders”• In 1891, Asa Candler acquired the formula, established a sales
force and began brand advertising • The formula for Coca-Cola syrup known as “Merchandise 7X”
remained a secret• The rest is history
Evolution Evolution of Pepsiof Pepsi• Invented in 1893 in New Bern, North Carolina by pharmacist
Caleb Bradham• By 1910 built a network of 270 bottlers• Declared bankruptcy in 1923 and again in 1932• Business began to grow during the Great Depression• Pepsi lowered price of its 12 –oz bottle to a Nickel – the same
Duncan foods (coffee, tea, hot chocolate)Belmont Springs water
The Pepsi The Pepsi ChallengeChallengeBlind taste test RebatesEroded Coke’s Market share Retail price cutsRolled out blind taste campaign nation wide
Advertisements that questions tests’ validity1978 – Re-negotiation of contract with franchisee bottlers
LeaderLeadershipship2001: Steve Reinemund“Grow the core add some more”
1980 – Roberto Goizueta
Launched new CSD products (Sierra Mist, Mountain Dew code red)
Most valuable Brand
Acquisition of Quaker Oats Use of lower priced corn syrup against sugar
Net income raised by 17.6% per year Double spending on ads 1981-84
ROI capital 29.3 (2003) from 9.5 (1996) Sold non-CSD business
Introduced Diet Coke (1982)
ExpanExpansionssionsAcquired – Pizza hut (1978), Toco Bell (1986), KFC (1986)
Exclusive deals with Burger king, McDonalds
Merged with Frito Lay to form PepsiCo Purchased Minute Maid, Duncan Foods, Belmont Springs water
Pepsi purchased Quaker Oats (Gatorade) in 2000
Acquired – Planet Java coffee drink brand (2001)
Acquired - Mad River juices and tea
1996-2004: 1996-2004: Reversal of FortuneReversal of FortunePepsi flourished Coke struggled
Acquisition of Quaker oats (2000) Flat growth
3% growth in 2004 Annual growth in net income falls to 4.2% from 18%(1990-96)
Net income rose by 17.6% per year Shareholders return -26%
ROI 29.3% from 9.5%(1996)
Shareholders return 46%
Quest for Quest for AlternativesAlternativesU.S. Market share for Pepsi and Coke
• CSD- 80%(2000) to 73.1%(2004)
• Diet soda-24.6%(1997) to 29.1%(2004)
• Bottled water 6.6%(2000) to 13.2%(2004)
• Non-carbs 12.6%(2000) to 13.7%(2004)
• Non-carbs & bottled water contribution to volume growth – coke 100% & Pepsi 75%
No longer designing of marketing course – established as total beverage company
Reluctant to diversify
Diet Pepsi as flagship brand - Diet Pepsi, Pepsi One, Diet Coke with Splenda
Evolving Structures Evolving Structures and Strategiesand Strategies• System profitability
• Price war (1990s)
• Low-cost strategy by the bottlers
• Incidence pricing
• Retailers resist price increases (Wal-Mart)
• Coke’s difficult relationship with bottlers like CCE was termed as
“Dysfunctional”
Internationalizing Internationalizing thethe Cola WarsCola Wars• Next largest market: Mexico, Brazil, Germany, China and the
United Kingdom, Asia and Eastern Europe• American: Chinese - 837 eight ounce cans: 21 eight ounce cans• Coke’s dominance : Western Europe, much of Latin America,
while Pepsi: Middle East and Southeast Asia• Coca-Cola became synonymous with American culture• About 70% of Coke’s sales and about 80% of its profits came from
outside the United States; only about one-third of Pepsi’s beverage sales took place overseas
• Arab and Soviet exclusion of Coke• World’s Market Share: Coke 51.4% and Pepsi 21.8%
SWOT SWOT Analysis: Analysis: PepsiPepsi• Enjoys a High-Profile Global Presence• Owns the World’s 2nd Best-Selling Soft Drinks
Brand• Constant Product Innovation• Aggressive Marketing Strategies • A Broad Portfolio of Products
Strength Weakness
Opportunity Threat
• Carbonates Market is in Decline• Pepsi is Strongest in North America• They Only Target Young People
• Increased Consumer Concerns in comparison to bottled water
• Growth in Healthier Beverages• Growth in Tea and Asian Beverages• Growth in the Functional Drinks Industry
• Obesity and Health Concerns• Increased Marketing and Innovation
Spending by Coke• Restriction to only North America as target
market
SWOTSWOT Analysis: Analysis: Coke Coke• Enjoys a High-Profile Global Presence• Fourth amongst the top five leading brands• Broad-based bottling strategy• 47% of global volume sales in carbonates
Strength Weakness
Opportunity Threat
• Carbonates Market is in Decline• Over-complexity of relationship with bottlers
in North America• Inefficient execution of business
• Soft drinks volumes in the Asia-Pacific region forecast to increase by over 45%
• Brands like Minute Maid Light and Minute Maid Premium Heart Wise are positioned well with the “Health-concerned” market
• Use distribution strengths in Eastern Europe and Latin America
• Growing "health-conscience" society• PepsiCo’s Gatorade, Tropicana and Aquafina
are stronger brands• Boycott in the Middle East• Protest against Coke in India• Negative publicity in Western Europe
According to this case Coke and Pepsi both cumulative spending on advertising.
Coke and Pepsi established brand identity over a long period of time. Now these brand become culture of almost every countries and in the case of Coke become part of World Culture
So this is very strong point of the these brand for establish their identity and their consumer attachment
Brand EquityBrand Equity
Coke and Pepsi both establish almost for more than a century
and consumers have emotional attachment with these two
brands.
Consumers identify these two brands for distance, these all
things are the brand strategies.
Advertisement create cozy relationship with their consumers
they feel relax to use these brands.
Brand Attachment Brand Attachment
In these both companies they invests heavy amount
which other competitor do not invest in their
company.
Competitive AdvantageCompetitive Advantage
Coke and Pepsi have focus on customer segmentation, for each segment they can easily serve.
They can easily search new segment for their products.
Franchise system is the best way to search new segmentation, which have very strong segment. And how can they serve in those segments.
Segmentation proved very easily approach for their targeted customers.
Segment Segment
Could they boost flagging domestic CSD sales? Through Product innovation Aggressive marketing and promotion Packaging innovations By diversification. Innovation : e.g diet coke
Would newly popular beverages provide them with new (and profitable) revenue streams?
Yes Non carb and Bottled water contribution to total volume growth: Coke-100%,
Pepsi-75 Because of Contamination issue, Obesity issue
Was the fundamental nature of cola war changing ? Due to the obesity issue and introduction of non carbonated drinks nature
change up-to some extent but still they have to focus on csd .
Key questionsKey questions
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.