Final Cola Wars Continue

8/6/2019 Final Cola Wars Continue

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Coca Cola was formulated in 1886 by John Pamberton,a pharmacist in Atlanta, Georgia who sold it at drugstore soda fountain as a portion for mental physicaldisorder.

In 1981, Asa Candler acquired the formula,established a sales force, and began brand advertisingof Coca-Cola.

In 1919, it went public under control of Robert

Woodruff then pioneered open-top coolers for use ingrocery store & other channel, developed automaticdispensers, & introduces vending machine.

Successful during WWII with the high CSD consumption

from the U.S soldiers.


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Pepsi was invented in 1893 in New Bern,NorthCarolina by Pharmacist Caleb Bradham.

Like coke, Pepsi adopted a bottling system, and by1910 Pepsi had built a network of 270 bottlers.

Pepsi struggled and declared bankruptcy twice, 1923& 1932.

During Great Depression grew in popularity due toprice decrease to a nickel.

In 1938, Coke sued Pepsi, claiming that the Pepsi-Colawas an infringement on the Coca-Colas trademark.

In 1950, Cokes share of the U.S market was 47% &Pepsi was 10%; 100s of regional CSD companies &offered a wide assortment of flavors.


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PEPSI&

COKE

MONOPOLY

PURECOMPETTION

MONOPOLISTIC

COMPETITION

OLIGOPOLY

In what market COKE & PEPSI can be categorized in ??


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Only a few firms in the market area.

Actions by any individual firm in CSD industry onoutput, product style or quality, price,introduction of new models.

Offering a similar product and branded. There is a large degree of interdependence with

other competitors.

Since in CSD, not one but two firms are

dominate, it called duopoly. Duopoly pairs often study complex tactical

scenarios of moves and probable countermovesagainst one another


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Barriersto Entry

Power ofSuppliers

Power ofBuyers

Threat of

Substitutes

Rivalry amongestablished

company

Soft Drink Industry

Porters Five Forces Analysis


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1. Potential Competitors

Companies that have a door to door distributionchannel in place like snack companies could chooseto diversify into soda industry

Switching costs are low for consumers who risk verylittle by trying new brands or beverages

Barriers to entry are relatively high, though, withlarge advertising budgets and competitive brandloyalty to big players like Coca-Cola and Pepsi

The drinks with high growth and high hype are non-carbonated beverages such as juice drinks, sports

drinks, tea-based drinks, dairy-based drinks, andespecially bottled water


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2. The Bargaining Power of Suppliers

Concentrate producers (CPs) negotiate directly withbottlers major suppliers particularly sweetenerand packaging suppliers to encourage reliablesupply, faster delivery, and lower prices

Coca-Cola and Pepsi are among the metal can

industrys largest customers and maintainrelationships with more than one supplier, givingthese suppliers less bargaining power due to theavailability of alternative suppliers

Metal cans make up the majority of the bottlerspackaged product (60%), followed by plastic bottles(38%) and glass bottles (2%)


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3. The Bargaining Power ofBuyers

Bottlers own a manufacturing and sales operation in anexclusive geographic territory, with rights granted in

perpetuity by the franchiser, subject to termination only inthe event of default by the bottler in1980 Soft DrinkInterbrand Competition Act preserved the right of CPs to grantexclusive territories to their bottlers, giving less bargainingpower to Bottlers buyers because there is no alternativesupplier.

Bottlers are locked into contracts that grant CPs the right toset prices and other terms of sale.

Bottlers are allowed to handle the non-cola brands of otherCps at their discretion.

Bottlers are also given freedom in choosing whether or not tocarry new beverages introduced by the CPs but cannot carrydirectly competitive brands

Competition for brand shelf space in retail channels givessome bargaining power back to buyers


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4. Threat of Substitute Products

Threat from substitute products are probably second

in importance to the cola industry only to the rivalryamong established firms: coffee cafes, tap water,milkshakes, fruit juice, hot tea, hot chocolate,chocolate milk and so on.

5. Rivalry Among Established Companies

Industry is largely consolidated with two majorplayers and a few smaller competitors like CadburySchweppes, making the companies interdependent.

International demand for carbonated soft drinks isgrowing, but domestic demand is slowing downsubstantially.

Exit barriers are high for bottlers with expensiveequipment, moderate for concentrate producers.

Advertising budgets are high, customers areinfluenced by brand perceptions.


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In the early years of the 21th century,growth in soft drink sales for both

Coke and Pepsi was falling short of precedent & of

investors expectations.

Control of market share

For more than a century, Coca Cola & Pepsivied for a throat share of the worldsbeverage market. The most intense battles inthe so-called cola wars were fought over the

$66 billion CSD industry in the U.S. Both Cokeand Pepsi are trying to gain market share inthis industry .


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PRODUCT 2000 (%) 2004(%)

Coca-Cola 44.1 43.1

PepsiCo 31.4 31.7

Ca r Sc eppes 14.7 14.


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Each company is coming up with new productsand ideas in order to increase their marketshare.

Pepsi has always taken the lead in developing

new products, but Coke soon learned their lessonand started to do the same.

In 1980s, Coke introduce 11 new products andPepsi introduce 13 products.

The battle for shelf space in supermarkets andother stores became fierce.


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Fanta (1960) {Sprite (1961), Low calorie cola Tab (1963) } Diet Coke (1982) Caffeine free coke (1983) Coca-Cola Classic (1985) New Coke (1985) Cherry Coke (1985)

COKE

Teem (1960) Mountain Dew (1964) Diet Pepsi (1964)

Lemon Lime Slice(1984) Product Launch Caffeine free Pepsi Cola(1987) Sierra Mist (2000) Mountain Dew Code Red (2001) Pepsi One (2005)

PEPSI


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Pepsi has always taken more risks, acted rapidly,and was always developing new advertisingideas. Both companies have also relied onfinding new markets, especially in foreign

countries. In foreign markets, both companies have

followed the marketing concept by offeringproducts that meet consumer needs in order togain market share.


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PEPSI COCA COLA

BEAT COKE AMERICAN PREFERREDTASTE

PEPSI GENERATION NO WONDER COKE REFRESHBEST

YOUNG AT HEART


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After Pepsi entered the fast-food restaurantbusiness by acquiring Pizza Hut (1978), Taco Bell(1986), and Kentucky Fried Chicken (1986), Cokepersuade Wendys and Burger King.

In 2005 Pepsi supplied all Taco Bell and KFCrestaurants and the great majority of Pizza Hutrestaurants, and Coke retained exclusively dealswith Burger King and McDonalds.

Its remained vigorous in 2004, Coke won theSubway account away from Pepsi, while Pepsigrabbed the Quiznos account from Coke.


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PEPSI COKE

Acquired Pizza Hut

(1978), Taco Bell (1986),KFC (1986),

Wendys , Burger King

Supply to Taco Bell, KFC

& Pizza Hut

Supply Burger King & Mc

Donald

Pepsi grabbed Quiznosfrom Coke

Coke won the subwayaccount from Pepsi


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Our proposal to solve this case is to use TheCournot Model

This is an oligopoly model, proposed by theFrench economist Augustin Cournot.

The models assumes that there are two equally

positioned firms; the firms compete on thebasis of quantity rather than price and each firmmakes an output decision assuming that theother firms behavior is fixed.


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It has the following features:

There is more than one firm and all firms producea homogeneous product, i.e. there is no productdifferentiation.

Firms do not cooperate, i.e. there is no collusion.

Firms have market power, i.e. each firm's outputdecision affects the good's price.

The number of firms is fixed.

Firms compete in quantities, and choose quantities

simultaneously. The firms are economically rational and act

strategically, usually seeking to maximize profitgiven their competitors' decisions


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Since Coke and Pepsi competing in quantity ratherthan price, we can conclude that the Cournot Model isthe best solution in order to solve the issue

encountered between them.

If Coke observes Pepsi producing 30mill units of outputin the current period, then Coke will seek to maximize

its own profits assuming that Pepsi will continueproducing the same units in the next period.

So, Pepsi will act as similar manner as Coke.

This pattern continues until reaching the long-runequilibrium point where output and price are stableand neither firm can increase its profits by raising orlowering output.


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Output is greater with Cournot duopoly than

monopoly, but lower than perfect competition

Price is lower with Cournot duopoly than

monopoly, but not as low as with perfect

competition.


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END OF PRESENTATION

Final Cola Wars Continue

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