Cola Wars Continue: Coke and Pepsi 2006

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CASE 6: COLA WARS CONTINUE: COKE AND PEPSI 2006

The Soft Drink Industry is divided into Carbonate Soft Drinks (CDS) and non-Carbonate Soft Drinks. This Industry has been so profitable since the beginning. Concentrate Businesses and Bottlers Companies are the main parts of the Soft Drink Industry Supply Chain. Talking about the Concentrate Companies, almost 80% of the CDS share market is for Coca-Cola and Pepsi.

WHY IS THE SOFT DRINK INDUSTRY SO PROFITABLE?

• Low threat of new enters due to the high share market between Coca-Cola and Pepsi. Nationwide Franchise Bottling have special agreements with the Concentrates. They aren´t allowed to bottle similar products in the same factory. This issue helps to reduce the competence. New Bottlers are more likely to be bought or refranchise by the two big nation wide bottling companies.
• Low threat of suppliers. Both concentrate and bottling businesses need simple and cheaper raw materials. The large amount of product in this industry help them to take advantage of economies of scale.
• Low threat of substitutes. It is reduced by the expansion of products in the Soft Drink industry. There are lot of alternatives in the market but Soft Drinks are available in lots of channels which help customers to obtain these products wherever they go.
• Threat of buyers. There is “mutual interest” between Concentrate and Bottling Companies. Bottlers purchase concentrate and after bottle or can the product, they deliver it to the customers. They need each other to obtain benefits due to the link between the Concentrate product and the final retail price, determined by the Bottlers. Concentrates usually sponsor Bottlers with marketing and advertisement, helping them to increase their profits.
• Low rivalry in the Soft Drink industry. It is a duopoly industry where Coke and Pepsi have an intense rivalry. The industry is not growing rapidly so it is really difficult for new entrants to compete with the already Soft Drink Firms. Loyalty of the customers and high capital investment are other of the reasons for the low rivalry in this industry.

CONCENTRATE AND BOTTLING BUSINESSES ECONOMICS

They are the two main agents of the Soft Industry Supply Chain. The concentrate business is, on average, more attractive than bottling due to:

• There are less number of Concentrate Business than Bottles Businesses. High number of bottlers supposes more competition and less profit margins
• Bottles Companies need huge capital cost to set up an efficient plan. They have the power to decided about the advance technology of their industries. More advance technology means more competitive advantage in the Soft Drink Industry.
• Concentrate Businesses spend lot of money in advertisement and marketing to support their bottlers. It is possible due to its high profits. Distribution and Production costs in Concentrate Businesses are much less than in Bottlers Companies. This issue enables Concentrates to invest more money in marketing and advertisement.

Last years the Soft Drink industry have looked for a Vertical Distribution in its Supply Chain. Nationwide Bottling Companies reduced the number of bottlers. This reduction enables the Soft Drink Industry to create more attractive packaging to the end customer. Concentrate Businesses understood this reduction in the number of bottlers as a way to reduce new competition. Concentrate Businesses don´t allow Bottlers to produce similar product in the same factory. In exchange, Concentrate businesses support bottlers with:

• Marketing and and advertisement
• Taking charge of negotiation “Customer Development Agreements” with nationwide retailers as Walmart. They are looking for shelf space in the stores in exchange of marketing.

COMPETITION BETWEEN COCA-COLA AND PEPSI

It has just been explained why Concentrate Businesses are more profitable than Bottle Businesses, but the reality is that most companies decide to go into the Concentrate Market instead of the Bottling Market. It is due to the link between the Soft Drink industry and the importance of Coca-Cola and Pepsi War. This war has helped them to increase their profits and consequently, increase the profitability of the Soft Drink industry.

The Cola Wars has been one of the main reasons of the Soft Drink Industry Profitability. Until 1950s, Coca-Cola didn´t consider Pepsi as a real competitor. At that time, Pepsi decided to beat Coke. Pepsi increase its investments in marketing, 1974 “Pepsi Challenge” blind taste test in order to show that “Pepsi is better than Coke”. Pepsi achieved really good results, for example in 1979 Pepsi passed Coke in food store sales for first time.

The real War has just started in the 1980s. Both Coke and Pepsi increased their advertisement and marketing investments. They change their Supply Chain in the Soft Drink industry thanks to the Anchor Bottle Model which created two huge Nationwide bottling companies (Coca-Cola Enterprise in 1987 and Pepsi Bottling Group in 1999). Refranchising allowed Coke’s largest bottlers to expand outside their graphic territories.

Other of the most important issues of this rivalry are:

• In 1980, new Coke´s CEO switched sugar to a lower-price alternative. Pepsi reacted doubling its marketing efforts.
• Diet Coke introduction in 1982. This launch was so successful; it was the most popular diet soft drink in the US.

In 1990s, the Soft Drink industry encountered new Challenges. The demand for its core product seemed to have leveled off. After this time, there is another battle inside of the Cola Wars. The new environment is characterized overall by: