COLA WAR CONTINUES: COKE

AND PEPSI IN 2010 (CASE

STUDY SOLUTION)

Akash Kumaran | M. Tousif Rab | P.S Anish | Saurabh Barange

(Group 4)
 Coal war continues: Coke and Pepsi in 2010
1. Why is soft drink industry so profitable?

2. Compare the economics of concentrate business with bottling business and tell why
profitability so different?

3. How the competition between coke and Pepsi affected industry profit?

4. How can Coke and Pepsi sustain this profit in wake of flattening demand and growing
interest in non- CSD

Question 1:

Soft drinks has become the world's leading beverage market according to the 2003 Global Soft
Drinks Survey from leading drinks consultancy Zenith International. Global soft drink
consumption is rising by 5 percent a year, way ahead of all other types of drinks. An overview of
an industry by

Porter’s Five Forces reveals that market forces are favorable for profitability.

 Defining the industry:

o The manufacturers of concentrate (CP) and the bottlers are both profitable. Such
two divisions of business are strongly interdependent, sharing costs in
acquisition, production , marketing and distribution. Some of their roles overlap;
for example, bottling is done by CPs, and many promotional activities are done
by bottlers. The sector is now to some degree vertically integrated. We also have
close relations with manufacturers and buyers. Entry into the industry will entail
one or both disciplines establishing operations.

 Rivalry:

o Revenues are highly concentrated in this industry, with Coke and Pepsi
controlling 73 per cent of the case market in 1994, along with their related
bottlers. The top six, leading to the next soft drink firms, dominated 89 per cent
of the market. In fact, the soft drink market could be characterized as an
oligopoly, or even a duopoly between Coke and Pepsi, resulting in positive
economic gains. Truth be sure, there was intense competition for market share
between Cokeand Pepsi and this often-impeded profitability. Pricewars, for
example, contributed in the 1980s to low brand loyalty and reduced profits for
both firms. Meanwhile, the Pepsi Challenge impacted market share without

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 hampering competitiveness per case, as Pepsi was able to compete on qualities
other than quality.

 Substitutes:

o Soft drinks became synonymous with "colas" in customers ' minds in the early
1960's. Other drinks, however, from bottled water to teas, became more popular
over time, especially during the 1980s and 1990s. Coke and Pepsi responded by
expanding their offerings through alliances (e.g. Coke and Nestea), acquisitions
(e.g. Coke and Minute Maid), and internal product innovation (e.g. Pepsi creating
Orange Slice), capturing the value of increasingly popular in-house substitutes.

 Power of buyers:

o Across five key outlets the soft drink industry marketed to consumers: grocery
shops, convenience and petrol, fountain, Vending, and mass merchandisers.

 Barriers to Entry:

o It would be nearly impossible for either a new CP or a new bottler to enter the

industry. New CPs would need to overcome the tremendous marketing muscle
and market presence of Coke, Pepsi, and a few others, who had established
brand names that were as much as a century old

Question 2:

Compared to the bottling industry Concentrate industry is extremely profitable. The reasons for
doing so are:

 Higher numbers of bottlers compared to those of concentrate producers that foster

rivalry and minimize margins in the bottling industry

 Huge capital costs to set up an efficient plant for the bottlers while the capital costs are
minimal in concentrated business

 Distribution and manufacturing costs constitute around 65% of bottler 's revenue, while
the concentrate sector accounts for about 17%.

 Most of the brand equity created within the company remains concentrated

Analyzing Porters-focusing producers:

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  New ENTRANTS – Low: It's hard for new market entrants, as they need a lot of money
and channels of distribution, and the business is dominated by previous concentrate
companies.

 SUBSTITUTES Threat – Low: The market has been dominated by two concentrates
producers (Coke and Pepsi).

 SUPPLIERS – Low bargaining power: Concentrate producers have established long-term

relationships with suppliers. The costs of moving from suppliers are low. Concentrate
producers have also had ties with more than one supplier.

 Buyer-Low bargaining power: Bottler and Fountain are two principal buyers. The
manufacturers of concentrates have mutual merchandising arrangements with the
bottlers. The number of bottlers had been declining gradually. Some of the major food
chain stores, such as Pizza hut and Kentucky Fried Chicken, were purchased by the
producers of concentrates

 Rivalry-High: Between Pepsi and Coke, two major players

PORTER analysis- Bottle

 BUYERS – High: The US CSD business Sounds burnt. The cost of switching is very small.
Coca-cola and Pepsi rivalry is serious. Yet CSD 's market price has gone up a little or has
been retained.

 ENTRANTS – Low: Profits for bottlers are small. It's hard and costly to create new
distribution networks. The number of bottlers is steadily decreasing. CSD's market
growth is small, or declining.

 SUBSTITUTES - Low: Many marketing outlets can't quickly replace bottlers. Selling soft
drinks by bottlers also retains a substantial share of the sales of Concentrates.

 SUPPLIERS - Medium producers of Concentrate got small bottlers. More than

manufacturers, bottlers have maintained partnerships. Concentrate producers have also
had ties with more than one supplier.

Question 3:

Coke and Pepsi during the 1960s and 70s focused on a strategy of differentiation and
advertising. The 1974 "Pepsi Challenge" was a prime example of this technique in which Pepsi
hosted blind taste in order to distinguish itself from Coke as a better degustation drug. In the
early 1990s, however, bottler Coke and Pepsi used low-cost tactics in the retail sector to

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compete with store brands, which had a negative effect on the bottlers' profitability. Net profit
as a percentage of bottlers' sales during this period was in the low single digits (-2.1-2.9 percent
Exhibit 4) Nevertheless Pepsi and Coke were able to maintain profitability through sustained
growth in Frito Lay and International sales. Nevertheless, the bottling firms agreed to end the
trade war in the late 1990s, which did little good to the industry by raising costs. Coke was more
successful internationally than Pepsi because of his early lead as Pepsi had failed to focus on his
international business after the world war and before the 70's. However, Pepsi sought to rectify
this error by entering emerging markets where it was not at a competitive disadvantage with
regard to Coke, as it did not make any headway on the European market.

Question 4:

 Coke and Pepsi have had enough time in the market to accumulate large amounts of
brand equity that can support them for a long time and allow them to use brand equity
as they diversify their market.

 Globalization has offered the people of the developing economies a boost to going up
the economic ladder. It opens up huge opportunities for these businesses.

 In the developing economies, per capita consumption is very small relative to the US
market so there is tremendous growth potential.

 Coke and Pepsi will diversify into non-carbonated beverages to offset the carbonated
beverages' flattening market. It will bring diversification options and a chance to expand

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