Cola Wars Continue: Coke and Pepsi in the Twenty-First Century - Case Study Example

2021-07-14 21:21:21
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George Washington University
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Case study
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Pepsi and Coca-cola have been in a continuous war for the market share of the Carbonated Soft drinks market for over two centuries, much with the $60-billion industry in the US. The industry was one of the most promising with an average consumption of 53 gallons of carbonated soft drinks per person every year. The years 1975-1995 were the most promising with an average annual growth of 10%. The competition between Pepsi and Coke was quite resourceful in pushing the performance of both companies forward. According to the former CEO of Pepsi-Cola, Roger Enrico, the two companies rivalry was equally resourceful in catapulting performance for both companies (Yoffie, 2004)

This season of growth, however, started dwindling in the 1990s when the consumption of carbonated soft drinks dropped for two years consecutively, and the worldwide shipments for both companies slowed. Furthermore, the twenty-first century introduced new scope of challenges including; where to find new revenue streams, the issue of flagging domestic cola sales, the era of profitability and sustained growth closing down or the slowdown was just an era passing by. The beverage giants responded with two main strategies; modifications of brand strategies, bottling and pricing and looking for emerging international markets to popularize their brand portfolios inclusive of non-carbonated beverages.

Some of the fuels of growth for the carbonated soft drinks included; introduction of diet and flavored carbonated soft drinks, and the reduction of the price of the soft drinks. The CSD (carbonated soft drink) consisted of four major participants in their production and distribution; suppliers, bottlers, concentrate producers and retail channels. The concentrated producers played several critical roles; blending raw material ingredients, shipping the blended ingredients to the bottler, addition of artificial sweetener to make diet soda concentrates, promotion, market research, advertising and maintaining bottler relations, developing programs for product planning, advertising, and market research, carrying out innovative marketing campaigns, employment of extensive sales and marketing staff who suggested operating procedures helped improve bottlers performance and setting of standards and assisted in direct negotiations with bottlers major suppliers for the encouragement of faster delivery, reliable supply, and lower prices.

The bottlers on the other hand, played the following roles; they purchased concentrate, added high fructose corn syrup and carbonated water, bottled the carbonated soft drinks and offered delivery to the customer accounts. The number of bottlers fell from over 2,000 in 1970 to less than 300 in 2000, and Coca-cola took the initiative of being the first producer of concentrate to build nation-wide bottling networks. Cadbury and Pepsi later followed suit.

Retail channels

Supermarkets were the main distributors of the carbonated soft drinks as the carbonated soft drinks were among the five largest selling products lines in the stores. They accounted for 3-4 percent food store revenues and yielding 15-20 percent gross margin. Some of the distribution channels for the carbonated soft drinks in 2000 were; Food stores (35%), fountain outlets (23%), vending machines (14%), convenience stores (9%) and other outlets are inclusive of mass merchandisers, drugs stores and warehouse clubs (20%) (Yoffie, 2004).

Suppliers to Concentrate Producers and Bottlers

The suppliers supplied inputs to concentrate producers and bottlers. The concentrate producers inputs included the following; citric/phosphoric acid, caramel coloring, caffeine and natural flavors. The inputs for bottlers included: packaging which included cans, plastic bottles, glass, sweeteners high fructose corn syrup and sugar and artificial sweetener.

Evolution of U.S Soft Drink Industry

Coca-Cola was formulated by John Pemberton in 1886 and was later acquired Asa Candler who established a sales force and began brand advertising. The formula for the soft drink is known as merchandise 7X and is a well-protected secret. The early years saw lots of battles of the coke company with imitators and counterfeits, and in 1916 alone, courts barred a total of 153 imitations of Coca-Cola. Some of the brand imitators include; Cold-Cola, Koca-Nola, and Coca-Kola. To boost the sales, Robert Woodruff worked with franchised bottlers to create availability of Coke unlimited to place and time and also developed international business.

Pepsi on the other hand was invented by pharmacists Caleb Bradham in 1893. It also adopted a franchised system of bottling. Additionally, the company also struggled in the market and was declared bankrupt both in 1923 and in 1932. To save itself, the company reduced the cost of its 12-ounce bottle to a nickel, and it started gaining market share despite competition from Coke (Zacks& Steele, 2016).

The rivalry between the two companies began in 1950 when Alfred Steele, a former Coca-Cola marketing executive became Pepsis CEO. Alfred introduced a fierce competition between the two companies making his theme in Pepsi to be, Beat Coke.' The following are some of Pepsis strategies to improve performance; encouraging bottlers to focus on take-home sales, introduction of the first 26-ounce bottles to the market to target family consumptions, introduction of Pepsi generation targeting the young, under the leadership of Donald Kendall and intense commercial using helicopters, sports cars, catchy slogans and motorcycles which closed Cokes lead to a 2-to-1 margin.

Cola wars heated up as Coke made further steps to increase the competition. Under the leadership of Robert Goizueta and Don Keough, the CEO, and president of Coca-Cola respectively, coke adopted strategies that shore up its performance. Switching from sugar to lower-priced high fructose corn syrup, intensifying marketing efforts by increasing advertising spending from $74 million to $181 million between the years 1981 and 1984 and selling off most of the noncarbonated businesses like wine, coffee industrial water treatment, and tea, while retaining Minute Maid (Yoffie, 2004). Coke faced major challenges including straining of the relationship between the company and its bottlers, but it managed it through bottler consolidation and spin-off. The soft drinks companies started to experience new and emerging problems in the late 1990s. Some of the emerging problems are inclusive of the following major ones; Financial crisis in various parts of the world and the fact that Coca-Cola faced problems resulting from leadership transitions.

The two rival companies later decided to internationalize their wars. Throughout the 1990s, new market access in India, China, and Eastern Europe stimulate the cola wars further. However, the market share in the US was way much higher than the international markets. The growth of the cola sales in the US had plateaued at the turn of the century at the turn of the century. However, more issues had started to emerge. The two companies overall growth in the sales of the soft drinks fell short of investors expectations. This further posed interesting questions about the rivalry of the companies; was the fundamentals nature of the wars changing? Would the parameters of the new rivalry include stagnant growth and profitability? The scope of competition was bound to take a different nature because of internationalization.

 

References

Yoffie, D. B. (2004). Cola wars continue: Coke and Pepsi in the twenty-first century. Harvard Business School.

Zacks, I. R., &Steele, A. (2016). Coke (KO) vs. Pepsi (PEP): The Battle of the Soda Stock. Zacks Investment Research, 2016-4.

 

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