Economic growth is best achieved in a regime of free-markets, with Government running balanced budgets and restricting use of Monetary policy to control inflation

HBR CASE CORPORATE STRATEGY COLA WAR CONTINUECOKE & PEPSI

NAVEED HASAN (06743) & TAHA KHALID (06774)

Why historically has the soft drink industry so profitable?Soft Drinks industries are so profitable because of there market strategies , the cost of their products / bottlers and competition with one another.Adaptive World War II exampleReactive Competitor ChangesProactive Cultural / Localized driveBrand Extension Non Cola & non CSDs and even snack foodsLine Extension Diet & ZeroFive AspectsBarriers to entry Franchise Agreements with bottlers, backward integration, advertising Spend , Brand Image / Loyalty , Retailer Shelf SpaceSuppliers having no power over pricingBuyers Segmented pricing model Food Stores, Convenience, Fountain, Vending Substitutes Less Direct alternative, non CSD diversificationRivalry Duopoly

Compare economics of the concentrate business to that of the bottling business. Why is the profitability so different? Concentrate business (NI 32%): Concentrate producers blend raw materials, ingredients and packaging the mixture and ship it to the bottling Company. Starting and maintaining a concentrate manufacturing plant involved little capital investment in machinery, overhead, and labor. Significant costs were for advertising, promotion, market research, and bottler relations. Producers negotiated with bottlers major suppliers. Example:- One factory could serve the entire united states.

Bottlers (NI 8%): Purchased concentrate, added carbonated water, added corn syrup, bottled it, and delivered it to customer accounts. Gross Profits were high but operating margins were thin. Bottlers handled merchandising. Bottling is clearly much less profitable; most bottlers lost money in the 1990s. The keys are rivalry and suppliers power.

Compare economics of the concentrate business to that of the bottling business. Why is the profitability so different? .. contHigher number of bottlers when compared to the concentrate producers which fosters competition and reduces margins in the bottling businessHuge capital costs to set up an efficient plant for the bottlers while the capital costs in concentrate business are minimalHigh costs for distribution and production account for around 65% of sales for bottlers while in the concentrate business its around 17%Most of the brand equity created in the business remains with concentrate producers

Bottling is clearly much less profitable; most bottlers lost money in the 1990s. The keys are rivalry and suppliers power.

How has the competition between Coke (1886) and Pepsi (1893) affected the industry's profits? PENDULUM SWING: During the 1960s and 70s Coke and Pepsi concentrated on a differentiation and advertising strategy. Example: Pepsi Challenge in 1974 was a prime example of this strategy where blind taste tests were hosted by Pepsi in order to differentiate itself as a better tasting product from Coke.PRICE WAR: However during the early 1990s bottlers of Coke and Pepsi employed low priced strategies in the supermarket channel in order to compete with store brands, This had a negative effect on the profitability of the bottlers. Net profit as a percentage of sales for bottlers during this period was in the low single digits.Pepsi and Coke were however able to maintain the profitability through sustained growth in Frito Lay and International sales respectively. The bottling companies however in the late 90s decided to abandon the price war, which was not doing industry any good by raising the prices.

How can Coke and Pepsi sustain their profits in the wake of flattening demand and the growing popularity of non CSDs?

Continue expansion into emerging markets. As the buying power of consumer increases, so would the sales of these brands.Both of them should start using healthy sweeteners in order to counter the claim of aerated drinks leading to obesity and other health problems. This would not take much investment and as the trend for healthy living grows consumers will be relatively insensitive towards price.Have and market a green strategy (like environmentally friendly factories, recycle of the bottles, water cleaning systems). This will have a positive effect on customer loyalty and will help in the brand building process.Continue to churn out newer products and bring about innovation in these products. Innovation to be based on geography, occasion, target demographic group and ingredients.For retailing strategies, increase shelf space, install more and better equipments in the market and also expand availability into new outlets and channels.

How can Coke and Pepsi sustain their profits in the wake of flattening demand and the growing popularity of non CSDs?The industry structure for several decades has been kept intact with no new threats from new competition.This industry does not have a great deal of threat from disruptive forces in technology.Coke and Pepsi have been in the business long enough to accumulate great amount of brand equity which can sustain them for a long time and allow them to use the brand equity when they diversify their business more easily by leveraging the brand.Globalization has provided a boost to the people from the emerging economies to move up the economic ladder. This opens up huge opportunity for these firmsPer capita consumption in the emerging economies is very small compared to the US market so there is huge potential for growth.Coke and Pepsi can further diversify into noncarbonated drinks to counter the flattening demand in the carbonated drinks. This will provide diversification options and provide an opportunity to grow.

How can Coke and Pepsi sustain their profits in the wake of flattening demand and the growing popularity of non CSDs?Boost flagging domestic CSD sales, Through Product innovation, Aggressive marketing and promotion, Packaging innovations, By diversification.Adjust strategy to align with new climate change, consumers looking for healthier alternatives, change unhealthy stigma with marketing, target to develop nutritious CSDJVS with Restaurants and Food Outlets Focus on core products:US Market: Zero/Diet + LiteGlobal market: Leverage Original Recipe as major, and remaining product line as major

How can Coke and Pepsi sustain their profits in the wake of flattening demand and the growing popularity of non CSDs?Growing nutritious snacks product markets Sports and energy drinksRe-ignite/innovate bottled waterEngage the green consumer for non-CSDsControl of production and distributionHealthy+ convenient choices for busy lifestylesExpand non-CSD: juice, sport, energy, bottled water, Vitamin Water

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