Cola Wars Continue

Coke & Pepsi in 2006

Abhishek Rahman Md. Estanul Kabir C. M. Sadat Ullah Abdullah Al Jubayer Amitabh Roy

Group Members

• Coca-Cola was formulated in 1886 by pharmacist John Pemperton who sold the product at drug stores as “potion for mental and physical disorders.”

• In 1891, Asa Candler acquired the formula, established a sales force and began brand advertising of Coca-Cola.

• In 1919, went public under control of Robert Woodruff expanded and developed in national and international markets

• Successful during WWII with the high CSD consumption from the U.S soldiers

How do you Open Happiness?

• Pepsi was created in 1893 in North Carolina by Pharmacist Caleb Bradham.

• By 1910 Pepsi had built a network of 270 bottlers.

• Pepsi struggled and declared bankruptcy twice

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

• In 1938, Coke sued Pepsi-Cola brand for infringement on Coca-Cola’s trademark.

Who made the Generation Next?

So called cold wars were fought over $66 billion in *CSD industry in the USA

Both achieved average annual growth of 10% within1975 ~ Mid 90’s◦ Continues growth in the USA and worldwide

However, the war started more then a centaury ago

At the late 90’s◦ US per capita went down slightly◦ Their relationship began fray◦ Avg consumption of 52 gallons by the US people

Prelude

*CSD: Carbonated Soft Drinks

At the late 90’s◦ Both experienced ups and downs on

Coke started facing operational difficulties Pepsi became more aggressive and launched new

alternatives◦ & both started working on

Developing Brand Strategies Pricing & Bottling

Prelude

Consumption grew by an avg. of 3% annually In 1970, avg. consumption was 23 gallons Went up because of

◦ Availability of CSD◦ Introduction of diet & ◦ Flavored items

Alternatives & status of CSD◦ Beer, Milk, Coffee, Bottled water, juices, tea, powdered drinks,

wine, sports drinks, distilled spirits & tap water◦ Yet, Americans drank soda than any other beverage◦ Cola maintained its dominance although its market share ◦ Dropped from 71% in 1990 to 60% in 2004

The U.S. CSD Industry

Involved 4 major participants◦ Concentrate Producers◦ Bottlers◦ Retail Channels◦ Suppliers

Production & distribution of CSD

Concentrate Producers

◦ Blend raw material ingredients◦ Packaged the mixture in plastic canisters &◦ Shipped the containers to the bottlers

Concentrate makers often added artificial sweetener with regular CSDs

Bottlers added sugar or high fructose corn syrup themselves

Production & distribution of CSD

Concentrate manufacturing◦ Involves capital investment in Machinery & overhead◦ Cost about $ 25 million to $50 million

Good enough to serve the entire United States

Most significant cost involves◦ Advertising, Promotion, Market Research and bottler support◦ Innovative & sophisticated campaigns◦ Spend on joint marketing programs with bottlers

Also look after◦ Customer development agreement◦ Supporting the bottlers in Sales efforts, setting standards & suggesting

operational improvements◦ Negotiate with the bottlers’ supplier for reliable supply, fast delivery and

lower price Sweetener & packaging makers

Production & distribution of CSD

Coca cola and Pepsi Cola combined 74.8% of the US CSD market sales volume in 2004 followed by Cadbury and Cott Corporation

Production & distribution of CSD

Bottlers◦ Purchased concentrate, add Carbonated water

and high fructose corn syrup ( in bottled or canned)

◦ Deliver to the customer accounts◦ Responsible for

Direct Store Door Secure shelf space Staking CSD products Positioning the brands trademark label Setting POS & ensure in store displays

Production & distribution of CSD

Bottlers process was capital intensive◦ High speed production line◦ Cost $4 million to $10 million each

Invest in trucks and distribution network◦ Cost allocation

Packaging involved 40% cost Cost of sales 45% Sweeteners 5 to 10% Concentrate 5%

◦ Gross profit routinely exceeded 40%◦ Operating margin within 7% to 9%

Production & distribution of CSD

Retail Channel◦ Pepsi had focused on sales through retail outlets◦ Coke had dominated fountain sales

Restaurants, Cafeterias and other outlets using fountain type dispensers

◦ At the 80’s Pepsi entered into the restaurants by acquiring Pizza

Hut, Taco Bell, KFC Coca Cola took the same route targeting the

competitors - Burger King, Wendy’s & Burger, McDonadls, Subway

Production & distribution of CSD

Sales through Retail ChannelProduction & distribution of CSD

32.90%

23.40%

14.50%

11.80%

7.90%

9.50%

Supermarkets Fountain OutletsVending MachinesMass MerchandisersConvenience stores and Gas StationsOther Outlets

Suppliers to Concentrate producers & Bottlers

Production & distribution of CSD

56%42%

2%

Metal CansPlastic bottleGlass bottle

Growth of Pepsi at starting of 1950 and onwards

“Beat Coke” motto of Pepsi Pepsi improves distribution channel

and sales through supermarket Convenient SKUs size of Pepsi picks

up consumption Marketing Campaign named “Pepsi

Generation” for young and teenagers

Cola wars initiate…

Pepsi sells concentrate to its bottlers @ 20% lower cost of Coke

Pepsi take initiatives to modernize the Bottlers plant and store delivery service

Coke remain unchanged with 800 independent bottlers

After modernizing the bottlers of Pepsi, increase the rate of concentrate equal to coke rate by promising to take part in advertising and marketing campaign

Bottler Up gradation in 1963

Coke experiment with new cola and non cola flavors, that includesCoke- Fanta in 1960- Sprite in (1961)- Tab in 1963, low calorie colaPepsi- Teem in 1960- Mountain Dew in 1964- Diet Pepsi in 1964

Both introduced nonrefundable bottle and convenient bottle size

Product Diversification in 1960 to 1965

Coke purchased - Minute Maid : fruit juice- Duncan Foods: Coffee, Tea, chocolate etc

Pepsi merged with - Frito-Lay: snack food to form PepsiCo

Bothe diversify their business to reach same target customer, use delivery system and same marketing orientation

Coke take initiatives to expand in overseas market and become aggressive in late 1970

Product Diversification non CSD industry

Year 1966 1970 1975 1980 1985 1990 1995 2000 2004E0

5

10

15

20

25

30

35

40

45

Consumption Comparison

CokePepsi

Coke advertising message◦ “American’s preferred Taste” in 1955 and ◦ “No Wonder Coke refreshes Best” in 1960

Pepsi’s Market Survey and demonstration that Consumer Preferred Pepsi to Coke

Coke Counter part- discounting on price

Pepsi passed Coke in food store sales for first time in 1979

Recognizing Competitors

Coke switched from using sugar to high-fructose corn syrup, lower price concentration

Doubling advertising cost in 1981 to 1984 by Coke and Pepsi.

in 1982 ◦ Coke sold off Non-CSD business and introduced Diet

Coke◦ became most successful beverage in Eighties

War Heats UP….

In between 1983 to 1987 ◦ Coke again introduced 11 new products and ◦ Pepsi introduced 13

Coke- Caffeine free coke, Cherry Coke etc

Pepsi- Lemon lime slice, caffeine free Pepsi cola

Both introduced new packaging, bottle size and shape. Discounting from both parties grew the customer

Cadbury Schweppes become third largest concentrate producer and became threat to the two giants

War Heats UP….

Both Coke and Pepsi is busy to manage Bottlers

Coke started to buy poorly managed Bottlers and sell those to better performing bottlers

Coke bought two big bottlers in 1985 and owned one third coke’s volume in company owned operations and created Coca-Cola Enterprise (CCE)

Pepsi acquired few bottlers and open subsidiary by name of Pepsi Bottling Group.

Bottler Consolidation and weak cola war

CCE raised $1 billion from capital market through offering 51% its shares to public

Improved operational excellence through◦ Increasing territories size◦ Organizing purchasing arrangements◦ Downsizing its works force by 20%

Coke became as an investment bank specialized in bottler deals

Bottler Consolidation and weak cola war

New challenges faced by the CSD Industry from 90’s onwards◦ Core product demand was leveling down◦ Sales volume grew at a meager rate of 1% or less

between 1998 to 2004 in contrast to 3% to 7% during the 1980’s and early 1990’s

◦ Global CSD demand remained flat increasing only 0.26 billion during 1999 and 2003

Adapting to the Times

Challenges related to performance and execution were addressed by◦ providing alternatives beverages to the health

conscious consumers◦ Adjusting key strategic relationships◦ Cultivating international markets

Adapting to the Times

Coke’s downfall vs Pepsi’s uprise Coke

Unsuccessful execution of several initiatives◦ Failed joint ventures with

P&G and Quaker Oats (the latter was later purchased by PEPSI)

Disagreement among internal top management and radical shifts in company policies◦

Pepsi• “Grow the core and add

some more” – Pepsi CEO– Diversified portfolio of

Products – Launch of new CSDs like

Sierra Mist and Mountain Dew and expanding into other beverage categories like Getorade

– Volume growth by 3% in 2004• Proactive to consumer

demand – Pepsi distributed its

focus to DIET PEPSI to cater the increasing popularity of alternative beverages

Share of total CSD volume grew from 24.6% to 29.1% during 1997 to 2004 ◦ Primarily due to the gaining popularity of the

diet/alternative beverages◦ New products such as Coca-Cola Zero, Pepsi One

and Sierra Mist Free became popular among young fitness conscious individuals especially men

In 2004 the US market experienced:◦ 1% growth in CSD volume◦ 7.6% growth in Non-Carb volume◦ 18.8% leap in single-serve bottled-water volume

A shift in TrendPeople saying cola was “too fattening”

increased from48% to 59%

• In 2004, Non-carb/alternative drinks grew at twice the rate of other food and beverage items

Pepsi was more aggressive than Coke in adapting to this shift in trend ◦ Pepsi developed a portfolio of Non-CSD products that

outsold Cokes’s rival product in each category Getorade (Pepsi) led PowerAde (Coke) by 80.4% to 18.1% Tropicana (Pepsi) lead Minute Maid (Coke) by 26.8% to 14.8%

◦ In the overall non-carb market Pepsi had a market share of 47.3% with Coke’s share of 27%

A shift in TrendEra of the Non-Carb Drinks

After losing out on market share in the CSD category both Coke and Pepsi fared back in the $11.4 billion bottled water category

Primarily it was their distribution prowess that gave them a competitive advantage over the other companies selling Spring water.

By 2004:◦ Aquafina (Pepsico) led the market share with 13.6%

over Dasani (Coke) holding 12.1% ◦ The market leader was however Nestle waters with

42.1% market share

Winning shares Crystal Clear

Relationship with the bottlers has been critical to Pepsi’s success over Coke

Coke raised its concentrate prices leaving the bottlers a narrower profit margin in the highly price sensitive industry

Pepsi’s higher-margin-channels (especially the convenience and gas channel) gave its bottlers wider profit margins as these were high consumption venues. The increasingly 20oz PET bottle yielded margins as high as 35%, compared with the 5% and 7% margins on cans!

Bottlers UP!

THANK YOU