Cola Wars Continue:Coke and Pepsi in 2006

Presented by Group D

Why, historically, has the soft drinks industry been so profitable?

QUESTION 1

Porter’s Five Force Analysis

Threat Of New Entrants - Low

• Concentrate manufacturing involves little capital investment

• Bottling – capital intensive• Access to distribution is limited• High brand loyalty

Threat Of New Entrants

• Bottling Network - Have franchisee agreements with their existing

bottler’s who have rights in a certain geographic area in perpetuity.

- Backward integration with bottling companies.• Advertising Spend - Huge advertising and marketing spend required.

Around $450 million by Coke and Pepsi put together in 2004

Bargaining Power Of Suppliers -Low

Commodity Ingredients• Concentrate Producers - Caramel coloring, phosphoric or citric acid,

natural flavors and caffeine• Inputs for Bottlers- Packaging- Sweeteners

Bargaining Power Of Suppliers

• Majority of the U.S. Carbonated Soft Drinks (CSDs) were packed in metal cans (56%)

- Coke and Pepsi were among the largest customers for metal can industry

- Cans are commodity, 2-3 manufacturers competed for single contract

• Plastic Bottles represented 42% of CSD packaging - Bargaining power of plastic bottle suppliers was

low

Bargaining Power Of Buyers- Moderate

31%

15%

9%4%

4%

3%

34%

Retail Channels

Supermarkets

Convenience stores/ Gas sta-tions

Supercenters

Mass retailers

Club stores

Drug Stores

Fountain ans Vending machines

Bargaining Power Of Buyers

• Supermarkets- Several chain stores and few local supermarkets- Intense competition for shelf space - Offer premium shelf space thus command lower prices• Mass merchandiser- Extremely fragmented - Have private label CSDs • Fountain Account- Intense competition for these accounts- Sacrificed Profits to land and keep accounts

Threat Of Substitutes - Low

• Large number of substitutes were available – bottled water, beer, milk, coffee, juice etc.

• Americans drank more soda than any other beverage with cola market share 71% in 1990

• Huge advertising, brand equity, and making easy availability of product reduced the threat of substitutes

Extent Of Rivalry - High

• Concentrate Producer Industry – DUOPOLY• Rest of the competition too small to cause any

upheaval of pricing or industry structure• Strategic convergence • Head-to-Head Competition between both

Coke and Pepsi reinforced brandrecognition of each other.

Conclusion

• Americans drank more soda than any other beverage

• Head-to-Head Competition between both Coke and Pepsi reinforced brandrecognition of each other.

• Since the Threat of New Entrant, Bargaining Power of Supplier, Threat of Substitutes were all low, the soft drink industry enjoyed high profitability

Compare the economics of the concentrate business to that of the bottling business: why is the profitability so different?

QUESTION 2

Concentrate Producers

• Blend raw material ingredients, packaged the mixture and shipped those to the container bottler.

• A typical manufacturing plan costs $25 million to $ 50 million.

• Significant costs were for advertising, promotion , market research and bottler relations.

• Coca-Cola and Pepsi claimed a combined 74.8% of the US CSD market sales.

• Concentrate producers earn more profit than bottlers.

Bottlers

• Cost of sale is more in bottlers than concentrate producers.

• Added carbonated water and high-fructose corn syrup.

• Bottled or canned is the resulting CSD product.• Delivered it to customer account.• Bottling process is capital intensive.

Operating Margins for Concentrate Producers & Bottlers

Concentrate ProducersCoca Cola Pepsi

Revenue 21719 8313Operating Profit 30.72% 23.00%

BottlersCCE PBG

Revenue 18158 10906Operating Profit 7.90% 9%

Cost Structure Concentrate Producer Bottler

$ per case % of Sales $ per case % of Sales

Net sales 0.97 100 4.7 100

Cost of Sales 0.16 17 2.82 60

Gross Profit 0.81 83 1.88 40Selling and Delivery 0.02 2 1.18 25

Marketing 0.42 43 0.09 2General Administration 0.08 8 0.19 4

Pretax Profit 0.29 30 0.42 9

Price ChangePrice Change from 1988-2004

Retail Price per case 0.60%

Concentrate Price per case 3.90%

CPI 3%

•Increasing price of concentrate has put pressure on the bottlers margins

Conclusion

• Long Term Debts by Assets Ratio is as high as 40%.• Channel Shift due to Big Retailers like Wal-Mart lead

to pricing pressures• With increasing number of SKU’s ,the no of product

lines and the Labor costs of the Bottlers Increases• Non-CSG products required costly new equipment

and major process changes• Rising raw material costs

How has the competition between Coke and Pepsi affected the industry profits?

QUESTION 3

Beverage Consumption / Person

1970 1975 1981 1985 1990 1994 1996 1998 2000 2002 2003 20040%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%Tapwater/Hybrids/All Others

Distilled Spirits

Wine

Powdered Drinks

Sports Drink

Tea

Juices

Coffee

Bottled Water

Milk

Beer

CSD

Need Creation

Market Share

Impact on Industry• Overall increase in industry reach

– Strong advertising– Diversification

• New Products• New Markets

• Price Pressures (1998-2004)– Concentration Price per case up by 3.9%– CPI up by 3%– Retail Price per case up by only 0.6% !

• Consolidation : moving towards Duopoly– Combined 50.8% market share in 1966 to 74.8% market share in 2004– No price war ?

Conclusion

• Overall Industry Volume is increasing– 3090 Mn in 1970 to 10240 Mn in 2004

• Per unit profits declined due to price war• New products and markets• Innovation– Glass bottles in India : Low Cost– Vending Machines : High Margin

• Net Profit/Sales for 2 dominant players increasing continuously : Industry doing well

Can Coke and Pepsi sustain their profits in the wake of flattening demand and growing popularity of non-CSD’s?

QUESTION 4

• CSD still accounts for the largest share in total liquid consumption• Coke and Pepsi CSD accounts for 55.4% of the market share in the Non-Alcoholic Refreshment Beverage

Industry• Coke and Pepsi are in the business since 1890’s – High Brand Equity• No other dominant player due to high barriers to entry• Both figure in the “Brands Most Important to Retailers List “• Product Differentiation

CSD MILK Bottled Water

Coffee Juices Tea Sports Drink

0

10

20

30

40

50

60

Consumption(gl/capita) 1998

CSD MILK Bottled Water

Coffee Juices Tea Sports Drink

0

10

20

30

40

50

60

Consumption2004

• Globalization : International Market• International Retail Market Not consolidated as US/Europe• Provide Coke and Pepsi better pricing power• Emerging Markets in BRIC and Developing countries

Population Consump Total Growth

USA 290809 837 243407133 -1.1

CHINA 1304196 21 27388116 1.2

INDIA 1065462 8 8523696 7.5

RUSSIA 143246 70 10027220 7.7

BRAZIL 178470 312 55682640 3.1

• Innovation• Diversification• Refrain from eroding each others market share• Maintain duopoly industry landscape

2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

0.5

1

1.5

2

2.5

3

3.5

EPS

2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

5000

10000

15000

20000

25000

30000

35000

Sales

Sales and EPS of Coke has increased in last decadeSimilar trend for Pepsi

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