Cola Wars: Coca-Cola Vs

Cola Wars: Coca-Cola vs. PepsiCo By Manu Chauhan, WMP 6029 Mukul Priyadarshi, WMP 6030 Nikhil Nangia, WMP 6031 Nilanjan Sen, WMP 6032 Nitin Saxena, WMP 6033 Nitin Verma, WMP 6034 A project report submitted in fulfillment for Managerial Economics WMP 2010-13 Indian Institute of Management, Lucknow Noida Campus Date: 05-09-2010 Table of Contents Introduction 3 The Evolution of the Soft Drink Industry 4 Soft Drink Industry – why is it so profitable? 5 Perfect Substitutes: Analysis 6 Pricing Decisions 7 Cooperation between Coca-Cola and PepsiCo 8 Beverages: The Big Three 9 Consumption patterns in India 10 Current Market ......................................................................................... 10 Market Share and Consumer Behavior.............................. ....................... 11 Rivalry in India ........................................................................................... 11 Legal and Ethical Issue in Indian Market 14 Bibliography 15 Introduction For over a century, Coca Cola and Pepsi vied for “throat Share” of the world’s beverage market. The most intense battles of cola wars were fought over the $60-billion industry in the United States, where the average American consumed 53 gallons of carbonated soft drinks (CSD) per year. In a “carefully waged competitive struggle”, from 1975 to 1995 both Coke and Pepsi achieved average annual growth of around 10% as both U.S and worldwide consumption consistently rose. According to Roger Enrice, former CEO of Pepsi-Cola: The warfare must be perceived as a continuing battle without blood. Without Coke, Pepsi would have a tough time being an original and lively competitor. The more successful they are, the sharper we have to be. If the Coca-Cola company didn’t exist, we’d pray for someone to invent them. And on the other side of fence, I’m sure the folks at Coke would say that nothing contributes as much to the present-day success of the Coca-Cola company than….. Pepsi. This cozy relationship was threatened in the late 1990s, however,, when US CSD consumption dropped for two consecutive years and worldwide shipment slowed for with Coke and Pepsi. In response, both firms began to modify their bottling, pricing, and brand strategies. They also looked to emerging international markets to fuel growth and broadened their brand portfolios to include non-carbonated beverages like tea, juice, mineral water and sports drinks. As the cola wars continued into the twenty-first century, the cola giants faced new challenges: could they boost flagging domestic cola sales? Where could they find new revenue streams? Was their era of sustained growth and profitability coming to a close, or was this apparent slowdown just another blip in the course of Coke’s and Pepsi’s enviable performance? The Evolution of the Soft Drink Industry Early History Coca-Cola was formulated in 1886 by John Pemberton, a pharmacist in Atlanta, Georgia, who sold it at drug store fountains as a “potion for mental and physical disorders.” A few years later, Asa Candler acquired the formula, established a sales force, and began brand advertising of Coca-Cola. Candler granted Coca-Cola’s first bottling franchise in 1899 for a nominal one dollar, believing that the future of the drink rested with soda fountains. But the company’s bottling network grew quickly. Robert Woodruff, who became CEO in 1923, began working with franchised bottles to make Coke available wherever and whenever a consumer might want it. He pused his sales force to place the beverage “in arm’s reach of desire”, and argued that if Coke were not conveniently available when the consumer was thirsty, the sale would be lost forever. He initiated “lifestyle” advertising for Coca-Cola, emphasizing the role of Coke in a consumer’s life. Woodruff also developed Coke’s international business. In the onset of World War II, at the request of General Eisenhower, he promised that “every man in uniform gets a bottle of Coca- Cola for five cents wherever he is and whatever it costs the company.” Beginning in 1942, Coke was exempted from wartime sugar rationing whenever the product was destined for the military or retailers serving soldiers. Government aids contributed to Coke’s dominant market shares in most European and Asian countries. Pepsi-Cola was invented in 1893 by a North Carolina pharmacist, Caleb Bradham. Like Coke, Pepsi adopted a franchise bottling system, and by 1910 it had built a network of 270 franchised bottlers. However, Pepsi struggled declaring bankruptcy in 1923 and again in 1932. Business began to pick up in the midst of the Great Depression, when Pepsi lowered the price for its 12-ounce bottle to a nickel, the same price Coke charged for its 6.5-ounce bottle. When Pepsi tried to expend its bottling network in late 1930s, its choices were small local bottlers striving to compete with wealthy Coke franchisees. Pepsi nevertheless began to gain market shares. Gradually, Pepsi’s U.S. sales surpassed those of Royal Crown and Dr Pepper in 1940s, trialing only Coca-Cola. In 1950, Coke’s U.S. market share was 47% and Pepsi’s was 10%. The Cola Wars Begin In 1950, Alfred Steele, Pepsi’s new CEO, made “Beat Coke” his theme and encouraged bottlers on take-home sales through supermarkets. In 1963, Pepsi launched its “Pepsi Generation” campaign that targeted young generation, which worked well. Coca-Cola and Pepsi began to experiment with new cola and non-cola flavors and a variety of packaging options in 1960s. Coke introduced Fanta (1960), Sprite (1961), and low- calorie Tab (1963). Pepsi countered with Teem (1960), Mountain Dew (1964), and Diet Pepsi (1964). In 1974, Pepsi launched the “Pepsi Challenge” in Texas. In blind taste test hosted by Pepsi’s bottler, the company tried to demonstrate that consumers in fact preferred Pepsi to Coke. Coke countered with rebates, rival claims, retail price cuts, and a series of advertisements questioning the tests’ validity. Pepsi Challenge was quite successful and in 1979, Pepsi passed Coke in food store sales for the first time. Balancing Market Growth, Market Share, and profitability During early 1990s, Coke and PepsiCo bottlers employed a low price strategy in supermarket channel in order to compete more effectively with high-quality, low-price store brands. Both elevated their advertising expenditure to a larger extent. Both of them set about to boost the flagging cola market in other ways, including exclusive marketing agreements with Britney Spears (Pepsi) and Harry Potter (Coke). Soft Drink Industry – why is it so profitable? According to the 2003 Global Soft Drinks Report from leading drinks consultancy Zenith International, Soft drinks has been world’s leading beverage sector. Global consumption of Soft drinks is rising by 5% a year, well ahead of all other beverage categories. An industry analysis through Porter’s Five Forces reveals that market forces are favorable for profitability. Defining the industry: Both concentrate producers (CP) and bottlers are profitable. These two parts of the industry are extremely interdependent, sharing costs in procurement, production, marketing and distribution. Many of their functions overlap; for instance, CPs do some bottling, and bottlers conduct many promotional activities. The industry is already vertically integrated to some extent. They also deal with similar suppliers and buyers. Entry into the industry would involve developing operations in either or both disciplines. Rivalry: Revenues are extremely concentrated in this industry, with Coke and Pepsi, together with their associated bottlers, commanding 73% of the case market in 1994. Adding in the next tier of soft drink companies, the top six controlled 89% of the market. In fact, one could characterize the soft drink market as an oligopoly, or even a duopoly between Coke and Pepsi, resulting in positive economic profits. To be sure, there was tough competition between Coke and Pepsi for market share, and this occasionally hampered profitability. For example, price wars resulted in weak brand loyalty and eroded margins for both companies in the 1980s. The Pepsi Challenge, meanwhile, affected market share without hampering per case profitability, as Pepsi was able to compete on attributes other than price. Substitutes: Through the early 1960s, soft drinks were synonymous with “colas” in the mind of consumers. Over time, however, other beverages, from bottled water to teas, became more popular, especially in 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 substitutes internally. Power of buyers: The soft drink industry sold to consumers through five principal channels: food stores, convenience and gas, fountain, vending, and mass merchandisers. Barriers to Entry: 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. Perfect Substitutes: Analysis It It can be inferred from the above article that Coca-Colaa and Pepsi are perfect substitutes and hence the pricing strstrategy of one didirerectlctly impacts ththe demand for ththee other product. Hence, the indifference curve of Coca- Cola and Pepsi would be a straight line with equal slopes across all points on the line. Pepsi slashed the price of its 300ml bottles from Rs.8 tto RRss..66, tthhus aannttiicicippaatiting aan iinnccrereaase iin tthhee ddemaand aand ccoonsnsuummppttiion of iitts prprododucuctt. TThhee ssaamme ccaan bbe ddeeppiicctteed bby pplloottttiinng tthhee price eellaassttiicciitty oof ddeemmaanndd for Pepsi. Pepsi reduced itits prprice frfrom P1(R(Rs.8) to P2(R(Rs.6), whicich would reresusult in an inincrcreaease in coconsnsumptptioion frfrom Q1 to Q2. Since, Coca-Colala aannd PPeeppssi aarree perfect substitutes; aan iinnccrreeaasse iinn coconsnsumptptioion onon Pepsi would result in a proportionate ddeeccrreeaasse iin tthhee ccoonsnsuummppttiioon of CCooccaa--CCoollaa.

Load more