External Scanning of Coca-Cola and Pepsi Cola - Case Study Example

? Cola Wars Case Study: Cola Wars Continue: Coke and Pepsi Cola Wars Continue: Coke and Pepsi in 2006 Case Background Case facts traced the historical evolution of the so-called cola wars between Coke and Pepsi since their invention in the late 1800s and up to current times. The economics and profile of the US carbonated soft drinks (CSD) industry was initially presented, prior to delving into the evolution of the US soft drink industry, where the cola wars started and transcended through diverse time periods. With new challenges that emerged in the late 1990s, Coke and Pepsi’s struggles to adapt to the changing environment and competitive pressures were expounded to finally seek the paths available to both institutions in the CSD industry. In the 21st century, Coke and Pepsi face the new era trying to ascertain if the wars would still continue on the ‘cola’ products and ultimately discern the location of their future battlefield. External scanning of Coca-Cola and Pepsi Cola The case is designed to specifically address the following concerns: a) Why, historically, has the soft-drink industry been so profitable? A discussion of the US soft drink industry revealed that the soft drink industry was actually pioneered with the invention of Coke in 1886 and Pepsi in 1893. Both companies captured the taste of the American public in their ability to quench the thirst of their target markets through the innovatively concocted carbonated drinks. These companies’ product life cycles rationalize the profitability during their historical growth, from the introductory stage, to growth and maturity. During the introductory to growth stages, more and more people who were able to try their CSDs recognized the ability of the product to satisfy consumers’ needs: quenching thirst, building relationships, sharing moments, and socializing, among others. Case facts revealed that the historical consumption of CSD have continued to exhibit increasing trend since the 1970s when 23 gallons were consumed by the Americans annually and rose substantially to 52.3 gallons per year by 2004 (Case facts: Exhibit 1, p. 16). The increase in consumption reveals continued increase in demand for CSDs that validate and rationalize the profitability of the soft drink industry. In fact, due to the prolific demand for Coke during its introductory stage, several trademark infringements were legally tried in court attesting to the lure of high profit potentials of the CSD business. Further, expansion into other countries significantly contributed to financial success and enhanced brand awareness and recall on a global scale. Other factors that contributed to the profitability of the soft drink industry were the regular updates and design of strategies that innovate the images of both Coke and Pepsi. By designing new product alternatives, advertisements and promotional campaigns, and distribution outlets and strategies, more varieties were offered to the consumers and price off discounts enabled more people to avail of the products at cheaper prices. By offering product alternatives, such as the diet sodas, consumers were receiving benefits in terms of consuming less sugar in their sodas. In addition, the strategies of working to improve “system profitability” by concerted efforts of concentrate makers and bottlers enabled the soft drink industry to revitalize and retain financial success. Finally, when the demand for CSD reportedly reached a plateau in the US market, both Coke and Pepsi scanned international markets for their products. As emphasized in the case, “waging the cola wars in non-U.S. markets enabled Coke and Pepsi not only to expand revenue, but also to broaden their base of innovation” (Case Facts: Internationalizing the Cola Wars, p. 15). The secret to the profitability of the soft drink industry therefore lies in innovating the 4Ps in marketing: product, price, promotion and place and ensure entrenched leadership on a global scale. Further, the application of strategies in their respective advertising campaigns has contributed significantly to inculcating messages that incorporate them as part of the US culture ensuring their virtual success and competitive advantage over other soft drink companies. b) Compare the economics of the concentrate business to that of the bottling business: Why is the profitability so different? Concentrate producers are revealed to require little capital investment in terms of machinery, overhead and labor; where a typical manufacturing plant costs about $25 to $50 million to build (Case Facts: Concentrate Producers, p. 2). For the concentrate business, the most significant costs were reported to be advertisements, promotions, market research and bottle support. On the other hand, bottlers are capital intensive and involve high-speed production lines. As indicated, bottling and canning lines cost from as small as $4 million to $10 million to produce, to as high as $40 million (the bottling plant in Fort Worth, Texas) and the $75 million plant with 4 production lines and a capacity of 40 million cases (Case Facts: Bottlers, p. 3). An examination of Exhibit 4 would reveal that from the comparative costs of a concentrate producer versus that of a bottler, the cost of sales for a concentrate producer is relatively small at 17% of sales, as compared to a staggering 60% of sales for bottlers. On the same token, the gross profit for concentrate producers is 83% of sales compared to only 40% of sales for bottlers. The costs of sales for bottlers are significant in terms of components of costs of packaging, concentrate and sweeteners. Further, regular increases in concentrate prices are additional burden to bottlers. On a comparative percentage of cost components, concentrate producers spend 43% of sales on advertising and marketing; while bottlers only spend 2%. As indicated, concentrate producers took the lead in developing marketing programs, particularly in product development, market research and advertisement (Case Facts: Concentrate Producers, p. 2). Further, they “employed a large staff of people who work closely with bottlers in terms of giving support in sales efforts, setting standards and in suggesting operational improvements” (Case Facts: Concentrate Producers, p. 2). The greatest percentage of cost spent by bottlers is on selling and delivery at 25% of sales compared to only 2% for concentrate producers. Overall, the pretax profit margin for concentrate producers is still 30% of sales, while only 9% for bottlers. Using Porter’s 5 forces as comparative analysis for the two companies, the following are revealed: a. Rivalry: The market shares in U.S. soft drink industry was presented in Exhibit 2 and revealed that it is dominated by both Coke (43%) and Pepsi (32%) and the rest by other smaller companies. Changes in leadership between Coke and Pepsi have been manifested through application of different strategies using the 4Ps and venturing into international markets. b. Buyer Power: Since costs per bottle or per can are not high, prices of the products are actually dictated by bottlers and concentrate producers who determine the costs of materials and labor that go into the product. c. Supplier Power: As indicated, prices of soft drinks are determined by concentrate producers and bottlers who shoulder most of the costs of sales and develop strategies to entice consumers to buy. The cost of delivery according to geographical area contribute to higher costs (e.g., in New York City) where strategies could include shouldering marginal expenses as the expense of lower profits. Further, as shown in Exhibit 6, bottling profitability depends on the types of distribution channels where high profit potentials are exhibited by Fount and Vending Machines versus supermarkets or club stores. d. Threat of New Entrants is minimal as the soft drink industry has already been dominated by the two companies for considerable lengths of time. The established strengths and competitive advantages over smaller companies or potential entrants could not be readily admonished or easily eroded. e. Threat of Substitutes is virtually minimal. Both companies have established strong brand image and leadership that consumers either prefer one or the other (Coke or Pepsi) when asked regarding CSD as a valued beverage to be consumed. c) How has the competition between Coke and Pepsi affected the industry’s profits? The competition between Coke and Pepsi has shifted the industry’s profits in parallel movements according to the two giants’ strategies. Meaning, industry responds and reacts to the strategies implemented by either Coke or Pepsi and market shares and profits are shifted depending on which implemented an innovative scheme. For example, during the 1960s when Coke focused its strategies in the international markets, Pepsi intensified its efforts in the U.S. enabling it to double its local market share between the periods of 1950s to 1970s (Case Facts: The Cola War Begins, p. 7). Through the famous “Pepsi Challenge”, the case reported that erosion in Coke’s market shares were eminent and required reaction in terms of renegotiating terms with its bottling companies to gain flexibilities in prices of concentrates and syrups. Pricing strategies and competition ensued with respect to Pepsi’s subsequently increasing the price of concentrates in response to Coke’s initial move (Case Facts: Pepsi Challenge, p. 7). During the 1980s, the thrust in competition between Coke and Pepsi focused on introduction of new products and giving retail discounts. Other competitors in the industry were subjected to changes in ownership as their businesses were acquired by either Coke or Pepsi to increase respective market shares. In addition, Coke’s problems with bottlers required them to purchase poorly managed bottlers resulting in an increase in the company’s long term debt to $1 billion (Case Facts: Bottler Consolidation, pp. 8 – 9). This move paved the way for the creation of Coca-Cola Enterprise (CCE) of which 51% of its shares were sold to the public. Pepsi responded with the establishment of the Pepsi Bottling Group and also sold 65% of its shares to the public. This strategy shifted profits from core products to bottlers and selling shares to the public. In the 1990s a reversal of leadership emerged as Coke faltered in the implementation of marketing strategies that ensued after the death of CEO Robert Goizueta, whose helm resulted in an improvement on Coke’s share price by 3,500% (Case Facts: Reversal of Fortune, p. 10). The flourishing of Pepsi generated profits for the industry through expansion into other beverages and into diversification of their product portfolio. Therefore, net returns for Coke exhibited decreases with annual growth in net income at 4.2% between 1996 to 2004; from 18% exhibited during the periods 1990 to 1997. The industry, through Pepsi’s leadership during 2003 “recorded a return on invested capital of 29.3%, up from 9.5% in 1996; for the first time in decades, it surpassed Coke in that measure” (Case Facts: Reversal of Fortune, p. 11). The shift in profits was manifested to change from Coke to Pepsi with smaller companies in the industry fighting for what is left from their respective market shares. Further developments on noncarbonated soft drinks shifted the industry’s thrusts, which also included strategies for consolidation of bottlers in the early 21st century. The results were indicated as increased retail pricing, falling sales volume, and concentrate makers generating lesser profits. These examples illustrate the fact the industry’s profits are influenced and dictated by the outcome of the cola wars between Coke and Pepsi and among the intermediaries and affiliates that they do business with. Despite fierce and intensive competition, there is virtually minimal effect on concentrate prices and prices do not change or fluctuate drastically. The rationale for this is because of both companies’ knowledge that applying a price war would be harmful and damaging to them in the long run. As shown in Exhibit 2, Coke and Pepsi dominated the market share of the US soft drink industry exhibiting 43% (Coke) and 32% (Pepsi) in 2004, respectively. d) Can Coke and Pepsi sustain their profits in the wake of flattening demand and the growing popularity of non-CSDs? From the experience and creative abilities of Coke and Pepsi to respond to challenges in their environment, there are great possibilities that they can sustain their profits in the wake of flattening demand and in the growing popularity of non-CSDs. In fact, their venture into non-CSDs has been eminent. Their success in bottled water, for example, proves that Coke and Pepsi never cease to design innovative techniques depending on what the market demands. Further, their shift in focus from the local market to other international markets has been instrumental in generating much needed profits to sustain their growths. As indicated, the following innovative strategies have validated that these giants in the industry continue to implement appropriate moves in response to market demands: introduction of health or diet products, new approaches to packaging, use of small returnable bottles, among others. They have been experts in implementing diverse marketing strategies that focus on product development, packaging, advertising, promotions and pricing. The excitement in the soft drink industry happens because of these two giants’ ingenuity and craft in their endeavors. It is commendable to note that both Coke and Pepsi have been the market leaders in the soft drink industry, both in the U.S. and on a global scale. Their CSD products are institutions in their own field and there are no substitutes or replacements for them. There could be other product alternatives and varieties of other beverages but consumers would always seek to drink either Coke or Pepsi at some point. Sustaining profitability had been the name of the game since their inceptions more than 120 years ago. In effect, Coke and Pepsi’s breadth of experience manifest their ability to replicate the same business model to the non-CSD industry through scanning the environment to match strengths and competitive advantages to available opportunities, applying appropriate marketing mix strategies and addressing threats posed by competitors as effectively as what they had done using the same model for the CSD industry. Reference Yoffie, D.B. (2009). “Cola Wars Continue: Coke and Pepsi in 2006.” Harvard Business Review. Pages 1 – 28. Read More