Strategy Analysis - Coke and Pepsi - Essay Example

Strategy Analysis and Section # of This case study is about the very popular cola wars between the two CSD (carbonated soft drink) giants in the world, supposedly, Coca Cola and Pepsi. Pepsi being younger than its counterpart has been struggling to be in Coke's place since the last 60 years. The companies have struggled with lags in the CSD industry and government regulations and at times Pepsi has managed to beat Coke in a number of aspects through expanding its market from over all beverage markets and also food markets all over the world. But in the end, some way or the other, Coke manages to be one step ahead of Pepsi and due to this Pepsi paid more attention to expanding its market for further growth overseas. The two giant American companies haven't stopped although their basic cola markets have leveled off in the world and now in the current year they still stand to battle against each other. Thus, Cola wars still continue and the market can still expect some new products from the companies in the beverage market. Strategic moves made by Coke and Pepsi during the period of rivalry and the moves those were significant to achieve competitive advantage The cola wars began in the 1950's when Alfred Steele the former Coke marketing executive was made the executive at Pepsi. Steele came up with the strategy "Beat Coke" that focused on take-home sales through supermarkets. Pepsi focused on family consumption so they came up with a 26-oz bottle. Thus after the 2nd world war, Pepsi's growth took a straight shot ahead as supermarkets began to increase in the country. CEO of Pepsi Donald Kendall launched a marketing campaign "Pepsi Generation" that targeted the youth of the nation or people young at heart. This helped Pepsi to squeeze Cokes lead to a 2-to-1 margin. Pepsi also worked with its bottlers to improve plants and store facilities. Thus, Pepsi's bottlers were greater than Cokes during 1970. Plus Pepsi sold concentrate to its bottlers at a price that was 20% lower than that of Coke. In 1960's the two companies decided to experiment with new cola and non-cola brands and also new packaging ideas. Thus Coke launched Fanta, Sprite and low calorie cola Tab. Pepsi launched Teem, Mountain Dew and Diet Pepsi. The companies introduced non-returnable glass bottles simultaneously and also 12-oz metal cans that were a huge hit since they are convenient, light and trendier. The companies also plunged into the non-CSD market that included juices, coffee, tea, hot chocolate and water. The flooded the beverage market. Coke bought Minute Maid (fruit juice), Duncan foods (coffee, tea, hot chocolate) and Belmont Springs Water. Whereas, in 1965 Pepsi merged with snack-food giant Frito-Lay in order to form Pepsi Co. Coca Cola's advertising strategy focused on showing that its product is better than the competitors. Coke focused on the overseas market during this period with the assumption that the domestic market has saturated and Pepsi competed with Coke in the domestic market and managed to double its share in the United States between 1950 and 1970. In 1974 Pepsi launched the "Pepsi Challenge" in Dallas, Texas where Coke was largest selling brand. They began differentiate with Coke with blind taste tests to ensure that people liked the taste of Pepsi more than any other cola. This strategy worked and sales shot up in Dallas. Then Pepsi launched thin campaign nationwide. Coke retaliated with retail price cuts, rebates, and advertisements that questioned the blind tests validity. But Pepsi challenge managed to win Coke's market share. In 1979, Pepsi sales increased more than Coke sales for the first time through retail outlets with a 1.4 share point lead. Coke then renegotiated its franchise bottling contract in order to achieve flexibility in pricing the concentrate and syrups. Its bottlers approved the contract on a condition that was fulfilled and Coke came side by side with Pepsi in the market. Then Coke announced a price increase in concentrate and so did Pepsi with a 15% increase of its own. In 1980's the cola wars heated up when Roberto Goizueta was made CEO of Coca- Cola and Don Keough was made President. Now Coke switched from using sugar to high-fructose corn syrup which was a low priced alternative. Pepsi adopted it three later. Both the companies doubled their advertising expenditures during 1981-1984. Goizueta sold all the previously acquired non-CSD units but retained Minute Maid. Coke introduced its first extension "Diet Coke" which was a hit and became the third-largest selling CSD. In 1985, Coke announced that they have changed their 99 year old coke formula and introduced "New Coke" but Pepsi took advantage of this move to declare that their new formula was a copy of the Pepsi formula. Coke markets dropped and its loyal customers rebelled. Thus, after six months, Coke claimed that the New Coke would be treated as a new brand but their original formula would be available under the name of "Coca Cola Classic" would be treated as their flagship brand. Both companies then flooded the market with new CSD brands. Coke launched 11 new products including Caffeine free-Coke and Cherry Coke. Pepsi launched 13 products that included Lemon-Lime Slice and Caffeine-Free Pepsi Cola. By the late 1980's both companies offered more than 10 major brands and 17 new container types. Thus, the "price war" began from here and consumers got used to discounts. Coke's CEO tried to improve relations with bottlers after the renegotiated ACT that was a burden on the bottlers so the company decided to re-franchise by buying weaker bottling companies and strengthened them with capital then sold them to their own large bottlers. Thus, their bottler's businesses improved. Thus, Coke bought its two largest bottling companies and these acquisitions formed the new Coca-Cola Enterprises (CCE). This company went public and raised funds. Thus now they had control over their bottling as well. Pepsi followed suit and acquired two bottling companies and formed Pepsi Bottling Group (PBG). Pepsi changed its flagship brand to "Diet Pepsi" in 2005 and the campaign against cola drinks began since now they are considered bad for health and not nutritious. So the two companies shifted to alternatives or "non-carbs" (juice, sports drinks, energy drinks and tea-based drinks). The war began again. Coke was doing better than Pepsi in non-carbs and water since 2001. Pepsi also developed a portfolio of non-carb products (Gatorade sports drink, Lipton tea and Tropicana juice) and achieved a market share more than Coke in 2004. Coke was still doing better in bottled water in 2005 since it bought Danone's shares. According to me Pepsi gained a competitive advantage through "Pepsi Generation" since they were targeting a new segment of the market that is the youth or people young at heart. It shot their sales up compared to Coke and gave them as edge. The new cola, non-cola brands and new packaging types gave both the companies an edge turn by turn. Since the "skirt" shape bottle of Coke became a sensation. The non-returnable glass bottles and metal cans gave both an edge. The "Pepsi Challenge" was an edge for Pepsi with a new campaign of blind taste tests that gave Coke a hard time. Coke's switch to a cheaper alternative "high fructose corn syrup" gave them an edge but Pepsi adopted it three years late. Coke's "Diet Coke" gave them an edge with the health conscious segment of the market and their re-franchising strategy to form CCE gave them a competitive advantage as well. Suggestions of Strategic Options to either Coke or Pepsi to establish real competitive advantage and the chances that they would result in a winning position for either Out of these two companies Coca-Cola needs to be improved and the CEO needs to adopt new strategies to gain a competitive advantage. Isdell the CEO of Coke still believes that the demand for cola will increase in the face of the current perceptions of the public that cola is bad for health. This assumption is far fetched and a business can never depend on unrealistic assumptions. The management at Coke has been very reluctant in giving up their flagship in Cola brands because they consider it as their prestige. This has caused them problems. Currently, in the Asian and Middle East markets Pepsi is doing better because it has been faster in adopting latest trends in the market. The CEO of Coke needs to focus on non-cola brands more comparatively so that they can get an edge over Pepsi. Cola has been negatively affected by the sudden social change that is against Cola and pro-health drinks. The CEO of Coke needs to accept Pepsi as their strongest competitor and a potential replacement in the market. Plus Pepsi's non cola brands are a hit! Coke must come up with new non-cola brands that are better and different than Pepsi non-cola brands. This option will result in a winning position for Coke because Coke has a wider market share than Pepsi, its just that Coke is not making an effort to come up to the standards of Pepsi. New non-cola brands will give them a new market where they can compete with Pepsi and it has been proved that Coke has a wider market share so it can win over Pepsi. Coke has not launched new products in a while and new products that are non-cola will definitely pull customers towards Coke since Coke is a senior brand compared to Pepsi. Although, Coke has introduced non-cola brands but their production is concentrated to certain countries. Coke can expand its market share since Pepsi has been looking into new markets for growth. In Asia, Coke has concentrated units in Japan where their non-cola brands are a success but they ignored the rest of the Asian countries unlike Pepsi. This way they have given their competitor a chance to grow comparatively. They introduced health and diet products in Mexico. But Coke has focused its non returnable glass bottles of cola to reach the poor or rural areas of China and India. They have ignored other potential markets where their non-cola brands could be a hit. Pepsi has used this opportunity to their advantage and introduced non-cola brands in other areas that Coke did not focus on. Coke needs to expand its market and grow in new potential markets in the world. This option is likely to put them in a wining position because Cola brands will be new and new products create a sensation in the market. Coke is a senior brand and generally people consider Coke as a better brand because Coke and Cola are more of a generic name for black drinks in the market. Coke can make use of this factor to sell more in the market. Since this is their edge over Pepsi. Coke still sells more than Pepsi although Coke does not provide all its products in all potential markets unlike Pepsi. Coke can make good use of the opportunity by riding over Pepsi in India. Recently, Pepsi was proved to have pesticides in it and they started to advertise to create awareness against this fact. Coke can easily launch a campaign stating that they do not use pesticides and their cola is not bad for health. They can position Coke as a better substitute to Pepsi. Coke can plunge into the snack food market to compete with Pepsi on new grounds. Since Coke is a much more superior brand than Pepsi they will sell more. These strategies will result in a winning position because they are an outright effort against Pepsi to prove to the world that Coke is bigger, better and more reliable. Market Structure in the US soft drink industry and the implications for government anti-trust policy The market structure of the US soft drink industry was very much in favor cola drinks until the non-cola drink craze swept the market all over the world. But by mid-2000s all CSD companies faced a challenge of achieving pricing power in the take-home or future consumption channels. Supermarket retail prices rose and the retailers that depended on CSD sales resisted the increase to a certain extend. The growth of mass-merchandiser channel led by Wal-Mart was a new threat to CSD companies because now the retailer insisted on negotiating with chain-wide marketing and shelving arrangements. This channel shift caused great stress on CSD companies. Thus, CSD producers now focused on attracting consumers through stepped-up marketing and innovation. Coke and Pepsi started to launch new packaging types and reconfigurations of their former packages but the bottlers faced rising costs and reducing profit margins. Companies switched to alternative beverages that are non-CSD products that made production and distribution practices for CSD makers complex and complicated. Bottlers had to install new infrastructure and buy new equipments to produce the non-CSD products. For e.g. Lipton Iced tea and Gatorade required costly equipments. Thus costs for CSD makers rose and profit margins reduced immensely. CSD makers now depend on per-ounce pricing for profits. In the case of Coke and Pepsi, they had to pay for the expensive bottling equipments and plants for their bottling companies. Bottlers also purchased concentrate-like additives from the concentrate makers and paid Coke and Pepsi through per-unit royalty fees. Coke and Pepsi also had to distribute some non-carbs through food brokers and wholesalers, as a result. Non-carbs are the in-thing and they cost a lot to the CSD makers so this has affected their profitability in complex ways. The switch towards health drinks, energy drinks, sports drinks and high retail pricing has reduced profit margins for these companies. Thus volumes for these products grew faster than CSD's but profits were comparatively lesser. CSD makers have shifted attention to bottled water was well because it constitutes a high percentage of the non-carbs market. But when consumption shifted from single serve to multi pack options the prices shifted as well. Coke and Pepsi's Dasani and Aquafina, respectively began to sell at a price that was lesser than their actual cost. The water brand market is highly price sensitive and can not depend on brand loyalty to drive sales. The cola wars were internationalized when Coke and Pepsi focused on international production. But these giants suffered due to the anti trust policy and regulations by the governments of various countries. These included price controls, advertising restrictions, foreign exchange controls, lack of infrastructure in various countries, cultural differences, political instability and local competition. For e.g. in Germany, in 2003 a bottle return law made many retailers to not hold Pepsi and Coke. This disruption caused an 11% fall in sales per year for Coke. In 2003, in Colombia, a Coke executive was killed by Marxist rebels and Coke was accused of collaborating with right-wing death squads. This spoiled their sales in that market. In many Latin American countries local competition spoiled the market for larger companies. But going international came with its benefits since Pepsi and Coke got to expand their revenue and broaden their base of innovation. But the anti trust policy reduced profit margins and increased costs. Read More