Cola Wars Continue: Coke and Pepsi 2006 - Case Study Example

Running head: Cola Wars Continue: Coke and Pepsi 2006: A case Analysis Cola Wars Continue: Coke and Pepsi 2006: A case Analysis [Professor’s name] [Date] Introduction For many years till date, the rivalry and competition between the two cola giants Pepsi-Cola and Coca-Cola has been a topic of discussion in the beverage industry all over the world. But according to the analysts this battle, which is being fought constantly over tenure of almost twenty years, now, is still continuing though it never included blood in it. (Yoffie, 2009, p. 1) That means the two strategically sound companies enjoyed the war and they continued their operations complementing each other. None of the two giants is ever threatened by the existence of the other, but over and above, they themselves admitted that one would not have been so successful in the absence of the other. (Yoffie, 2009, p. 1) This notion quite obviously reflects the strategic decisions, which the two companies often come up with to capture the different unexplored segments of the market. However the carbonated soft drinks industry in the United States of America suddenly declined as the annual consumption of carbonated soft drinks decreased in US, and in the year 2004 it reached a constant low. (Yoffie, 2009, p. 1) The two companies definitely got affected by the downward trend of the industry, but in different ways. This particular case study analyzes the strategic management decisions that the two separate companies adopted, in the segments of bottling, pricing and brand promoting, in order to sustain their growth in the declining beverage market of United States. The focus is on the various strategic approaches adopted by the two cola companies in order to attain a desired position in the market. The strategic changes adopted by the two players in the case study ensure that the competition or the cold war between the two will continue for the years to come. Case analysis The foundation of Coca-Cola, which is the older of the two companies, dates back to the year 1886. A pharmacist named John Pemberton was the first to discover the formula for the potion and in the year of 1891, Asa Candler obtained the formula and with a specific objective started a sales force to distribute the product under the brand name of Coca-Cola. (Yoffie, 2009, p. 5) The first bottling franchise for the particular company was opened in the year 1899, and the growth rate was so substantial that within a gap of eleven years the company acquired about three hundred and seventy franchises in USA. (Yoffie, 2009, p. 5) With growth and popularity there were also direct threat to the brand image of Coca-Cola as there were an eminent number of imitators in the industry who wanted to capture some portion of the newly promoted segment of the beverage industry. During 1916 there were almost about one hundred and fifty three imitations, as result of which Coke introduced a 6.5-oz bottle, which had a “skirt” design. (Yoffie, 2009, p. 6) This can be regarded as the first attempt on the part of the company to establish its brand uniquely and they also took a patent for their design of the bottle. (Yoffie, 2009, p. 6) Though the competition was minor, the company was focused on its branding. The next landmark in the history of the firm arrived when Candler (who was the owner at that time) sold the firm to some investors in the year 1919. (Yoffie, 2009, p. 6) Since then the company became publicly listed. After four years of the company being public, Robert Woodruff became the leader and he concentrated on mass distribution of the product. (Yoffie, 2009, p. 6) That means he aimed at reaching each and every American consumers through many innovative channels of distributions and sales. It was during his tenure between 1920 to about 1930s that Coke came up with innovative ideas like open-top coolers in most of the grocery stores across the country and also developed automatic fountain dispensers and vending machines. (Yoffie, 2009, p. 6) Such strategic approaches on the part of Woodruff reflected their urge to penetrate the lives of the consumers and this increase in number of points-of-contact helped the company in two ways. Firstly, any consumer who intends to have a coke will have much more options in their disposals and can avail coke anytime anywhere. Secondly this increase in sales outlets also helped the company in penetrating the minds of the consumers more often than not. Till this point the company was busy focusing and capturing the beverage market of United States. But during the World War II, their (Coke’s) leader Woodruff played an excellent role in making an alliance with the United States Army and thus Coke by following the army established it’s base in different parts of Europe and Asia. (Yoffie, 2009, p. 6). This strategic move on the part of their leader is what made the brand international. They established around sixty-four plants overseas at that time. Following the US troop gave Coke other strategic advantages as well. Among the consumers of America they became extremely popular as they injected a patriotic image in their brand. A pharmacist, Caleb Bradham, established Pepsi-Cola, little younger among the two cola giants, in the 1893. (Yoffie, 2009, p. 6) Their strategic plans in the bottling segment somehow followed that of Coke, as they adapted a franchise bottling system and by the end of the year 1910 a network of about two hundred and seventy bottlers were established. They were running in full fledge. (Yoffie, 2009, p. 6) But the main strategic game that Pepsi played was during the Great Depression in United States. They offered 12-oz bottle to the consumers at the same price that Coke charged for its 6.5-oz bottle. (Yoffie, 2009, p. 6) This is considered to be one of the greatest strategic moves, as during that period cost was becoming the main parameter on the basis of which the American consumers chose a product over another. Though there were number of other market players in the carbonated soft drinks industry, during the 1940s Pepsi adapted concentrated marketing and operational strategic plans to become the second largest market share holder just after Coke. Since then the company continued to play a dominant role in the industry. The main strength of Coca-Cola is its distribution network and more than that, the international markets. Their brand image was supreme at one point of time that helped the company to obtain sustainable position in the market. Though the two companies entered the market at almost same point of time the market share of Coke was quite high during the 1950s. That meant Coke carried on the lead it obtain during its foundation, and this surely can be regarded as an internal strength of the company. Also the fact that Coca-cola introduced various innovative distribution channels helped it to reach millions of customers at a time. Being the first movers in the market, Coke to a great extent promoted their brand as the preferred brand of America. In the carbonated soft drinks market, Coca-Cola can be regarded as the first movers and their international focus fetched high revenue for the company during a certain period of time. Now the main internal weakness of Coca-cola is their unstable relationship with the bottlers. The contract with the bottlers and even the establishment of their own flagship-bottling unit proved to be very costly for the company. The internal and main strength of Pepsi-Cola is its diversification in product launching and operations. They (Pepsi) concentrated on focused customer segments and designed their campaigning and advertising programs aiming at those particular segments only. They concentrated on product promotion as well as quite efficiently achieved cost advantage when compared to Coca-Cola. Pepsi sold the concentrate to their main bottlers at a rate, which is twenty percent lower than that of the other competing company. (Yoffie, 2009, p. 7) The revenue, which was saved in this segment, was effectively utilized in the campaigning programs. This initiated the growth for the company. Pepsi also excelled in product innovations especially in the non-CSD market segment and also became the pioneer in the different strategic alliances. The major example of such innovative strategic alliances became evident when the company entered the fast-food restaurant business by acquiring Pizza-Hut in 1978 and Taco-bell and Kentucky Fried Chicken in 1986. (Yoffie, 2009, p. 4) Eventually they spun-off their restaurant business though the fountain pouring rights in these food chains remained with them (Pepsi). The company gave more focus and tried to establish its dominance in the United States market during the time when Coke concentrated more on its international market. That is the reason why the maim weakness of PepsiCo is its international presence when compared to Coca-Cola, for a significant period of time in the history of this competition. In this section of the report, we analyze the external industry environment and the various components involved in the industry. During the 1970s the average consumption of carbonated soft drinks in the United States of America was around twenty-three gallons. (Yoffie, 2009, p. 1) This figure increased at a rate of three percent per year over the period of next three decades. (Yoffie, 2009, p. 1) This growth in market was fueled more with the increase in the availability and options of carbonated soft drinks, backed by other varieties like diet drinks and soft drinks with other flavor varieties. This long range of products in the industry prompted most of the Americans to choose this variety of drinks over beer, mil, coffee, juices, tea wine, distilled spirits etc. If we now breakdown the carbonated soft drinks industry we will observe that the cola segment occupies the highest share, though its market dropped from about seventy one percent in 1990 to about sixty percent in the year 2004. (Yoffie, 2009, p. 2) The other segments, which are non-cola in nature, include lemon, citrus, pepper-type, orange and other different flavors. There are prominently four major participants in the production and the distribution channel of this industry. They are the concentrate producers, the bottlers, the retail channels and lastly the suppliers to these retailing channels. (Yoffie, 2009, p. 2) The job of the concentrate producers is to blend the ingredients identified as raw materials, package the mixture in plastic containers and ultimately ship them to the bottlers. (Yoffie, 2009, p. 2) This segment of production often involves a little amount of capital investment in machinery, in overhead or in the case of the labor. The typical cost of a concentrate manufacturer are about $25 million to about $50 million and one single plant has the operational capability to serve the entire nation (United States). But the main parameters, which determine the cost effectiveness of concentrate producers, are its advertising, promotion, efficiency of market research and the support from the bottler. (Yoffie, 2009, p. 2) The companies, which we are discussing about so far, are the concentrate producers. To have an in-depth knowledge about the entire industry the other elements also have to be considered. Sometimes these producers promote and advertise their product jointly with the bottlers, but always it is the concentrate producers who take the initiative of campaigning, advertising and the market research part. (Yoffie, 2009, p. 2). It is the duty of the concentrate producers to arrive at some “customer development agreement” with the retailers. The agreement between the retailer and concentrate producer is such that the later provides funds to the former in return of the marketing assistance the retailers are providing by displaying the products in their shelves of the shops. (Yoffie, 2009, p. 2) As the bottlers were only franchises the companies used these bottlers to tap the local markets (smaller regional accounts) and establish the relationship between the retailers and the company. For doing this, bottlers demanded a pre-agreed percentage of sales from these Retails outlets, which was around 50 percent. (Yoffie, 2009, p. 2). This is the reason why it is important to establish a strong relationship with the bottlers since they act as a crucial element in the distribution channels of the carbonated soft drinks. The typical relationship making strategy that the concentrate producers adopt is supporting the bottlers with the sales forces, helping them (bottlers) for setting quality standards and also suggesting operational improvements so that the entire value chain is optimized financially. (Yoffie, 2009, p. 2). Strong relationship with the suppliers is also beneficial for obtaining discounts in important ingredients like sweeteners and packaging materials. Due to the fragmented structure of the industry, the companies in order to obtain cost efficiency must concentrate on maintaining a healthy relationship with the other elements that fall in the value chain. Now after obtaining a general view of the industry and its operational parameters we will now focus on the SWOT analysis of the two companies. It has to be kept in mind that this case analysis focuses on two companies and provides a comparative study of their business and corporate level strategies. For this matter the SWOT analysis that we will be discussing is also comparative in nature. This means we will analyze the strengths and the weakness of the two companies when compared to one another. And also as these two companies together occupy most of the market share in the industry providing a comparative SWOT analysis is quite relevant. Firstly we will study the SWOT analysis of Coca-Cola, shown in the table below. Strengths Weakness 1. In the CSD segment they are the first movers 2. Innovative distribution channels 3. More coverage in the international markets. 1. Unstable relationship with the bottlers. 2. Lack in diversification and introduction of products, where they became followers to Pepsi. 3. Lack of concentrated product campaign in USA Opportunity Threats 1. Opportunity is less as the market is falling, and it is same for both of the companies. 1. Compared to Pepsi, Coke showed less susceptibility in the changing markets. Thus from the study it is revealed that in the cola segment of the carbonated soft drinks market, Coca-Cola dominated for a longer period but when it comes to the innovative strategic alliances and product range expansion they are still lagging behind Pepsi. Now we will analyze the Strengths, Weakness, Opportunity and Threat of the second company, which is Pepsi-Cola. As we are doing a comparative study Pepsi’s strengths and weaknesses would be judged by comparing the strengths and the weaknesses of Coca-Cola. The following table shows the SWOT analysis of Pepsi-Cola. Strengths Weakness 1. When compared to Coke, Pepsi is more diversified in their operation 2. Pepsi has a strong and focused marketing campaign targeting specific segments at a time. 3. Successfully maintained relationships with the bottlers and became cost leaders very quickly. 4. More abrupt in product promotion. 5. Shows more susceptibility than Coke with changing times. 1. Lacks in concentrated product promotions and market coverage when the international markets are considered. . 2. Distribution channels are not as innovative as Coke, as Pepsi still concentrates on retail sales. Opportunity Threats 1. Opportunity is less as the market is falling, and it is same for both of the companies. 1. The downward trend of the market is squeezing out profit from the company. Thus we can observe that while one company concentrates more on its network building worldwide the other focuses on brand promotion and advertisements. The aim of one of the company is to reach more customers at a time, while the other concentrates on product innovation to grasp more segments of customers. The corporate level strategy and vision of the two companies are distinctly different though it can be said in any case of innovative move by any company, the other never hesitated to follow it. That means, be it marketing channel innovation or product introduction, both the companies followed each other to match them in every segment. But there are still some uniquely different advantages like wide spread distribution channel or low price which distinguishes the corporate level strategies of the two companies. Now after differentiating the two broad level strategies of the companies we can focus on some business level strategies adopted by the two cola giants. It has been historically observed that Pepsi had focused on retail outlet sales whereas Coke concentrated more on its fountain sales. (Yoffie, 2009, p. 4) With the popularity of the concept, the competition for fountain outlets among the two giants became more intense and eventually Coke used an established restaurant chain "Burger King" for selling their product through the fountain outlets located within each franchise opening of the restaurant. (Yoffie, 2009, p. 4) According to an industry researcher, the operating margin was almost ten percent lower in the case of fountains when compared to the bottles or cans. (Yoffie, 2009, p.4) Pepsi quickly grasped this advantage, while they also focused on increasing fountain outlets. This is a major business level strategic difference between the two companies. Coke quite smartly enough designed a distribution channel where they are directly dealing with the fountain outlet retailers, removing the bottlers altogether. The reliance on the bottlers decreased and the company invested heavily on the development of the “service dispensers” which are being used to provide the fountain solutions to the customers. They also took care of the accessories like the supporting equipments, and provided the fountain customers with cups, heavy point-of-sale advertising, and other promotional materials, which were available in the store. (Yoffie, 2009, p.4) But though Coke concentrated on developing these fountain outlets they could not totally ignore the bottle sales of the products. The business level strategy where Pepsi surpassed Coke is the operational efficiency they achieved in the bottling department, thereby reducing the cost element. Till early 1970s Pepsi sold the concentrate solutions to the bottlers at a twenty percent low price. (Yoffie, 2009, p. 7) But eventually they increased the price, but assisted the bottlers in the advertising and promotional activities. During the first part of the current century both Pepsi and Coke focused on improving their “system profitability”. (Yoffie, 2009, p. 12) This means that concentrate producers and the bottlers will now share the overall profit from the sales of the beverages. To support this strategic move both the companies introduced their own flagship bottling companies the CCE and the PBG so that profit remains within the corporate itself. This was a distinct structural change that has been introduced in the two companies to compete in the market. This structural change was introduced so that the companies can focus on a low-price strategy. But it was far fetched as the bottlers were hugely in debts and with the market conditions fluctuating the companies then focused on “incidence pricing” where the price of the concentrate to the bottlers varied accordingly with the different channels and packages. (Yoffie, 2009, p. 12) This move was necessary to maintain the relationship with the bottlers especially for Coca-Cola as Pepsi’s relationship with PBG was very strong and it is a unique factor, which affected its growth in the recent era. Conclusion Though Pepsi observed some operational advantages with changing times, but in the current years the return from the soft drinks industry has fallen well short of the investors’ expectation. (Yoffie, 2009, p. 15) Thus the companies in order to survive and maintain their dominance and prestige must exploit some unexplored areas in the market. They should try and capture larger horizon and different customer segments. Though while implementing the changes, they should not dilute their brand image and value proposition. The main focus that the two companies are now having is shifting its industry base from beverages to food & beverages, which will introduce a newer battle field to fight on for Coke and Pepsi. Reference: 1. Yoffie DB. April 16, 2009. “Cola Wars Continue: Coke and Pepsi in 2006”: Harvard Business School, UK Read More