Cola Wars - Pepsi V Coke Analysis

Cola Wars Case Questions

Jeff Cummins, Emily Flessas, Marly Messina, Jay Morrison

1.        There are three major factors that have contributed to the historic profitability of the carbonated soft drink (CSD) industry. The first major influence is the breadth of distribution and innovative accessibility. With a variety of outlets to provide CSDs to customers, product awareness over the years has been high. Supermarkets account for nearly 33% of CSD distribution and serve as valuable outlets for consumers due to the frequency in which consumers visit these stores. Additionally, supermarket growth progressed from 10,000 stores in 1945 to over 32,000 in 1962, paralleling the growth the CSD market saw during this time. Furthermore, Coca-Cola, the CSD industry leader in the 1920s and 1930s, pioneered the grocery store coolers at the checkout line. This strategy was effective in that it increased impulse purchases by placing products conveniently in reach of consumers waiting in line to checkout. The invention of the fountain drink dispenser also served as an effective outlet for distribution. Originating from drugstore soda fountains, the dispensers grew to cover all outlets serving CSDs by the glass, including restaurants, cafeterias, and fast-food stores. The ease of use of this technological advancement had a positive impact on product distribution.
        A second factor that has influenced the historical success of this industry is lack of legislation. In 1970, Americans consumed 23 gallons of CSDs annually with few regulations on the customer side. The popularity of soft drinks continued to skyrocket over the next 30 years, with the average American consuming nearly 52 gallons of CSDs annually in 2004. This trend of high consumption took a negative turn in 2005 when federal nutrition guidelines linked carbonated soft drinks to containing the leading obesity-causing sugar in American consumers. As a result of these guidelines, schools across the nation started initiatives to ban CSDs from vending machines, and the American Beverage Association announced rules limiting the availability of soft drinks in certain schools. Since vending machines accounted for 14.5% of CSD distribution, these initiatives resulted in a significant negative impact on sales.
        The last factor is the CSD industry’s ability to cover a wide range of markets and adapt to consumer preferences. Not only have soft drinks been a lucrative commodity in America, but they have also been a successful product in the global market. In 2004, Coca-Cola products were sold at 9 million outlets in over 200 countries worldwide, accounting for nearly 52% of the global market share. Pepsi was less effective in the global market at this time, with only a 22% global market share, but nonetheless, held a meaningful presence. However, the success of the global industry did not come from product consistency, but rather the ability of firms such as Coca-Cola and Pepsi to diversify their product line and appease more consumers. In the 1960s, both companies began to differentiate their brands by trialing new flavors such as Fanta, Sprite, Mountain Dew, and diet soft drinks. This expanded consumer reach by providing similar substitutes while keeping profits within the industry. Additionally, the concept of a ‘diet’ soft drink was branded as a ‘healthier’ alternative and helped to soften the negative stigma of the obesity-breeding market. Overall, the $66 billion CSD industry has enjoyed high profitability, but will have to continue to change and adapt to remain relevant in today’s market.

2.        When looking at the economics of the concentrate business compared to that of the bottling business, there are a few factors that cause the financial results of the two to be different. When looking at the inputs, concentrate producers require only a few, including caramel coloring, phosphoric or citric acid, natural flavors, and caffeine. Due to these minimal inputs, the concentrate manufacturing process involves little capital investment, requiring $25 to $50 million to build one plant. The most substantial costs for a concentrate producer are advertising, promotion, market research, and bottler support costs. Bottlers, on the other hand, require many inputs, including various forms of packaging (cans, plastic and glass bottles), sweeteners, and the concentrate. Packaging and concentrate account for 80% to 90% of the cost of sales, sweeteners account for 5% to 10%, and labor and overhead make up the remaining costs. The bottling process is capital intensive and involves many production lines that are not always as flexible as desired. A bottling plant could cost anywhere from $40 to $75 million, with individual bottling and canning lines from $4 to $10 million each, depending on the packaging type. Both Coca-Cola and Pepsi require roughly 100 plants to provide nationwide distribution.