Cola War Case

Cola War Case

introduction

During the 1980s, Coca-Cola and Pepsi-Cola began an escalating campaign of

mutually - targeted television advertisements which became known as the Cola

Wars. This summary is based on the findings with respect to the following key

aspects: Carbonated soft drinks industry’s structure, evaluation of driving change factors in this industry and finally analysis of key strategic factors it is faced with.

Value Chain Analysis

Analysis of the carbonated soft drink (CSD) industry shows that there are 2 important players i.e. Concentrate Producers and Bottlers. Focusing on the downstream of the supply chain it is to be pointed out that concentrate producers incure relatively low fixed costs with respect to production plant, staff, equipment and R&D as the concentrate is produced of a more than 100 years old formula and relatively cheap raw material (e.g. caffeine). Concentrate is shipped to bottlers which incure relatively high fixed cost with respect to plant, equipment and staff and which add carbonated water and high fructose corn syrup to the concentrate, bottle or can, package and ship it to the respective retailer. Besides that CDS hold a big stake in the direct delivery of concentrate to diverse fountain accounts like McDonalds, Burger King etc.

Taking this cost intensive bottling business into consideration both Coca Cola and Pepsi founded their own bottler spin-offs which operate according to the so called Anchor Bottler Model or are linked to the respective CSD company via Master Bottler Contracts.

In both cases companies under this contract are not allowed to handle a direct competitive brand e.g. no possibility to bottle Pepsi and Cola at the same time. In 2000 Cokes bottling system was the most concentrated with its top 10 bottlers producing 94% of domestic volume followed by Pepsi with 85% and Schweppes with 71% of their respective franchisees. Focusing on the upstream of the supply chain it is to be said that bottlers have to contribute to CSD companies cost on Marketing but on the other hand have the right to refuse to contribute in promotion acitivities i.e. test marketing requested. Bottlers also play an important role in negotiating cooperative merchandising agreements with retailers i.e. retailers agreeing to specified promitional activity and discount levels in exchange for a payment from the bottler i.e. bottlers have a final say in decisions concerning retail pricing, new packaging, selling ads etc. In 2000 the distribution of CSDs in the US took place through food stores (35%), fountain outlets (23%), vending machines (14%), convenience stores (9%) and other outlets (20%). Tranditionally bottlers fight for retail shelf space to ensure visbility and accessibility for their products whereas the proliferation of products and packaging types creates intense shelf space pressures.

Competitive nature of the CSD industry

Until the early 1950s Coca-Cola was the indusputed number one in the CSD business acting as a monopolist. Today the CSD industry is composed of 3 big players i.e. Coca-Cola, Pepsi-Cola and Schweppes and some low-price store brands. As a consequence one sees a consolidated industry dominated by a few multi-national corporations each of which struggling to differentiate its products from the competition. Strategically speaking those firms are so called analysers which operate at least in 2 different product market areas one stable and one variable e.g. Coke and Diet Coke.

Summarising on the supply chain and competitive nature of this industry it can be concluded that profitability mainly arises due to short supply chain, low material cost, low fixed cost, efficient supplier/distributor network and high entry barrier for new competitors.

Driving change factors

One way to analyse and identify external factors which have an impact on the CSD industry is the so called Issues Priority Matrix. The main environmental variables to focus on are the task environment and the societal factors. Among the task environment 2 main factors have to be taken into consideration i.e. Rivalry among existing firms and new products. Rivalry between Coca-Cola and Pepsi-Cola daily shows by watching the respective advertisements on television e.g. “Always Coca Cola” or “Pepsi Challenge”. The impact on the corporation is high as one competitive move by the company produces a immediate reaction by its competitor e.g. Pepsi-Cola broke Coke’s stronghold at Disney and Coke won over Pepsi to supply the 10,000-store chain of Burger King Corporations. In this framework the launch of new products is a second essential factor which influences the CSD industry. It seems to be that every