Cola Wars - Coke vs Pepsi

Cola Wars: Coca-Cola vs. PepsiCo By

Manu Chauhan, WMP 6029 Mukul Priyadarshi, WMP 6030 Nikhil Nangia, WMP 6031 Nilanjan Sen, WMP 6032 Nitin Saxena, WMP 6033 Nitin Verma, WMP 6034

A project report submitted in fulfillment for

Managerial Economics WMP 2010-13

Indian Institute of Management, Lucknow Noida Campus

Date: 05-09-2010

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Table of Contents Intro Int roduc ductio tion n

3

The Evolution of the Soft Drink Industry

4

Soft Drink Industry – why is it so profita profitable? ble?

5

Perfect Perf ect Subs Substitu titutes: tes: Anal Analysis ysis

6

Pricing Pric ing Deci Decision sions s

7

Cooperation Coopera tion between Coca-Cola and PepsiCo

8

Beverages: The Big Three

9

Consumption Consumptio n patterns in India

10

Current Market ...................... .............................................. .......................................... ............................ ..................... ............... .... 10 Market Share and Consumer Behavior.............................. ........................................ ..................... ............. .. 11 Rivalry in India....... ............... ................ ................ ................ ................ ................ ................ ................ ................ ............ ........ ........ .... 11 Legal and Ethical Issue in Indian Market

14

Bibliogr Bibl iograph aphy y

15







Introduction

For over a century, Coca Cola and Pepsi vied for “throat Share” of the world’s beverage market. The most intense battles of cola wars were fought over the $60-billion industry in the United States, where the average American consumed 53 gallons of carbonated soft drinks (CSD) per year. In a “carefully waged competitive struggle”, from 1975 to 1995 both Coke and Pepsi achieved average annual growth of around 10% as both U.S and worldwide consumption consistently rose. According to Roger Enrice, former CEO of Pepsi-Cola: The warfare must be perceived as a continuing battle without blood. Without Coke, Pepsi would have a tough time being an original and lively competitor. The more successful they are, the sharper we have to be. If the Coca-Cola company didn’t exist, we’d pray for someone to invent them. And on the other side of fence, I’m sure the folks at Coke would say that nothing contributes as much to the present-day success of the Coca-Cola company than….. Pepsi.

This cozy relationship was threatened in the late 1990s, however,, when US CSD consumption dropped for two consecutive years and worldwide shipment slowed for with Coke and Pepsi. In response, both firms began to modify their bottling, pricing, and brand strategies. They also looked to emerging international markets to fuel growth and broadened their brand portfolios to include non-carbonated beverages like tea, juice, mineral water and sports drinks. As the cola wars continued into the twenty-first century, the cola giants faced new challenges: could they boost flagging domestic cola sales? Where could they find new revenue streams? Was their era of sustained growth and profitability coming to a close, or was this apparent slowdown just another blip in the course of Coke’s and Pepsi’s enviable performance?







The Evolution of the Soft Drink Industry

Early History Coca-Cola was formulated in 1886 by John Pemberton, a pharmacist in Atlanta, Georgia, who sold it at drug store fountains as a “potion for mental and physical disorders.” A few years later, Asa Candler acquired the formula, established a sales force, and began brand advertising of Coca-Cola. Candler granted Coca-Cola’s first bottling franchise in 1899 for a nominal one dollar, believing that the future of the drink rested with soda fountains. But the company’s bottling network grew quickly. Robert Woodruff, who became CEO in 1923, began working with franchised bottles to make Coke available wherever and whenever a consumer might want it. He pused his sales force to place the beverage “in arm’s reach of desire”, and argued that if Coke were not conveniently available when the consumer was thirsty, the sale would be lost forever. He initiated “lifestyle” advertising for Coca-Cola, emphasizing the role of Coke in a consumer’s life. Woodruff also developed Coke’s international business. In the onset of World War II, at the request of General Eisenhower, he promised that “every man in uniform gets a bottle of CocaCola for five cents wherever he is and whatever it costs the company.” Beginning in 1942, Coke was exempted from wartime sugar rationing whenever the product was destined for the military or retailers serving soldiers. Government aids contributed to Coke’s dominant market shares in most European and Asian countries. Pepsi-Cola was invented in 1893 by a North Carolina pharmacist, Caleb Bradham. Like Coke, Pepsi adopted a franchise bottling system, and by 1910 it had built a network of 270 franchised bottlers. However, Pepsi struggled declaring bankruptcy in 1923 and again in 1932. Business began to pick up in the midst of the Great Depression, when Pepsi lowered the price for its 12-ounce bottle to a nickel, the same price Coke charged for its 6.5-ounce bottle. When Pepsi tried to expend its bottling network in late 1930s, its choices were small local bottlers striving to compete with wealthy Coke franchisees. Pepsi nevertheless began to gain market shares. Gradually, Pepsi’s U.S. sales surpassed those of Royal Crown and Dr Pepper in 1940s, trialing only Coca-Cola. In 1950, Coke’s U.S. market share was 47% and Pepsi’s was 10%. The Cola Wars Begin

In 1950, Alfred Steele, Pepsi’s new CEO, made “Beat Coke” his theme and encouraged bottlers on take-home sales through supermarkets. In 1963, Pepsi launched its “Pepsi Generation” campaign that targeted young generation, which worked well. Coca-Cola and Pepsi began to experiment with new cola and non-cola flavors and a variety of packaging options in 1960s. Coke introduced Fanta (1960), Sprite (1961), and low-







In 1974, Pepsi launched the “Pepsi Challenge” in Texas. In blind taste test hosted by Pepsi’s bottler, the company tried to demonstrate that consumers in fact preferred Pepsi to Coke. Coke countered with rebates, rival claims, retail price cuts, and a series of advertisements questioning the tests’ validity. Pepsi Challenge was quite successful and in 1979, Pepsi passed Coke in food store sales for the first time. Balancing Market Growth, Market Share, and profitability

During early 1990s, Coke and PepsiCo bottlers employed a low price strategy in supermarket channel in order to compete more effectively with high-quality, low-price store brands. Both elevated their advertising expenditure to a larger extent. Both of them set about to boost the flagging cola market in other ways, including exclusive marketing agreements with Britney Spears (Pepsi) and Harry Potter (Coke).

Soft Drink Industry – why is it so profitable?

According to the 2003 Global Soft Drinks Report from leading drinks consultancy Zenith International, Soft drinks has been world’s leading beverage sector. Global consumption of Soft drinks is rising by 5% a year, well ahead of all other beverage categories. An industry analysis through Porter’s Five Forces reveals that market forces are favorable for profitability. Defining the industry: Both concentrate producers (CP) and bottlers are profitable. These two parts of the industry are extremely interdependent, sharing costs in procurement, production, marketing and distribution. Many of their functions overlap; for instance, CPs do some bottling, and bottlers conduct many promotional activities. The industry is already vertically integrated to some extent. They also deal with similar suppliers and buyers. Entry into the industry would involve developing operations in either or both disciplines. Rivalry: Revenues are extremely concentrated in this industry, with Coke and Pepsi, together with their associated bottlers, commanding 73% of the case market in 1994. Adding in the next tier of soft drink companies, the top six controlled 89% of the market. In fact, one could characterize the soft drink market as an oligopoly, or even a duopoly between Coke and Pepsi, resulting in positive economic profits. To be sure, there was tough competition between Coke and Pepsi for market share, and this occasionally hampered profitability. For example, price wars resulted in weak brand loyalty and eroded margins for both companies in the 1980s. The Pepsi Challenge, meanwhile, affected market share without hampering per case profitability, as Pepsi was able to compete on attributes other than price. Substitutes: Through the early 1960s, soft drinks were synonymous with “colas” in the mind of consumers. Over time, however, other beverages, from bottled water to teas, became more popular, especially in the 1980s and 1990s. Coke and Pepsi responded by expanding their offerings, through alliances (e.g. Coke and Nestea), acquisitions (e.g. Coke and Minute Maid), and internal product innovation (e.g. Pepsi creating Orange Slice), capturing the value of increasingly popular substitutes internally.







Barriers to Entry: It would be nearly impossible for either a new CP or a new bottler to enter the industry. New CPs would need to overcome the tremendous marketing muscle and market presence of Coke, Pepsi, and a few others, who had established brand names that were as much as a century old.

Perfect Substitutes: Analysis

It

can be inferre inferred d from the above above article article that that Coca-Col Coca-Colaa and Pepsi are perfect substitutes and hence the pricing strate strategy gy of one dire directl ctly y impac impacts ts the the demand demand for the the other product. Hence, the indifference curve of CocaCola and Pepsi would be a straight line with equal slopes across all points on the line.

Pepsi slashed the to Rs.6, thus dema emand and same can be elasticity of its its price price from from resu result lt in an to Q2.

price of its 300ml bottles from Rs.8 anticip cipating ting an increa rease in the consu nsumption of its prod produc uctt. The depicted by plotting the price demand for Pepsi. Pepsi reduced P1(R P1(Rs.8 s.8)) to P2(R P2(Rs.6 s.6), ), whic which h would would incr increa ease se in cons consum umpt ptio ion n from from Q1

Since, Since, Coca-Co Coca-Cola la and Pepsi are perfect perfect substitutes; substitutes; an increase in cons consum umpt ptio ion n on Pepsi would result in a proportionate decrease in the consu nsumption of Coca-Cola. In order order to maintai maintain n









decided to offer Sunfill sachets priced at Rs2. for free along along with with the the 300 300ml ml bottl bottle, e, there thereby by incre increasi asing ng the Marginal Utility of its product. This would also result in an increase in the consumption of Coca-Cola. Thus, as Coca-Cola’s Coca-Cola’s Marginal Utility moved from MU1 to MU2, due to the value addition, so would the Quantity move from Q1 to Q2.

However, since Pepsi reduced the price of its 300ml bottle, it resulted in the movement of the budget line, due to which more customers will be prompted prompted to consume Pepsi instead instead of CocaCola. As depicted in the adjoining figure, since the price of Pepsi reduced, the Budget Line of Pepsi Pepsi and Coca Coca-C -Cola ola,, moved moved from from B1 to B2. B2. Th This is resul resulted ted in a furth further er incre increase ase in the consumption of Pepsi from P1 to P2. Hence, it can be concluded that the best way for CocaCola to counter this would be by reducing the price of its 300ml bottle to match it to that of Pepsi’s. This would be needed since Pepsi and Coca-Cola are perfect substitutes.

Pricing Decisions

The US CSD market is mature. The industry sales growth is largely driven by population growth as well as the amount of advertising and product innovation taking place in the industry. Given the mature nature of the market, both Pepsi and Coca Cola have resorted to pricing discrimination strategies to maximize the value of consumer demand. Direct Price Discrimination – the simplest form of extracting customer surplus is charging customers with different prices based on their location and purchasing power. This is evident in the international operations of both Pepsi and Coca Cola. Cola prices in Mexico, Brazil and Eastern Europe are lower than prices in the U.S., even though the cost of the concentrate is practically the same. Domestically, direct price discrimination is based on distribution channel segmentation. Restaurant fountain drinks, single drinks at gas stations and take-home packs at supermarkets have all different prices on a per-unit basis even though their costs adjusted for packaging and distribution would not warrant such a discrepancy. Obviously, such segmentation helps situational-based pricing differences: the most price insensitive consumers







pricing with private labels, but still they will be ineffective in ‘stealing’ Pepsi customers as long as Pepsi’s brand (and Coke’s for that sake) maintains high customer loyalty. Pepsi may enhance its price discrimination capability though creating bundle offers to restaurants and convenience stores. The Frito Lay brand, controlled by PepsiCo through Frito Lay North America, is the undisputed leader in the salty snack segment. If Pepsi bundles snacks with soft drinks as part of its pricing strategy aimed at fast food restaurants and stores it may be able to increase sales and obtain better shelf space from retailers. This may prove a very important tactic in trying to re-claim share in the fountain drink segment, a large part of which was lost after Pepsi’s exit from the restaurant business in 1997. Currently, Coca Cola holds approximately 67% share of the total fountain cola sales.

Cooperation between Coca-Cola and PepsiCo

Despite sharing a number of common interests, Pepsi and Coke appear to take little advantage of potential cooperative strategies. In fact, recent evidence suggests that both companies have actually engaged in mutually destructive behavior despite potential benefits from tacit collusion. In the following section, we have identified areas in which opportunities for cooperation exist and should be exploited for the benefit of both Pepsi and Coke. Development of Overseas Markets – Markets – Although Pepsi and Coke have avoided the temptation to run negative advertising in the U.S. where consumer penetration approaches 100%, both companies have engaged in ruthless advertising tactics abroad, where the opportunity for growth far exceed those domestically. Perhaps most confounding are Pepsi and Coke’s recent spate of vicious attack advertisements in India.

More importantly, although per-capita consumption of soft drinks in India is only six bottles per year, one-third of India’s one billion citizens are under 18, an important demographic whose consumption habits Pepsi and Coke would like to affect through compelling marketing. Coke’s director of external affairs, Rahul Dhawan, asserts that the Indian ad war between the cola giants is “dirty.” Few years ago, both companies were fined by the Indian Supreme Court for causing “environmental damage” by defacing Himalayan rocks with painted advertisements. Given the enormous size of the potential Indian soft drink market and the existing reluctance of Indian consumers to drink colas daily (Coke and Pepsi are simply too







However, Pepsi and Coke would benefit through a concerted marketing effort to encourage distribution of soft drinks in schools. Pepsi and Coke would stand to benefit from shifting their focus from competitive actions to obtain exclusive school district contracts to creating a unified marketing approach that educates consumers about their community involvement and eliminates negative misperceptions. As a result, both companies would benefit from potential widespread acceptance of soft drink distribution in schools. – Although price-fixing between Pepsi and Coke would likely lead to legal action, Pricing – there are other ways in which both companies have missed opportunities for cooperation in pricing. For example, in a 1999 Brazilian magazine interview, Coke’s chairman, Doug Ivester, mentioned the development of a vending machine which would automatically increase prices during hot weather. The story ran worldwide and generated a public outcry. Pepsi criticized Coke’s intentions as exploitative and opportunistic.

However, both companies missed an opportunity to build pricing flexibility into the distribution of carbonated beverages through vending machines – a common interest for both companies. Rather than join the chorus of contempt for Coke’s actions, Pepsi should have attempted to explain the consumer benefits of lower soda prices in cool weather. As a result, both companies could have enjoyed the economic benefits of flexible pricing.

Beverages: The Big Three •

Coca Cola......................44.50%

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Pepsi..............................31.40%

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Cadbury Schweppes.......14.40%

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Total...............................90.30%







Consumption patterns in India

In Tier 1, 2 and 3 cities in India, 29% of Indian consumers report consuming carbonated beverages/soft drinks during a fixed time of the day suggesting consumption has become a routine part of their day, with most consumption taking place during the 'afternoon to evening' time period. Not surprisingly, consumption is highest in Tier I cities such as Mumbai, Delhi, Kolkata, Chennai, Hyderabad and Bangalore. The level of consumption is seen to increase with rising household incomes (with the exception of the highest income level) while decreasing with age.







consume consumers rs refraine refrained d from spending spending on non-esse non-essentia ntiall items items in the wake wake of the economic economic downturn.

The market preference is also highly regional based. While cola drinks have main markets in metro cities and northern states of UP, Punjab, Haryana etc. Orange flavored drinks are popular in southern states. Sodas too are sold largely in southern states besides sale through bars. Weste Western rn marke markets ts have have prefe prefere rence nce towar towards ds mango mango flavo flavore red d drinks drinks.. Diet Diet coke coke prese presentl ntly y constitutes just 0.7% of the total carbonated beverage market. Market Share and Consumer Behavior

The Coca-Cola Company and PepsiCo together hold 95% market share of soft-drink sales in India. Rivalry in India

When the cola giants, Pepsi and Coke, entered the Indian market, they brought with them the cola wars that had become part of global folklore. This case study details the various battles fought in India by the two rivals with its focus on the publicity campaigns where the two sought to steal each other's fizz. The case also outlines battles fought on other fronts - conflicts with bottles, product modifications, attempts to steal the rival's employees and other mini wars. On the whole, the case attempts to provide a comprehensive perspective regarding the dimensions of the cola wars and the direction in which they are heading. "Our real competition is water, tea, nimbupani and Pepsi... in that order." - Coke sources in 1996. "When you're No 2 and you're struggling, you have to be more innovative, work better, and be more resilient. If we became No 1, we would redefine the market so we became No 2! The fact is that our competition with the Coca-Cola company is the single most important reason we've accomplished what we have. And if they were honest, they would say the same thing." - Pepsi sources in 1998. "Both companies did not really concentrate on the fundamentals of marketing like building









market share growth seemed unlikely. However, Coke and Pepsi kept rejuvenating the market through product modifications and pricing/promotion/distribution tactics. As the competition was intense, the companies had to frequently implement strategic changes in order to gain competitive advantage. The only way to do this, apart from introducing cosmetic product innovations, was to fight it out in the marketplace. This modus operandi was followed in the Indian markets as well with Coke and Pepsi resorting to more innovative tactics to generate consumer interest. In essence, the companies were trying to increase the whole market pie, as the market-shares war seemed to get nowhere. This was because both the companies came out with contradictory market share figures as per surveys conducted by their respective agencies - ORG (Coke) and IMRB (Pepsi). For instance, in August 2000, Pepsi claimed to have increased its market share for the first five months of calendar year 2000 to 49% from 47.3%, while Coke claimed to have increased its share in the market to 57%, in the same period, from 55%. Media reports claimed that the rivalry between Coke and Pepsi had ceased to generate sustained public interest, as it used to in the initial years of the cola brawls worldwide. They added that it was all just a lot of noise to hardsell a product that had no inherent merit. The Players

Coke had entered the Indian soft drinks market way back in the 1970s. The company was the market leader till 1977, when it had to exit the country following policy changes regarding MNCs operating in India. Over the next few years, a host of local brands emerged such as Campa Cola, Thumps Up, Gold Spot and Limca etc. However, with the entry of Pepsi and Coke in the 1990s, almost the entire market went under their control. Making billions from selling carbonated/colored/sweetened water for over 100 years, Coke and Pepsi had emerged as truly global brands.







Bottling was the biggest area of conflict between Pepsi and Coke. This was because, bottling operations held the key to distribution, an extremely important feature for soft-drink marketing. As the wars intensified, both companies took pains to maintain good relationships with bottlers, in order to avoid defections to the other camp...

II -Advertising When Coke re-entered India, it found Pepsi had already established itself in the soft drinks market. The global advertisement wars between the cola giants quickly spread to India as well. Internationally, Pepsi had always been seen as the more aggressive and offensive of the two, and its advertisements the world over were believed to be more popular than Coke's. It was rumored that at any given point of time, both the companies had their spies in the other camp. The advertising agencies of both the companies (Chaitra Leo Burnett for Coke and HTA for Pepsi) were also reported to have insiders in each other's offices who reported to their respective heads on a daily basis...

III -Product Launches Pepsi beat Coke in the Diet-Cola segment, as it managed to launch Diet Pepsi much before Coke could launch Diet Coke. After the Government gave clearance to the use of Aspertame and Acesulfame-K (potassium) in combination (ASK), for use in low-calorie soft drinks, Pepsi officials lost no time in rolling out Diet Pepsi at its Roha plant and sending it to retail outlets in Mumbai. IV -Poaching Pepsi and Coke fought the war on a new turf in the late 1990s. In May 1998, Pepsi filed a







• In May 1996, Coke launched Thums Up in blue cans, with four different pictures depicting 'macho sports'such as sky diving, surfing, wind-surfing and snow-boarding. Much to Pepsi's chagrin, the cans were colored blue - the color Pepsi had chosen for its identity a month earlier, in response to Coke's 'red'identity... • There were frequent complaints from both the players about their bottlers and retailers being hijacked. Pepsi's blue painted retail outlets being painted in Coke's red color overnight and vice-versa was a common phenomena in the 1990s... • Coke also turned its attention to Pepsi's stronghold - the retail outlets. Between 1996-98, Coke doubled its reach to a reported 5 lakh outlets, when Pepsi was present at only 3.5 lakh outlets. To reach out to smaller markets, interceptor units in the form of mobile vans were also launched by Coke in 1998 in Andhra Pradesh, Tamil Nadu and West Bengal. However, in its rush to beat Pepsi at the retail game, Coke seemed to have faltered on the service front. For instance, many shops in Uttar Pradesh frequently ran out of stock and there was no servicing for Coke's coolers...

Legal and Ethical Issue in Indian Market Presence of Pesticides Pesticides In 2003, the Centre for Science and Environment (CSE) findings stirred the beverage industry in India. CSE claimed to find dangerous levels of pesticides in all the 57 samples of 11 soft drinks brands collected collected by the organization from 25 different different manufacturing manufacturing units of Coca-Cola and PepsiCo spread over 12 states. The study found a cocktail cocktail of three-five three-five different different pesticides in all the samples - on an average 24 times higher than norms laid down by government-run Bureau of Indian Standard (BIS). Rajasthan, Madhya Pradesh, Chhattisgarh,







polluting polluting the water as well as the land. The Coke reiterated its commitment to trim down water usage usage and take take steps steps towards towards environm environment ent sustaina sustainabili bility ty and farmer farmer’s ’s welfare welfare.. However However,, activists retort that Coca Cola is in the business of water usage and wasting, creating a luxury product largely largely for the middle class. They are unlikely to put water concerns over profits, until they are forced to.

Bibliography

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http://en.wikipedia.org

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http://www.coca-colaindia.com

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http://pepsicoindia.co.in

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www. parleagr par leagro o.com

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http://www.euromonitor.com/Sof http://www.euro monitor.com/Soft_Drinks_in_India t_Drinks_in_India

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http://www.scribd.com/doc/17286232/Comparative http://www.scribd.com/doc/17286 232/Comparative-Study-of-So -Study-of-Soft-Drinksft-DrinksRetail-Sector-in-India http://faculty.haas.berkele http://faculty .haas.berkeley.edu/meghan/299 y.edu/meghan/299/Case_analysis_Co /Case_analysis_Coke_Pepsi2.pdf ke_Pepsi2.pdf

Cola Wars - Coke vs Pepsi

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