Case Study Cola Wars

COCA-COLA CASE STUDY[pic 1]

For more than a Century Coca-cola and Pepsi Cola have been in intense battles over the carbonated soft drink (CSD) industry in the World. From 1975-1990s, it was a continued battle “without blood”. Both firms achieved average annual revenue growth around 10% since CSD worldwide consumption rose steadily year after year. However, in 1990s the situation changed and their paths started to diverge. Since then, the battle has been more aggressive.

Why, historically, has the carbonated soft drink industry been so profitable?

Coca-Cola was first formulates in 1886 by a pharmacist. In 1970s CSDs consumption in America was 23 gallons per year. Annual growth over the three next decades was 3%. This increase in consumption was fueled by introduction of diet and flavored varieties as well as decline in prices. Cola segment had always the largest market share within CSD category (around 70%). During the late 1990s the soft drink industry encountered new challenges. Demand for its core products seemed to leveled off. Volume of sells seemed almost flat during past 3 years. Annual growth rates decreased 4% and worldwide annual per-capita decline. In respond to all this changes, both Pepsi and Coca-Cola had to adapt to recapture their historically high growth and profitability.

It is obvious that along the history SDI has been very profitable. Let’s see some of the factors that contribute to this:

-The materials they use for their products are really basic and cheap so suppliers can not have a big power. The products they sell allow them have economies of scale easily and thus, have lower costs.

-it is really difficult to new firms to enter the Soft drink market since both Coke and Pepsi have franchise agreements with bottles. By these agreements bottlers aren’t allow to take new brands for similar products. Also, Pepsi and Coke have been along the years buying bottling companies.

- Even though there are numerous substitutes, Cola has been strongly advertised and it is very easy to find by consumer in all different kind of places: vending machines, supermarkets, restaurants etc.

- There is no real rivalry, Coca- Cola and Pepsi have always been the only firms competing since the rest is very small. The way the have always contribute to profitability is that they both have always try to beat the other by differentiation strategies, new products introductions and advertising but never price. It has helped them lower their profits.

Compare the economics of the concentrate business to that of the bottling business.  Why is the profitability so different?

Concentrate producers:

They blend raw material ingredients, package the mixture in plastic containers and shipped them to the bottler. This process involves little capital investment ($25-$50 million to build one plant that could serve the entire US), and the rest of the costs derived from advertising, promotion, market research and bottler support.

Bottlers:

Bottlers purchase concentrate, added carbonated water and fructose syrup, bottle or can the product, and deliver to the customer. There is a big difference in the economics of the of the concentrate business to that of the bottling business. This process was capital-intensive since it involved high speed production lines that were interchangeable. Lines costs from $4-10 million each, but they could even range as high as 475 million depending on volume and package type. Bottlers also invested in trucks and distribution networks. As the number of bottles is much bigger than concentrate producers, bottles market is much more competitive and have lower profit margins.

How has the competition between Coke and Pepsi affected the industry’s profits?

Coca-Cola was first formulates in 1886 by a pharmacist. it was firs bottled in 1899 and by 1910 they had reached 370 franchisees. Pepsi, was invented in 1893. it also adopted a franchise bottling system. However, it struggled to survive during 20-30s. In 1938, Coke filed against Pepsi but court ruled in Pepsi’s favor and by that time Pepsi expanded its bottling network.

Can Coke and Pepsi sustain their profits in the wake of flattening demand and the growing popularity of non-CSD?

For more than a Century Coca-cola and Pepsi have been in intense battles over the carbonated soft drink (CSD) industry in the World. From 1975-1990s, it was a continued battle “without blood”. Both firms achieved average annual revenue growth around 10% since CSD worldwide consumption rose steadily year after year. During the late 1990s the soft drink industry encountered new challenges. Demand for its core products seemed to leveled off. Volume of sells seemed almost flat during past 3 years. Annual growth rates decreased 4% and worldwide annual per-capita decline. In respond to all this changes, both Pepsi and Coca-Cola had to adapt to recapture their historically high growth and profitability. Now the situation is the following: demand is flattening and there is an increase in popularity of non CSD products. However, there are many reasons for Coke and Pepsi to sustain their profits:

• They are worldwide known and haven’t have any real competition for more than Century.
• They have diversified their business into non-CDS products so this will give them room to grow.
• They have been competing in the market for a really long time so they have enough money to continue diversifying and investing in other sort of products.
• They can still improve their processes and reduce costs and get higher profits per sale.
• Emerging countries are a really good opportunity for Coke and Pepsi since even though they are already known there, there isn’t as much consumption as in Europe or Us.

From 1970-2004, number of soft drink bottlers have fallen because companies have built a nationwide franchised bottling network.

Retail Channels:

In 2004, the main distribution channel of soft drinks was the supermarket (32,9%), followed by fountain outlets, vending machines and mass merchandise. Sales reached $12,4 billions, and CSDs accounted for 5,5% of edigible grocery.

Suppliers to concentrate producers and bottlers

Both producers and concentrate producers negotiated with them.

EVOLUTION OF THE US SOFTDRINK INDUSTRY