Coke Vs. Pepsi

Coke and Pepsi"

Analyze the Situation

Historically, the carbonated soft drink industry in the United Stated has been profitable for various reasons. The industry's two dominant players Ð'- Coke and Pepsi Ð'- have both grown their revenues by 10% annually from 1975 to 1994. By 1998, the US beverage industry reached stability with gallons of CSD (carbonated soft drinks) consumed per capita on an annual basis floating between 54 and 52.3. Before the market reached this plateau, Coke and Pepsi were able to maintain high profitability simply because the market kept growing, which allowed for profitable sales growth. They focused their strategies closely around the 4 Ps. They placed their product everywhere, including supermarkets, convenience stores, gas stations, mass retailers, retail super-centers like Wal-Mart, club stores, drug stores, fountain outlets (which includes fast food restaurants), vending machines, and a variety of small groceries stores. Coke was the first cola drink in the word, so they were first to market with this new and novel product Ð'- Pepsi followed shortly thereafter, and the uniqueness of this cola drink relative to other beverages allowed both companies focus on developing these core brands for decades. In 1950 Coke and Pepsi had more than 50% of the US market. They began an aggressive battle to capture more and more loyal customers, with each company more specifically defining and constantly refining the essence of their brand. Each developed unique and differentiated advertising strategies. During the 60Ð'Ò's, Coke began to shift some of its attention to international markets, while Pepsi maintained its US focus, gaining some market share from Coke.

Price was another factor in both companies' historical profitability. From the 80Ð'Ò's to 2000, the average retail price for CDS products actually trended down once adjusted for inflation. These prices made their products more attractive to consumers and while each company made less profit per bottle, they sold more bottles and continued to enjoy profitable sales growth. It is important to highlight that the growth of CSDs up to 1998 was also affected by the relative lack of concern consumers had around health issues in beverages.

Even with US sales volumes flattening after 1998, industry profits were still growing. Coke grew its profit margin from 15.5% to 24.2% (1995 to 2004), and Pepsi from 16.7% to 23% in the same period. This was achieved primarily due to the economic differences between the concentrate business and the bottling business. In 2004, among national concentrate producers, Coke and Pepsi had more than the 74% of the US CSD market in sales volume. The bottler business is a network of franchises with exclusive geographic sales operations in a defined territory. The concentrate business involves far less capital investment, as a concentrate plant costs about $25 to $50 million. Compare this with a bottling plant, which run between $40 and $75 million. The bottling business involves a higher cost of sales (60%), significant