You are on page 1of 4

Anca Popa Maria ,B4

Coca-Cola & Pepsi


Since 1970, when Americans consumed 23 gallons of CSDs annually, consumption of CSDs
has grown by an average of three percent per year. The two main reasons for the substantial and steady
growth are the increase of CSDs and the creation of diet and flavored products. As stated in the case,
although there are alternatives to the consumption of soda, Americans have continued to drink more
soda than any other beverage. The following will be a 'five forces' analysis of the Cola industry, and to
a lesser extent, the bottler industry, through the viewpoints of the two largest players in the CSD
industry, Coca-Cola and Pepsi-Cola.
The first force is the threat of new entrants. I do not see a major risk of new entrants in the Cola
industry for Coca-Cola and Pepsi-Cola. There has been the emergence of Cadbury Schweppes as the
third leading market share in the CSD industry but they are a distant third. As mentioned in the case,
the number of U.S. soft drink bottlers has substantially decreased from more than 2,000 in 1970, when
Americans were consuming only 23 gallons of CSDs annually, to fewer than 300 in 2004, when the
industry was peaking in the United States. There are many barriers to entry for new entrants. Not only
do they have to compete with market share that Coca-Cola and Pepsi-Cola dominate, but they have
much less income to dish out for advertising and public bottling. There have already been many
imitations of Coca-Cola and Coke has fought trademark infringements in court, eliminating new
competitors by winning such cases and also patenting such products as the 6.5-oz bottle whose unique
'skirt' design became an American image, an icon.
In terms of bottling, Coca-Cola Enterprises (CCE) and Pepsi Bottling Group (PBG) have
emerged as two of the top bottling companies within their respective industry and have become the
standard for the bottler industry. As will be discussed in the following force, the threat of suppliers,
Coca-Cola Enterprises and Pepsi Bottling Group are vital to Coke and Pepsi's success as they bottle the
majority of the companys products, especially in North America. The threat of new entrants is
minimal since CCE and PBG are so large that any bottler company looking for entrance is more than
likely to be bought and taken over or refranchised.
The second force that will be discussed is the threat of suppliers: There is an immense amount
of bargaining power within the main bottling companies behind Coca-Cola and Pepsi-Cola, Coca-Cola
Enterprises for Coke and Pepsi Bottling Group for Pepsi. In 1986, Coke created their independent
bottling subsidiary, CCE, which became their largest bottler by 2004 and handled an estimated 80% of
Coke's North American bottle. CCE also has the ability to volume and has logged annual sales in
excess of 18 million dollars. The same has gone for Pepsi who imitated Coke's bottler model and
acquired three major bottlers in the late 1980s for more than three billion dollars total (MEI Bottling,
Grand Metropolitan's bottling operations, and General Cinema's bottling) and by 1999, formed Pepsi
Bottling Group (PBG). PBG became their main bottler and supplier as it produced 57% of PepsiCo
beverages in North America and 40% worldwide. The creation of both company's own independent
bottlers led to a drop in the total number of bottlers. Such bottling companies, with CCE and PBG,
became the powerhouse of the bottling companies, garnering more bargaining power. This can be
shown by the total number of Pepsi bottlers dropping from more than 400 in the mid-1980s to as low
as 102 after the creation of PBG.
The one concern with bottling companies CCE and PBG having so much market share and
power of production for Coca-Cola and Pepsi-Cola is that they may be unwilling to change their means
of production in terms of advanced technology and quicker processing which in turn may lead to
higher profitability for Coke and Pepsi. Such bottling companies also had the power to increase retail
pricing, which both did in 1999 and 2000. Both CCE and PBG raised retail pricing in supermarkets by
6% to 7% which in turn dropped consumer sales of CSDs and led to a loss in profit. More so Coke and
CCE had a, what has been considered, a 'dysfunctional' relationship while PBG's and PepsiCos
relationship has been fairly strong and essential for their success. In turn, Coke faces more of a threat
from their suppliers than Pepsi since PBG has consistently posted higher net revenue-per-case-growth
and larger profits than CCE.

Anca Popa Maria ,B4

The threat of buyers and consumer demand is the third force in the five forces analysis. The
threat of buyers is shown in my previous paragraph on threat of suppliers. Once retail prices increased,
there was a decline in consumer sales and volume which in turn led to profits to drop. The consumer
always makes their statement heard in terms of what they buy and if they are not happy with a
company's product, that company will find out when their quarterly sales reports come in and
sales/volume/profit are all down. There was a struggle to achieve pricing power, and in the
supermarket channel, retail prices rose in the mid-2000s leading a decline in store traffic and a drop in
CSD sales.
There was also the threat of consumer preference changing in the early 2000s when obesity
became a national topic. CSDs became one of the major issues and reasons for the increased number of
overweight individuals according to the New Federal Nutrition guidelines that was issued in 2005.
This led to a ban of soft drinks in schools in New York City, some in California, and other areas. In
response to such threats and years of minimal growth in CSD sales, Coca-Cola and Pepsi-Cola
responded to the buyer's demand for alternative beverages from their sugar-filled regular soft drinks.
Diet Sodas especially became a vocal point in terms of increasing sales and the public's view of the
CSD industry. In early 2005, Pepsi made Diet Pepsi their flagship brand, an indicator of the company
attempting to garner a more positive public opinion and more so an indicator of the shift within the
beverage industry.
The increased demand for diet soda is immediately shown in the figures given within the case.
In the U.S. market, diet sodas share of total CSD volume jumped from 24.6% in 1997 to 29.1% in
2004. This in turn made up for the decline in regular soft drink consumption. The response to such
figures led both companies to come out with even more diet and sugar-less drinks such as Pepsi One
and Diet Coke with Splenda. The threat of buyers was shown in this case as the consumers spoke
loudly of their need for alternative beverages by halting sales of soft drinks. Coca-Cola and Pepsi-Cola
successfully responded with alternative beverages that did not only include diet soda but also noncarbonated beverages which included juices and juice drinks, sports drinks, energy drinks, tea-based
drinks, and bottled water. As shown in the figures, in 2001, non-carbs and bottled water combined to
contribute to more than 100% of Coke's total volume growth and three-fourths of Pepsi's volume
growth, and by 2004, these products grew at double the rate of other Pepsi food and beverage products.
In terms of competition with their non-CSD products, Pepsi did indeed out-sell Coke. The 2004
volume sales of each category proved this fact: Gatorade 80.4% vs. PowerAde 18.1%; Lipton 35.2%
vs. Nestea 23.9%; Tropicana 26.8% vs. Minute Maid 14.8%. This in turn led to Pepsi having a higher
market share of 47.3% vs. Coke's 27.0%. However, in terms of bottled water, Coke beat out Pepsi with
their Coke/Dannon overall market share of 21.9% vs. Pepsi's 13.9%. However, both companies
emerged as leading beverage brands in the bottled-water category, just proving their versatility within
the industry and their successful responses to consumer needs.
The fourth force to be discussed is the threat of substitutes. Though there is some brand loyalty
in the cola industry, if the price does not fit the product, the consumer will not buy the cola product.
Although there are loyal customers to each company, many consumers of CSD products will more
often than not buy the lower priced product whether it is Coke, Pepsi, Schweppes, or store brand.
Other substitutes have been discussed in the threat of buyers and their demand for alternative
beverages. Such substitutes included diet and non-carbonated drinks, and bottled water.
The fifth and final force of the 'five forces' analysis is the threat of rivalry. The threat of new
rivalry in the CSD industry is minimal. Immediately, from the first page of the case, with the quotes by
former CEO of Pepsi, Roger Enrico, one can understand that the Cola War between Pepsi and Coke
have made both companies even stronger and more profitable than if there was just Pepsi or just Coke.
Both companies have become dominant industry leaders because of their rivalry amongst one another
that they have increased the barriers to entry for any new companies to emerge and sustain
profitability. Cadbury Schweppes did indeed make it successfully into the industry and became the
biggest competition in the 1990s for both companies but they were a distant third.
The Cola War between Coca-Cola and Pepsi-Cola also weakened small, independent bottlers.
As pointed out directly from the case, the pressures to spend more on advertising, product and
2

Anca Popa Maria ,B4

packaging increases, along with discounted prices, led to the demise of many family-owned bottlers as
they did not have the substantial amount of resources to stay competitive.
Due to Cola War between Coca-Cola and Pepsi-Cola, and their ever increasing market share
within the CSD industry, the Cola industry is not an attractive industry due to the barriers to entry
mentioned above in the threat of new entrants and threat of rivalry. Many newly-formed companies
looking for entrance within the industry will have a tough time gaining any sort of sustainable market
share from Coke and/or Pepsi and their income for research and development, advertising, bottling,
and production is much more limited than either two powerhouses.
The Pepsi-Cola initiative to close the widening gap between Coke and them started with the
"Beat Coke" motto which targeted family consumption through a 26-oz bottle. This idea helped shape
Pepsi's growth in the postwar era in supermarkets and convenience stores. In 1963, Pepsi launched its
"Pepsi Generation" marketing campaign. The target audience for this campaign was for 'the young and
young at heart.' Such a marketing campaign had a substantial impact in the Cola War as it helped slim
Coca-Cola's lead to a 2-to-1 margin. Pepsi also modernized plants of their bottlers and improved their
delivery services, proving that they were as innovative as Coke was.
Another campaign that helped Pepsi gain market share and catch-up to Coca-Cola was their
1974 "Pepsi Challenge" in Dallas, Texas. They aimed this challenge in Dallas since Coke was the
dominant brand in the city. The idea for the challenge was to take blind taste tests between Coke and
Pepsi and which one was the preferred choice. After testing, it was shown that it was in fact Pepsi, not
Coke that was the preferred taste in a dominant Coca-Cola city. This campaign was so successful in
gaining steam on Coke that Pepsi made it a nationwide campaign. With such successes, Pepsi was able
to counter any new initiatives that Coke made such as using alternatives to sugar and increased
advertising spending.
Though potential new entrants had no shot in the CSD industry, Pepsi still waged the Cola War
against Coca-Cola and had a period of great successful in closing the gap. Pepsi was able to gain
market share and catch up to Coca-Cola due to Coke's internal difficulties and execution failures,
mainly due to their reliance on a traditional CSD-oriented model. Both companies attempted to gain
high growth and profitability in a completely new area that had not been tapped before. This target
consumer audience was the increasing health-conscience consumer and the international markets that
had not been reached yet. Both companies strived to provide alternative beverages from their sugarfilled soft drinks that were blamed for obesity in America. Due to Coca-Cola's reliance on a more
traditional CSD-oriented model, Pepsi was able to expose Coke's weakness by becoming more flexible
and creating greater production differentiation. They did this by acquiring both SoBe and Quaker Oats,
maker of Gatorade after both companies were to be originally acquired by Coca-Cola.
Pepsi continued to flourish and gain market share by launching new CSDs such as Sierra Mist
in 2001 and Mountain Dew Code Red in the same year. With their acquisition of Quaker Oats, Pepsi
was able to expand into other beverage categories since, as stated above, Quaker Oats is the maker of
Gatorade. The previously mentioned acquisitions and expansion of other beverage categories led to
substantial growth in the U.S. Pepsi's North American beverage volume grew by 3% in 2004 and
gained on Coca-Cola thanks in large part due to their more diversified portfolio of products than Coke.
As shown in the figures mentioned in the case, from 1996 to 2004, Coke's annual growth in net income
was only 4.2% versus their 18% annual growth from 1990 to 1997. On the other side of the
competition, Pepsi-Cola's net income rose on average of 17.6% from 1996 to 2004 and in terms of
shareholders from 1997 to 2004 for both companies, Pepsi shareholders saw a return of +46% while
Coke shareholders saw a loss of 26%.
The five forces are changing due to the demand for new products. Both Coca-Cola and PepsiCola have focused on attracting consumers through more marketing and innovation of their products.
Coke has launched new advertising campaigns with new tag lines such as "The Coke Side of Life" and
both Coke and Pepsi have come out with packaging innovations (i.e. Fridge Packs) and different size
liter bottles. Because the CSD industry is fairly elastic, Coke and Pepsi will have to continue to be
innovative and continue with their product proliferation in order to sustain their market share without
losing any to one another.
3

Anca Popa Maria ,B4

One the demand for CSDs reached its highest level in the United States, both Coca-Cola and
Pepsi-Cola extended their brand into new abroad markets. The U.S. remained the largest consumers in
CSD products but international markets (Mexico, Brazil, Germany, China, and the United Kingdom)
were next in line in terms of largest markets. Both companies have targeted markets in Asia and
Eastern Europe as they strive to re-gain the sales volume lost in the United States. Coke has been able
garner Western Europe and much of Latin America while Pepsi has been able to grasp a stranglehold in
the Middle East and Southeast Asia. In terms of international market share, Coke has been able to
easily defeat Pepsi as 70% of Coke's sales and nearly 80% of their profits come from outside of the
U.S. while only one-third of Pepsi's beverage sales come from overseas.
The international markets have shown much promise as indicators have revealed a 12%
increase in beverage volume overall in 2004 thanks in large part to the strong performances in Asia
Pacific and Europe, Middle East, and Africa divisions. The Cola War in the international markets has
allowed Coca-Cola and Pepsi-Cola to expand their revenue and to become more innovative with new
ways of packaging, creating more products, and finding new means of selling their products.

You might also like