Pepsi docx

Cola Wars Continue: Coke and Pepsi in 2010

For more than a century, Coke and Pepsi vied for “throat share” of the world’s beverage market. The most intense battles in the so-called cola wars were fought over the $74 billion carbonated soft drink (CSD) industry in the United States.1 In a “carefully waged competitive struggle” that lasted from 1975 through the mid-1990s, both Coke and Pepsi achieved average annual revenue growth of around 10%, as both U.S. and worldwide CSD consumption rose steadily year after year.2 According to Roger Enrico, former CEO of Pepsi:

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 the 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.3

That relationship began to fray in the early 2000s, however, as U.S. per-capita CSD consumption started to decline. By 2009, the average American drank 46 gallons of CSDs per year, the lowest CSD consumption level since 1989.4 At the same time, the two companies experienced their own distinct ups and downs; Coke suffered several operational setbacks while Pepsi charted a new, aggressive course in alternative beverages and snack acquisitions.

As the cola wars continued into the 21st century, Coke and Pepsi faced new challenges: Could they boost flagging domestic CSD sales? How could they compete in the growing non-CSD category that demanded different bottling, pricing, and brand strategies? What had to be done to ensure sustainable growth and profitability?

Economics of the U.S. CSD Industry
Americans consumed 23 gallons of CSDs annually in 1970, and consumption grew by an average of 3% per year over the next three decades (see Exhibit 1). Fueling this growth were the increasing availability of CSDs and the introduction of diet and flavored varieties. Declining real (inflation- adjusted) prices that made CSDs more affordable played a significant role as well.5 There were many

Professor David B. Yoffie and Research Associate Michael Slind prepared the original version of this case, “Cola Wars Continue: Coke and Pepsi in 2006,” HBS No. 706-447. This version was prepared by Professor David B. Yoffie and Research Associate Renee Kim. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

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( For the exclusive use of X. Bian, 2017. )

( This document is authorized for use only by Xiaolin Bian in BPS Coursepack Fall 2017 taught by Jeremy Vogelmann, Rutgers University from September 2017 to December 2017. )

711-462 Cola Wars Continue: Coke and Pepsi in 2010

alternatives to CSDs, including beer, milk, coffee, bottled water, juices, tea, powdered drinks, wine, sports drinks, distilled spirits, and tap water. Yet Americans drank more soda than any other beverage. Within the CSD category, the cola segment maintained its dominance, although its market share dropped from 71% in 1990 to 55% in 2009.6 Non-cola CSDs included lemon/lime, citrus, pepper-type, orange, root beer, and other flavors. CSDs consisted of a flavor base (called “concentrate”), a sweetener, and carbonated water. The production and distribution of CSDs involved four major participants: concentrate producers, bottlers, retail channels, and suppliers.7

Concentrate Producers
The concentrate producer blended raw material ingredients, packaged the mixture in plastic canisters, and shipped those containers to the bottler. To make concentrate for diet CSDs, concentrate makers often added artificial sweetener; with regular CSDs, bottlers added sugar or high-fructose corn syrup themselves. The concentrate manufacturing process involved relatively little capital investment in machinery, overhead, or labor. A typical concentrate manufacturing plant, which could cover a geographic area as large as the United States, cost between $50 million to $100 million to build.8

A concentrate producer’s most significant costs were for advertising, promotion, market research, and bottler support. Using innovative and sophisticated campaigns, they invested heavily in their trademarks over time. While concentrate producers implemented and financed marketing programs jointly with bottlers, they usually took the lead in developing those programs, particularly when it came to product development, market research, and advertising. They also took charge of negotiating “customer development agreements” (CDAs) with nationwide retailers such as Wal-Mart. Under a CDA, Coke or Pepsi offered funds for marketing and other purposes in exchange for shelf space. With smaller regional accounts, bottlers assumed a key role in developing such relationships, and paid an agreed-upon percentage—typically 50% or more—of promotional and advertising costs. Concentrate producers employed a large staff of people who worked with bottlers by supporting sales efforts, setting standards, and suggesting operational improvements. They also negotiated directly with their bottlers’ major suppliers (especially sweetener and packaging makers) to achieve reliable supply, fast delivery, and low prices.9

Once a fragmented business that featured hundreds of local manufacturers, the U.S. soft drink industry had changed dramatically over time. Among national concentrate producers, Coke and Pepsi claimed a combined 72% of the U.S. CSD market’s sales volume in 2009, followed by Dr Pepper Snapple Group (DPS) and Cott Corporation (see Exhibits 2, 3a and 3b). In addition, there were private-label manufacturers and several dozen other national and regional producers.

Bottlers
Bottlers purchased concentrate, added carbonated water and high-fructose corn syrup, bottled or canned the resulting CSD product, and delivered it to customer accounts. Coke and Pepsi bottlers offered “direct store door” (DSD) delivery, an arrangement whereby route delivery salespeople managed the CSD brand in stores by securing shelf space, stacking CSD products, positioning the brand’s trademarked label, and setting up point-of-purchase or end-of-aisle displays. (Smaller national brands, such as Shasta and Faygo, distributed through food store warehouses.) Cooperative merchandising agreements, in which retailers agreed to specific promotional activity and discount levels in exchange for a payment from a bottler, were another key ingredient of soft drink sales.

The bottling process was capital-intensive and involved high-speed production lines that were interchangeable only for products of similar type and packages of similar size. Bottling and canning

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