Cola War Case
Length: 1270 words (3.6 double-spaced pages)
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During the 1980s, Coca-Cola and Pepsi-Cola began an escalating campaign of
mutually - targeted television advertisements which became known as the Cola
Wars. This summary is based on the findings with respect to the following key
aspects: Carbonated soft drinks industry's structure, evaluation of driving change factors in this industry and finally analysis of key strategic factors it is faced with.
Value Chain Analysis
Analysis of the carbonated soft drink (CSD) industry shows that there are 2 important players i.e. Concentrate Producers and Bottlers. Focusing on the downstream of the supply chain it is to be pointed out that concentrate producers incure relatively low fixed costs with respect to production plant, staff, equipment and R&D as the concentrate is produced of a more than 100 years old formula and relatively cheap raw material (e.g. caffeine). Concentrate is shipped to bottlers which incure relatively high fixed cost with respect to plant, equipment and staff and which add carbonated water and high fructose corn syrup to the concentrate, bottle or can, package and ship it to the respective retailer. Besides that CDS hold a big stake in the direct delivery of concentrate to diverse fountain accounts like McDonalds, Burger King etc.
Taking this cost intensive bottling business into consideration both Coca Cola and Pepsi founded their own bottler spin-offs which operate according to the so called Anchor Bottler Model or are linked to the respective CSD company via Master Bottler Contracts.
In both cases companies under this contract are not allowed to handle a direct competitive brand e.g. no possibility to bottle Pepsi and Cola at the same time. In 2000 Cokes bottling system was the most concentrated with its top 10 bottlers producing 94% of domestic volume followed by Pepsi with 85% and Schweppes with 71% of their respective franchisees. Focusing on the upstream of the supply chain it is to be said that bottlers have to contribute to CSD companies cost on Marketing but on the other hand have the right to refuse to contribute in promotion acitivities i.e. test marketing requested. Bottlers also play an important role in negotiating cooperative merchandising agreements with retailers i.e. retailers agreeing to specified promitional activity and discount levels in exchange for a payment from the bottler i.e. bottlers have a final say in decisions concerning retail pricing, new packaging, selling ads etc. In 2000 the distribution of CSDs in the US took place through food stores (35%), fountain outlets (23%), vending machines (14%), convenience stores (9%) and other outlets (20%).
Tranditionally bottlers fight for retail shelf space to ensure visbility and accessibility for their products whereas the proliferation of products and packaging types creates intense shelf space pressures.
Competitive nature of the CSD industry
Until the early 1950s Coca-Cola was the indusputed number one in the CSD business acting as a monopolist. Today the CSD industry is composed of 3 big players i.e. Coca-Cola, Pepsi-Cola and Schweppes and some low-price store brands. As a consequence one sees a consolidated industry dominated by a few multi-national corporations each of which struggling to differentiate its products from the competition. Strategically speaking those firms are so called analysers which operate at least in 2 different product market areas one stable and one variable e.g. Coke and Diet Coke.
Summarising on the supply chain and competitive nature of this industry it can be concluded that profitability mainly arises due to short supply chain, low material cost, low fixed cost, efficient supplier/distributor network and high entry barrier for new competitors.
Driving change factors
One way to analyse and identify external factors which have an impact on the CSD industry is the so called Issues Priority Matrix. The main environmental variables to focus on are the task environment and the societal factors. Among the task environment 2 main factors have to be taken into consideration i.e. Rivalry among existing firms and new products. Rivalry between Coca-Cola and Pepsi-Cola daily shows by watching the respective advertisements on television e.g. "Always Coca Cola" or "Pepsi Challenge". The impact on the corporation is high as one competitive move by the company produces a immediate reaction by its competitor e.g. Pepsi-Cola broke Coke's stronghold at Disney and Coke won over Pepsi to supply the 10,000-store chain of Burger King Corporations. In this framework the launch of new products is a second essential factor which influences the CSD industry. It seems to be that every time domestic cola demand appears to plateau alternative beverages can provide a growth engine for the firms e.g. Pepsi Cola's introduction of Pepsi One in the late 1998 was respnsible for minor recovery of the diet drink segment. So the launch of a new derivative is medium in occurrence but has a high impact on the corporation. With respect to the societal factors one seems to be especially important i.e. Change in consumer behaviour respectively lifestyle. As consumer trends shifted from diet soda to lemon lime to tea-based drinks, to other popular non-carbs, CSD firms vigorously started to expand their brand portfolios taking care not to stray to much away from the original product i.e. regular cola. So derivatives emerged from Pepsi Light to Cherry Cola showing that consumer behaviour has a massive impact on the respective corporation.
Key strategic issues for Coca-Cola and Pepsi-Cola
Between 1975 and 1995 Coca-Cola and Pepsi-Cola achieved average annual growth of 10% in a "carefully waged competitive struggle" when both US and worldwide consumption rose. In the late 1990s however US CSD consumption dropped for two consecutive years for both Coke and Pepsi. Whilst trying to bring the business back on track with the launch of various derivatives of the regular cola, Coke and Pepsi-Cola need to consolidate their international business activities. International consolidation of the market share is more than ever important. Both brands face the interesting issue they are an icon to the American way of life and culture which may have advantage in western hemisphere oriented countries but also disadvantages in the arabic states. The current political situation where the US are heavily engaged in anti-terrorism acitivities also has a impact on the consumption of American products. Therefore Coke is investing into a so called "Glocal Strategy" which means that in every culture other than the US the product needs to adapt to local cultural specificities. Secondly Coca-Cola and Pepsi-Cola should diversify more with respect to the creation of a holding company to minimise risk in case the CSD business is slowing down for a longer time. Coke has already invested in a media company to boost not only marketing around the brand but also the creation of a multi-functional company. Last but not least both Coke and Pepsi have to be aware of low-price producers, which already hold a market share of about 20% world wide. Following the example of other products it seems to be likely that also Coke and Pepsi will find imitators of their products worldwide.
Both Coke and Pepsi should strengthen their brand image like in the past i.e. both companies dispose of a global brand architecture which they should keep but allow local markets to develop their own brand strategies to adapt more quickly and efficiently to changing consumer demands. Secondly according to recent surveys consumer behaviour is based on products, which are, familiar to them however also offer unknown surprises e.g. regular cola, which tastes like Cherry or other flavour. So the launch of derivatives should be further developed. The principal however with this kind of brand is that the original product is not to be changed as one marketing executive of Coca-Cola stated: "Coke is a classic and one should not change a classic only the scenario around it."