Cola Wars

Executive Summary

We are going to show the Cola wars in the twenty-first century, this war started when Pepsi enter in the market (1983) when the incumbent Coca-Cola (Coke) was already there (1886).

The soft drinks market it's been here for a long time and will continue to exist, and will continue to be profitable and a relevant market all over the world. Both Coca-Cola and Pepsi are Carbonated Soft Drinks (CSD), and it's relevant to talk in this specific market the four major participants involved in the production and distribution of CSDs, because without the perfect exchange between them, this specific market and the soft drinks in general couldn't be so profitable and well managed. So, because Coca-Cola and Pepsi are the major companies operating in the CSD (cola segment of the CSD have a market share between 60% and 70%) market and also in the soft drinks market in general, each big and crucial decision (in terms of prices, promotions, advertisements, etc.) influence a lot all these industries.

Recently, both companies are faced with the emerge demand and popularity of non-carbonated drinks, so we are going to show as well how these companies are thinking to respond at this trend.

Introduction

For over a century, the cola wars result into a constantly changes in their industry, and it seems to continue for a long time. This war started in the United States industry, but when both faced some problems in terms of CSD demand (specially in the late 1990s) and with their war as well, they start to globalize all over the world, so competition sometimes is good for the companies rethink their strategies and be more successful in their markets and even in new potential markets, globalize in a competitive market can not only sustain the company profit but also increase. Their new strategies were: modify their bottling, pricing, brand strategies, and also to produce new products, non-carbonated beverages (bottled water, juice, tea, sports drinks, etc.). To understand more this war, we are going to answer the following 4 questions.

1.Why is the soft drink industry so profitable?

Just at title of curiosity the CSD represents 60 billion $ just in the U.S. and that only represent part of the soft drinks business we are talking of a enormous industry just and the U.S.

In this Market every single person is a potential client. This is also a market that has beneficiate from a continuous growth each year since the beginning of its industry.

The growth in this market is not more only connected with the number of clients but mainly with the quantities that each client consume during a certain period of time.

For a market of this size is more than normal a large number of players, with a large number of products each one with different flavours and sizes (bottle).

As any profitable business is normal to conclude that we are looking to a market with a very strong competition in which every player struggle for a bigger share, and a better profit. With the increase of players and consequent proliferation of new products it is normal to assume the adoption of new strategies. Advertisements, price cuts, rebates, aggregation between concentrate producers and bottlers, expansion to new areas, new design on bottle, new products, new flavours, are just some of the strategies possible in this market and used by their players. This industry is composed by several retailers, bottlers and concentrates producers. Each one of these steps has access to a percentage of the total profit of each of these products.

Even with the small growth of the soft drink industry, he exists, and we have also o remember that nevertheless we are not selling much more there are still very reasonable margins in average that make this industry a very profitable one.

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

The profitability is so different basically because they have a lot of different kind of costs.

Concentrate producers:

Their blend process involves little capital investment in machinery, overhead, or labour.

Their manufacturing plant cost approximately $25 million to $50 million to build

Their most significantly are related with advertisements, promotion, market research, and bottler relations

They invest heavily in their trademarks, ith innovative and sophisticated marketing campaigns

Bottlers:

They assume a larger role in developing trade and consumer promotions, and pay an agreed percentage (normally 50%) of promotion and advertisement costs.

For instance, Coke and Pepsi bottlers offered "direct store door" delivery, which involve route delivery sales people physically placing and managing the CSD brand in the store

The bottling process was capital-intensive plant, and involved specialized, high-speed lines

Bottling and canning lines cost from $4 million to $10 million each

The minimum cost to build a small bottling plant (roughly 80, 85 plants are required for full distribution across the US), with four lines automated warehousing, and a capacity of 40 million cases, are more or less $75 million

Packaging account for approximately half of bottlers cost of goods sold

They invest a lot of capital in trucks and distribution networks

They purchased to major inputs: packaging, which included $3.4 billion in cans, $1.3 billion in plastic bottles, and $0.6 billion in glass; and sweetener, which included $1.1 billion in sugar and high fructose corn, and $1.0 billion in artificial sweetener

In the following table (exhibit 5 in the case-study), are represented the costs that we referred, and also the profits, showing very well the disparity of values between this two businesses:

CONCENTRATE PRODUCERS

BOTTLER

DOLLARS PER CASE

PERCENT OF SALES

DOLLARS PER CASE

PERCENT OF SALES