The Cola Wars

For more than a century Coca Cola and Pepsi are each other’s most dangerous competitor. However this competition makes each firm more innovative and original. The most intense battle of these two companies is in the $60 billion industry in the United States, where the average American consumed 53 gallons of carbonated soft drinks (CSD). In the late 1990’s consumption of CSD dropped for twoconsecutive years, as a result Coke and Pepsi began to modify their bottling, pricing, and brand strategies. They also looked to emerging international markets to seek growth and to expand portfolios by including non-carbonated beverages.

Economics of the U.S. CSD Industry
Through the mid 1990’s the real price of CSD’s fell and many alternatives to CSDs existed. However Americans still drank moresoda than any other beverage. The cola segment of the CSD industry maintained its 60%-70% market share. Four major participants were involved in the production and distribution of CSDs: concentrate producers, bottlers, retail channels and suppliers.

Concentrate producers. They combined raw material ingredients (excluding sugar), packaged it in plastic containers, and shipped the blendedingredients to the bottler. The process requires little capital, a plant cost approximately $25 million to $50million to build, and one plant could serve the entire United States. A concentrate producer’s most significant costs were for advertising, promotion, market research, and bottler relations. Usually the bottlers agree to pay 50% of promotional and advertising costs.

Bottlers. Bottlerspurchased concentrate, added carbonated water and high fructose corn syrup, bottled or canned the CSD, and delivered it to customer accounts. Coke and Pepsi bottlers offered “direct store door” (DSD) delivery, which involved route delivery sales people physically placing and managing the CSD bran in the store. The relationship of the bottlers and retailers was essential for the selling of the product.The bottling process was expensive; the cost of each plant ran from $4 million to $75 million depending on the size and number of lines of the plant. Nearly 80-85 plants were required for full distribution across the US. Bottlers also invested capital in trucks and distribution networks, their profits often exceeded 40% but operating margins were low. Due to a decrease in the number of bottlers inthe US, Coca-Cola was the first concentrate producer to build nation-wide franchised bottling networks. The key to success was to maintain and good relationship with the bottlers and establish reasonable prices for sweeteners in order to avoid problems.

Retail Channels. The main distribution channel for soft drinks was the supermarket. Branded CSDs had a delivery method advantage over privatelabel CSDs, since Branded CSDs were delivered directly to the stores, firms such as Coca Cola avoided additional cost of transportation and storage while private label CSCs delivered their products to a retailer’s warehouse. Historically Pepsi had focused on sales though retail outlets, while Coke had dominated fountain sales. Coke and Pepsi invested in the development of fountain equipment, suchas service dispensers, and provided fountain customers with cups. Pepsi signed contracts of fountain service with Pizza Hut, Taco Bell, and Kentucky Fried chicken. While Coke did with McDonald’s, Burger King and Wendy’s.

Supplier to concentrate producers and bottlers. Concentrate producers required few inputs: caramel coloring, phosphoric, natural flavors and caffeine. Bottlers purchased twomajor inputs: packaging and sweeteners. Plastic bottles, introduced in 1978, boosted home consumption of CSDs because their large 1, 2 and 3 liter sizes. Coke and Pepsi were among the metal can industry’s largest customers. Since the can constituted about 40% of the total cost of packaged beverage, bottlers and concentrate producers often maintained relationships with more than one supplier. In...