Sometimes Peace Is a Myth.

Sometimes Wars NEVER End…

Anshuk.P&

Siddharth.K.KaulPresent

THE COLA WARS (1898 – )

Agenda• Magnitude of the War• Economic & Financial Facts• Timelines• SWOT Analysis• Porter Five Forces • Porter Strategy for Competitive Advantage• Strategic Masterstrokes• Recap

The Magnitude of the WAR

• 420,000 employees• 220bn. USD of Market cap• 92bn. USD in revenues• 3.6bn. USD/year on advertising• 4500+ products in the market• 200+ countries involved• 25 million followers on the social network

Company facts and FiguresCoca Cola

• Established 1886• 139,600 employees• Revenues of 35bn USD• 3500+ beverages• Focused in the beverages

segment alone• 80% revenues from

international markets • 2.5bn USD for advertising

annually

PepsiCo

• Established 1898• 285,000 employees• Revenues of 60bn USD• 600+ products• Diversified into beverages, energy

drink, health drinks, snacks and health foods

• Major share of revenues from the US markets.

• 1.7bn USD for advertising annually

TIMELINES

Net Sales

2010 2009 2008 2007 20060

10,000

20,000

30,000

40,000

50,000

60,000

70,000

PepsiCoke

2010 2009 2008 2007 20060

5,000

10,000

15,000

20,000

25,000

30,000

35,000

PepsiCoke

Gross Profit

2010 2009 2008 2007 20060

2,000

4,000

6,000

8,000

10,000

12,000

14,000

PepsiCoke

Net Income

Financial Performance Analysis

Values: USD $ in millions

SWOT Analysis – Strength’sCoca Cola

• Has four of the top 5 leading brands in beverages

• High profile global presence• Extremely strong brand position• Broad based bottling strategy• 47% of global volume sales

from beverages• Licensed bottlers in

international markets• High utilization of fixed assets• Advertising and Differentiation

of products

PepsiCo

• High profile global presence• Aggressive marketing strategies

using film stars and sport stars• Constant product innovation• Diversified portfolio of products• Strong brand presence in FMCG

sector like Quaker’s, Lays, Frito etc.

• Product positioning due to exclusive space in company owned fast food giants like KFC, Pizza Hut, Taco Bell etc

SWOT Analysis – WeaknessesCoca Cola

• Carbonates markets are in decline. Increasing preferences for health products

• Complex relationships with bottlers in America

• The system of supply not efficient for non carbonates

• Hard to differentiate product in terms of taste as product variety is very limited within cola based beverages.

PepsiCo

• Carbonates markets are in decline. Increasing preferences for health products

• Major share of revenues, 85%, come from the US market only

• Their marketing strategy focuses only on youth

• Hard to differentiate product in terms of taste as product variety is very limited within cola based beverages.

SWOT Analysis – OpportunitiesCoca Cola

• Soft drink volumes in Asia Pacific forecast to increase by 45%

• Brands like Minute maid light and Minute maid premium, Heart wise are positioned well in the health conscious market

• Distribution networks are very strong in Eastern Europe and Latin America

PepsiCo

• Increased consumer concerns with regards to safe drinking water.

• Growth in the healthier beverages segment. Pepsi expect revenues to go from 13 to 30 bn USD by 2020

• Growth in tea and other Asian beverages

• Growth in functional drinks segment

SWOT Analysis – ThreatsCoca Cola

• Growing health conscience in the society

• PepsiCo’s Gatorade, Aquafina and Tropicana are stronger brands

• Coke was boycotted in the Middle east

• There was a temporary phase where coke was banned in India

• Negative publicity in Western Europe

• Supermarket chain owned brands

PepsiCo

• Health concerns in the Society• Coca cola has increased it’s

marketing expenditures phenomenally

• Strong only in the North American markets

• Pepsi drastically cut it’s advertising expenses in the beverage segment post 2009

• Pepsi sales slip behind coke and diet coke to number three in 2011.

• Supermarket chain owned brands• Coca-Cola has such a strong base of

loyal customers, who identify with the cola brand.

The CSD Segment Constituents

• In this industry the concentrate business is focused around the production of concentrate of the soft drinks and then selling this with franchise agreements to bottling firms.

• The production facilities for concentrate require low capital investment and input prices are low relative to sales price as branding leads to the ability of increasing margins

• The artificial sweetener suppliers and carbonated water suppliers also form a part of the supply chain. The CP’s generally negotiate deals between the bottlers and them

Porter’s Five Forces

Rivalry within the concentrate

industry

Bargaining Power of Suppliers

Bargaining Power of Buyers

Barriers to Entry

Threat of Substitutes

Porter’s Five Forces In CP Industry

• You need a great recipe and thereby a special kind of expertise.• You need access to distribution channels, like retailing shelves, fountains...• Government policies, regulations, restrictions...• A strong brand is very beneficial, but also comes with a heavy investment in marketing.

Threats of new entrance (low):

• If new in the industry there is a high risk for substitutes in various forms. For example freshly squeezed juice, real brewed coffee...

• If one has a strong brand the risk of substitutes is smaller due to the strong brand. However, there is still a high threat level.

• Trends affect the substitute threat.

Threats of substitutes (medium):

• Due to the normally generic ingredients suppliers lack bargaining power, especially if one is a large customer.

• However, a lot can be gained from good supplier relationships.

Bargaining power of suppliers (low):

Porter’s Five Forces In CP Industry

Bargaining power of buyers (medium):

• Bottlers: Normally low• Fountain based customers: High• Retailer: Medium if one has a strong brand. Very high if one has a weak brand

Rivalry among existing competitors (high):

• As can be easily seen in the case title, it can be quite fierce.• Strong competition exist in every form and way, from business deals, communication, price

pressure, potentially similar target groups, some markets lack a clear reader...• HOWEVER, this can be good for the companies...

Due to the medium level off the competitive forces, the industry should be profitable. However, it should lack the extreme margins seen in for example the perfume industry, due to intense pressure from competitors (and often buyers). However, this does not mean that an individual brand/company is profitable.

Porter’s Five Forces In Bottling Industry

•You need capital to start a new bottling company.

•However, the amount of unique skill/resources required is lower than the concentrate industry. For example, you cannot patent the right to bottle...

•You can enter with fairly weak downstream distribution contacts.

Threats of new entrance

(medium):

•Fountains increasingly popular.

•What will stop the consumers from in the long run buy the concentrate themselves (think something similar too soda stream...).

•Potential problems with various bottling trends.

Threats of substitutes (medium):

•The service provided by bottlers is fairly generic.

•Even though supplier’s products often are generic there are many exceptions like for example Coca Cola’s concentrate.

•Exception: when a supplier enters a market where there might be hinders, this situation might not hold true.

Bargaining power of

suppliers (high):

Porter’s Five Forces In Bottling Industry

•Retailers have incredibly high bargaining power.

•However, some help can be provided from the stronger/bigger brands like Coca Cola.

•For mind teasing’s sake, imagine the opposite of the current situation: If one decides to see the bottler as a service supplier to the concentrate manufacturer, they often still would lack bargaining power.

Bargaining power of buyers (high):

•Most likely heavy competition due to the ordinary service and multiple (possibly over 100) competitors.

•Concentrate companies have their own bottling companies/departments.

Rivalry among existing competitors (high):

The competitive forces are much higher in the bottling industry which results in the lower margins and makes it more difficult to be profitable once

established.

What the Five Forces Model Concludes

The five forces model show how the two companies competition has resulted in various results.

The competition has made them bigger and stronger as well as lifted the “cola” subcategory out of the generic “soft drink” category.

This has in many ways had very beneficial effects on both companies with the probable exception of one thing, margins.

Customers today are becoming ever more used to various options, retailers are becoming a power to be reckoned with, health trends are striking hard at sugar based drinks and the environment is the hot topic in the media.

What the Five Forces Model Concludes

This results in fiercer competition reducing the threat of entrance into established parts of the concentrate industry. However, suppliers and buyers can increase their power through for example “eco” differentiation.

Opportunities are also opening up with the ever more global market, new energy and “healthy” drinks market as well as the increasing bottled water market.

Nevertheless, it seems apparent that companies such as Coca Cola will have to go away more and more for its core product to stay highly profitable.

This results in the possibility of new substitutes but also potential new ways of increasing profits and increasing bargaining power.

Summary of Porter’s strategies

Cost-Leadership

Industry’s lowest cost producer

Price setting over price following

Benefit from higher profit margins

Product-Differentiation

The differences in one product from another

Unique customer perception

Packaging and Promotional activities

Strategic Masterstrokes of the War

• Second World War– “A coca cola for every soldier when he needs it where he needs it”– Sanction of freedom from Sugar rationing– Government aid in setting up bottling networks internationally

Coca Cola managed to make optimum use of the situation and achieved cost efficient production and hence cost leadership. Their distribution networks played a great role in their international expansion later on.

Strategic Masterstrokes of the Warunderstood in terms of Porter’s strategies• Following the Supermarket trail (1950 – 1970) & The Pepsi generation

campaign (1963)– Pepsi manage to take advantage of the mantra, Location, Location and

Location.– They made deals with supermarkets and spread wherever the supermarkets

went. – While Coca cola was busy expanding in international markets, Pepsi eroded it’s

share in the US markets– Pepsi defined it’s consumer segment and started targeting the youth

Pepsi took advantage of the lack of concern Coca cola showed w.r.t their beverages in the US market owing to their lion’s share. Pepsi doubled it’s market share in this period. The Pepsi generation campaign tapped into the “cool” attitude of the youngsters and further reduce the pepsi to coke ratio to 1:2

Strategic Masterstrokes of the Warunderstood in terms of Porter’s strategies

• Expanding in the global markets(1950 – 1970)– Coca cola capitalised on the foundations laid during the second world war– By 1970 two thirds of units manufactured by coca cola catered to global

markets– Coca cola built strong distribution networks, decades before any other major

rival could

Coca cola was the first major CSD producer in many foreign countries. Thereby establishing it’s strong brand and wide network, virtually without any major competitor.

Strategic Masterstrokes of the Warunderstood in terms of Porter’s strategies

• The Blind Taste Test or The PEPSI Challenge (1974)– Pepsi directly attacked coca cola and tried to erode the brand image cushion

coca cola had acquired– Pepsi succeeded in turning around the market shares in the pilot cities and

then made it a nationwide campaign– Coca cola was by the beginning of 1980 forced to officially acknowledge the

threat from Pepsi– Coca cola’s growth in the 1970 – 1980 decade was negligible compared with

Pepsi.– While Pepsi’s corporate share grew from 21.4 to 24.2% coca cola’s increased

only by .3%

Pepsi differentiated it’s product based on its primary attribute, it’s taste. It changed the customer perception of coca cola being the best tasting drink. This coupled with various promotional activities by making the bottlers give the product at discounted price to retailers, to reduce price further, made Pepsi a cost leader.

Strategic Masterstrokes of the Warunderstood in terms of Porter’s strategies

• The Corn Syrup, Un-diversification and the Player attitude – Roberto goizueta(1980 - 1990)– Coca cola started buying it’s bottlers to reduce costs and distributing margins

across CP and bottling units– This helped lower the cost charged to the consumer while retaining acceptable

profit levels– Coca cola allocated vast sums of money for advertising campaigns. Started

officially targeting Pepsi– Coca cola sells of all non performing non beverage units.– Coca cola replaces sugar with corn syrup and saves huge on costs.– Coca cola introduces many new beverages, like diet coke, expands the

portfolio

Coca cola took all steps to steps to cut costs and attain cost leadership. It also made efforts to solidify it’s all American family refreshing rejuvenating drink image. The steps paid off and coca cola was again moving away from Pepsi in beverage sales

The Recent Strategic MistakePepsiCo Ceo indra Nooyi in a press release in 2009 said:

“We know it’s good, and everyone’s pretty happy with the overall taste, so why spend all our time worrying about what other people think?” PepsiCo CEO Indra K. Nooyi told reporters during a press conference at the company’s corporate headquarters. “Frankly, it just feels sort of weird and desperate to put all this energy into telling people what to drink. If they don’t like it, then they don’t like it. That’s not really any of our business anyway.”…

…”You can’t taste an ad, anyway,” Nooyi said. “People are going to make up their own minds regardless of whether we spend millions trying to inform them that Taylor Swift drinks Pepsi. I mean, seriously, does it really matter if Taylor Swift drinks Pepsi? She’s just a human being like everybody else.”

• Sales fell. Pepsi lost no.2 position to diet coke.

The Recent Strategic AmendmentNooyi has come under pressure from Wall Street for a stagnant stock price

and a lagging North American beverage business. She has been criticized for taking her eye off the core business of sodas to expand into healthier products, such as hummus and drinkable oatmeal.

PepsiCo, based in Purchase, New York, expects to cut 8,700 jobs, or 3 percent of its global workforce, across 30 countries as part of a plan to save an extra $1.5 billion over the next three years.

It also plans to increase advertising and marketing by $500 million to $600 million this year, centered on 12 brands, including Pepsi, Mountain Dew, Gatorade, Tropicana, Quaker and Doritos. It will spend an additional $100 million this year to improve delivery and display racks.

Quick Recap• Coke – Pepsi War Definition• Company Key Facts• Economic & Financial Facts• SWOT Analysis• Porter Five Forces • Porter Strategy for Competitive Advantage• Strategic Masterstrokes