single spaced one page summary answer these question
Case discussion Questions
1)Why is the soft drink industry so profitable?
2)Why is producing concentrate more profitable than bottling cola?
3) What effect does Coke-Pepsi competition have on profitability?
Cola Wars Continue: Coke and Pepsi in the Twenty-First Century 9-702-442 R E V : J A N U A R Y 2 7 , 2 0 0 4 ________________________________________________________________________________________________________________ Research Associate Yusi Wang prepared this case from published sources under the supervision of Professor David B. Yoffie. Parts of this case borrow from previous cases prepared by Professors David Yoffie and Michael Porter. 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. Copyright © 2002 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. D A V I D B . Y O F F I E Cola Wars Continue: Coke and Pepsi in the Twenty-First Century For over a century, Coca-Cola and Pepsi-Cola vied for “throat share” of the world’s beverage market. The most intense battles of the cola wars were fought over the $60-billion industry in the United States, where the average American consumed 53 gallons of carbonated soft drinks (CSD) per year. In a “carefully waged competitive struggle,” from 1975 to 1995 both Coke and Pepsi achieved average annual growth of around 10% as both U.S. and worldwide CSD consumption consistently rose. According to Roger Enrico, former CEO of Pepsi-Cola: 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.1 This cozy relationship was threatened in the late 1990s, however, when U.S. CSD consumption dropped for two consecutive years and worldwide shipments slowed for both Coke and Pepsi. In response, both firms began to modify their bottling, pricing, and brand strategies. They also looked to emerging international markets to fuel growth and broadened their brand portfolios to include non-carbonated beverages like tea, juice, sports drinks, and bottled water. As the cola wars continued into the twenty-first century, the cola giants faced new challenges: Could they boost flagging domestic cola sales? Where could they find new revenue streams? Was their era of sustained growth and profitability coming to a close, or was this apparent slowdown just another blip in the course of Coke’s and Pepsi’s enviable performance? 1Roger Enrico, The Other Guy Blinked and Other Dispatches from the Cola Wars (New York: Bantam Books, 1988). For the exclusive use of T. Phan, 2020. This document is authorized for use only by Trang Phan in MGMT 449_THUR_Spring 2020 taught by JUNG YEON LEE, Kennesaw State University from Jan 2020 to Jul 2020. 702-442 Cola Wars Continue: Coke and Pepsi in the Twenty-First Century 2 Economics of the U.S. CSD Industry Americans consumed 23 gallons of CSD annually in 1970 and consumption grew by an average of 3% per year over the next 30 years (see Exhibit 1). This growth was fueled by increasing availability as well as by the introduction and popularity of diet and flavored CSDs. Through the mid-1990s, the real price of CSDs fell, and consumer demand appeared responsive to declining prices.2 Many alternatives to CSDs existed, 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. At 60%-70% market share, the cola segment of the CSD industry maintained its dominance throughout the 1990s, followed by lemon/lime, citrus, pepper, root beer, orange, and other flavors. CSD consisted of a flavor base, a sweetener, and carbonated water. Four major participants were involved in the production and distribution of CSDs: 1) concentrate producers; 2) bottlers; 3) retail channels; and 4) suppliers.3 Concentrate Producers The concentrate producer blended raw material ingredients (excluding sugar or high fructose corn syrup), packaged it in plastic canisters, and shipped the blended ingredients to the bottler. The concentrate producer added artificial sweetener to make diet soda concentrate, while bottlers added sugar or high fructose corn syrup themselves. The process involved little capital investment in machinery, overhead, or labor. A typical concentrate manufacturing plant cost approximately $25 million to $50 million 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. Marketing programs were jointly implemented and financed by concentrate producers and bottlers. Concentrate producers usually took the lead in developing the programs, particularly in product planning, market research, and advertising. They invested heavily in their trademarks over time, with innovative and sophisticated marketing campaigns (see Exhibit 2). Bottlers assumed a larger role in developing trade and consumer promotions, and paid an agreed percentage—typically 50% or more—of promotional and advertising costs. Concentrate producers employed extensive sales and marketing support staff to work with and help improve the performance of their bottlers, setting standards and suggesting operating procedures. Concentrate producers also negotiated directly with the bottlers’ major suppliers—particularly sweetener and packaging suppliers—to encourage reliable supply, faster delivery, and lower prices. Once a fragmented business with hundreds of local manufacturers, the landscape of the U.S. soft drink industry had changed dramatically over time. Among national concentrate producers, Coca- Cola and Pepsi-Cola, the soft drink unit of PepsiCo, claimed a combined 76% of the U.S. CSD market in sales volume in 2000, followed by Cadbury Schweppes and Cott Corporation (see Exhibit 3). There were also private label brand manufacturers and several dozen other national and regional producers. Exhibit 4 gives financial data for Coke and Pepsi and their top affiliated bottlers. 2 Robert Tollison et al., Competition and Concentration (Lexington Books, 1991), p.11. 3 The production and distribution of non-carbonated soft drinks and bottled water will be discussed in a later section. For the exclusive use of T. Phan, 2020. This document is authorized for use only by Trang Phan in MGMT 449_THUR_Spring 2020 taught by JUNG YEON LEE, Kennesaw State University from Jan 2020 to Jul 2020. Cola Wars Continue: Coke and Pepsi in the Twenty-First Century 702-442 3 Bottlers Bottlers purchased 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 brand in the store. Smaller national brands, such as Shasta and Faygo, distributed through food store warehouses. DSD entailed managing the shelf space by stacking the product, positioning the trademarked label, cleaning the packages and shelves, and setting up point-of-purchase displays and end-of-aisle displays. The importance of the bottler’s relationship with the retail trade was crucial to continual brand availability and maintenance. Cooperative merchandising agreements between retailers and bottlers were used to promote soft drink sales. Retailers agreed to specified promotional activity and discount levels in exchange for a payment from the bottler. The bottling process was capital-intensive and involved specialized, high-speed lines. Lines were interchangeable only for packages of similar size and construction. Bottling and canning lines cost from $4 million to $10 million each, depending on volume and package type. The minimum cost to build a small bottling plant, with warehouse and office space, was $25million to $35 million. The cost of an efficient large plant, with four lines, automated warehousing, and a capacity of 40 million cases, was $75 million in 1998.4 Roughly 80-85 plants were required for full distribution across the United States. Among top bottlers in 1998, packaging accounted for approximately half of bottlers’ cost of goods sold, concentrate for one-third, and nutritive sweeteners for one-tenth.5 Labor accounted for most of the remaining variable costs. Bottlers also invested capital in trucks and distribution networks. Bottlers’ gross profits often exceeded 40%, but operating margins were razor thin. See Exhibit 5 for the cost structures of a typical concentrate producer and bottler. The number of U.S. soft drink bottlers had fallen, from over 2,000 in 1970 to less than 300 in 2000.6 Historically, Coca-Cola was the first concentrate producer to build nation-wide franchised bottling networks, a move that Pepsi and Cadbury Schweppes followed. The typical franchised bottler owned a manufacturing and sales operation in an exclusive geographic territory, with rights granted in perpetuity by the franchiser. In the case of Coca-Cola, territorial rights did not extend to fountain accounts—Coke delivered to its fountain accounts directly, not through its bottlers. The rights granted to the bottlers were subject to termination only in the event of default by the bottler. The original Coca-Cola