Cola Wars Strategy Case Analysis

Executive Summary: Together, Pepsi and Coke have historically dominated the carbonated soft drink (CSD) market while competing fiercely with each other for market share in the U.S. Until the late 1990s, CSD consumption in the U.S. grew at a healthy annual rate of 3% - 7%, and both Coke and Pepsi were able to prosper.

However, largely due to health issues related to the consumption of soft drinks, consumption of CSDs in the U.S. has been declining since the late 1990s. A five forces analysis of the soft drink industry (Exhibit 1) shows that focusing on the CSD market is not likely to be a highly profitable strategy going forward.

I recommend that Pepsi focus on continued innovation and expansion into “non carbs” in both the U.S. and in emerging markets where Coke does not already have a dominant presence.

Key Questions/Issues: Pepsi and Coke focused on producing concentrate, or flavor base, for the beverages while leaving the bottling function to nationwide networks of franchisees. The concentrate business was much more profitable than bottling due to lower fixed costs, lower operating costs, and the well-known brands of the concentrate producers. The concentrate industry had a low threat of entry, low bargaining power for suppliers and low to moderate bargaining power for buyers (whereas bottlers faced very high bargaining power from their suppliers—Coke and Pepsi), and a market with healthy levels of growth.

In the 1980s, began buying up and consolidating their bottling franchises. As a result of the cola wars, bottlers were pressured to increase spending on marketing and promotion, new packaging and product, and allow for widespread retail discounting, all of which squeezed profit margins and strained relationships between bottlers and Coke and Pepsi. The consolidation strategy removed weaker independent