The Cola Wars
Competitive Strategy Introduction
Coke and Pepsi have been going to war for over a century. This war has been fought with prices, with taste challenges, and with advertising. Throughout this bottle battle both companies have remained dominant players in the carbonated soft drink industry and have moved beyond their original products into many new areas.
Resources
The core resources that have allowed Coke and Pepsi to maintain dominance are their brand image and their marketing strategies. Coke has focused on a brand image that relates more to a way of life then to a soft drink. With “Buy the world a Coke” and other such campaigns Coke has strived to position itself in the minds of consumers as a lifestyle choice to choose Coke instead of just a purchase decision.

Pepsi has pursued a similar yet differentiated version of Coke’s strategy. “The Pepsi Generation” was an ad campaign aimed at making Pepsi the drink of the next generation. Advertising was trying to position Pepsi as the preferred drink of the youth of America. Pepsi furthered this image as the preferred drink through the Pepsi challenge, a campaign aimed at boosting total soft drink sales as well as allowing the two soda giants to be directly compared.
What makes these resources valuable?

The large anchor-bottling corporations and the contracts that bind them to Coke and Pepsi are also huge resources. Both companies own large equity stakes in these major bottlers and are able to use this to influence the running of these “independent” firms. These contracts also prohibit bottlers from carrying directly competing brands. This is very prohibitive to any small or new company. With this huge bottling and distribution network, Coke and Pepsi are able to gain large scope and scale economics over their smaller competition. Good.

Internationally Coke had a tremendous first mover advantage over Pepsi, and remains the dominant international soft drink producer. With brand awareness world wide Coke has been able to place their brand in the minds of consumers all over the globe. However, this advantage is dwindling. Pepsi is changing its focus to international affairs now and away from its single focus of the domestic market. Coke has a global scope advantage.

Coke and Pepsi have also learned how to get along. These two companies no longer pursue large discount pricing strategies to gain shelf space over one and other. Thru the intense competition of the eighties and nineties Coke and Pepsi were able to push many of the smaller bottlers off the shelf. Though there is competition the established brands of Coke and Pepsi ensure that for the foreseeable future there will not be any competition taking away their shelf space. This has allowed Coke and Pepsi to use an oligopoly like pricing strategy. In this pricing strategy neither one makes drastic cuts to prices and if one raises prices the other company will most likely follow suit shortly. Good – the “cola wars” are fought with branding and marketing, not with pricing.

Profits
Profitability in the soft drink concentrate business has endured for several reasons. One reason is the resource of the brand. The companies have been able to successfully position themselves above discount soda. Coke and Pepsi are premium brands and consumers will pay more to drink a Pepsi then they will to drink a W-Cola.

The concentrate business has also been able to pass many of its costs onto its bottlers. In the case of soda the bottlers bear most of the fixed costs, the cost of distribution, the costs of labor, and the costs of some inputs (such as high fructose corn syrup). The contracts with these bottlers ensure that Coke and Pepsi both get regular increases for their concentrate and provide some means for the bottler to adjust price but most bottlers are stuck with their concentrate provider. This is a function of the cp’s power as a seller.
Need a little more here on the cp’s power as both a buyer of commodity inputs and a seller of concentrate at a contract price. They feel no real pressure from the market.

As stated in the case it is costly to invest in the capital required to build these bottling plants and to switch them over to produce different bottles. Though the bottling industry has consolidated greatly over the last decade, Coke and Pepsi are still the concentrates they need, so the concentrate provider has great influence over the bottlers. This can be seen when comparing the price increases that bottlers implemented to the price increases in concentrate, in the period of 1988 to 2000 the retail price rose 0.3% while the price of concentrate rose 4.2%. These numbers just show the influence that the concentrate providers have over their bottlers.

The Value Chain
The value chain starts with the companies that supply the concentrate producers. The ingredients in concentrate are commodities, and therefore Coke or Pepsi can choose where they purchase their resources. In this relationship, the concentrate has the ability to switch to any provider so Coke or Pepsi have the power. As suppliers, both Coke and Pepsi are on equal footing. Both companies have contracts with bottlers that will last for perpetuity or until the bottler makes a large mistake. Both Coke and Pepsi also own large stakes in their major bottling companies.

Bottlers have a large capital investment in their equipment and have negotiated contracts with Coke and Pepsi that says they will pay predetermined prices (perhaps based upon some formula), this gives Coke and Pepsi the power as suppliers. The bottlers must also purchase other inputs, these range from bottling components to high fructose corn syrup. Both of these are variable costs that the bottler must bear independently of either Pepsi or Coke, while still maintaining the final pricing strategy dictated by the concentrate producer. In the case of their other supplies, the bottler has the power as the buyer. They are able to switch to any different supplier for these goods and with the ability to switch comes bargaining power. This leads to lower profitability for the providers of sweeteners and other inputs.

The bottlers have large advantages of scale and scope. A bottler’s truck can carry any brand to the store. This is true in distribution but it is not true in production, where unique capital investments are required. There is no adjustment needed for the same truck to carry Coke and root beer. The companies can also gain scale through their large distribution networks and through larger sales. Larger sales provide for less frequent deliveries, which decreases expenses and labor; these larger deliveries go to stores like Sam’s club. Right.

Bottlers also have power over retailers. The brands of Coke and Pepsi account for significant portions of a grocery store’s profits and are necessary staples that need to be carried. You cannot have a grocery store without Pepsi and Coke. This gives the bottlers power as suppliers. Think about this. The retailer has the chance to play Coke and Pepsi off against each other and demand concessions in price and promotional costs – they can also make a bigger commitment to private label. The retailer has choices – that leads to power.

The Industry
Supplying concentrate is a very lucrative business if you are Coke or Pepsi. Both companies have significant brand images that allow them to charge a premium and both companies have locked bottlers into long-term contracts that ensure future price increases for Coke and Pepsi. The bottling business on the other hand is less glamorous. Coke and Pepsi have many different package styles and sizes.

Variety may be the spice of life it is hurting the bottlers. The companies that bottle for Coke and Pepsi have made multi-million dollar investments in specific machines that handle specific size containers. These large investments are at risk if Coke and Pepsi all of a sudden decide to drastically shift the size and shape of their bottles. Coke and Pepsi can’t do this – only the bottler can do this. The bottler also currently is dealing with multiple sizes of bottles and two different size cans. This wide range in selection is decreasing the scale benefits that bottler would enjoy if Coke and Pepsi could decide to only have two size containers (for instance). Right – this should have been discussed when you mentioned scale on the prior page.

Bottlers have revolted to these wide variations in few instances. The companies will not invest in the reverse osmosis process needed for the bottled water and will not invest in the hot bottling technology needed for Lipton Tea. In both of these cases, Coke and Pepsi have had to open their own facilities or provide the equipment for the bottler. Being publicly held means these bottling companies have responsibilities to all of their shareholders, these share holders will see losses if Coke and Pepsi drastically change their container size but, the companies would see larger losses if they lost their contracts with Coke and Pepsi. The bottlers must keep their shareholders happy which in the case of Pepsi and Coke’s largest bottlers they are the larges shareholder. However, shareholders would be very irritated if the companies went bankrupt due to the loss of their largest contracts with Coke and Pepsi.

There was a need for a more thorough Porters 5 forces analysis in this section somewhere. You did analyze the power issue, and you looked at the opportunity for scale and scope – but we probably needed a more thorough industry analysis.

The Future
If current trends can be used to map the future for Coke and Pepsi they will have to move beyond their traditional business models. Pepsi is currently gaining most of its total growth from increases in sales of snack foods by Frito-Lay and is gaining share over Coke in almost all non carbonated areas. Sports drinks, water, and tea seem to be the replacements for soda. Though the carbonated beverage market will be there for as far as we can see, it may not grow and it may even shrink.
Coke and Pepsi need to reevaluate their current model in order to survive in this new world. Their previous brand equity in Coke and Pepsi will not help them in these new industries, they will not be gaining scope by using their brand. They also need to consider scale for their bottlers. Pepsi and Gatorade are not put in the same containers, these containers are very different. As such bottlers may need to invest in completely new equipment and as can be seen in recent developments, bottlers seem unwilling to do that. This may mean that Coke and Pepsi will both have to adjust and to perhaps start up their own bottling facilities to facilitate future growth.

The issue here is that the bottlers are consolidating (CCE) and gaining power, and they have the right to refuse to launch new products, so they are a barrier to innovation.
Conclusion
Coke and Pepsi seemed to have allowed the cola wars to come to a hault,halt but there are future wars over the throat share that are yet to be fought. With future growth being concentrated in non-carbonated beverages their may be a future Ade War (between Gatorade and PowerAde).

Grade is B. Improvement over the first paper, which is good. Needed a little more Porter analysis – power of buyer and seller at the start of the paper; full 5 forces analysis at some point. The section on the future missed the point about refusal to launch new products.