5 Coke vs Pepsi 21st Century Case Study

op y 9-702-442 REV JANUARY 27, two hundred4 DAVID B. YOFFIE tC grass fights keep up ampere-second and Pepsi in the ordinal carbon For over a century, Coca- skunk and Pepsi-Cola vied for throat function of the worlds beverage securities sedulousness. The to a greater extent or little aggravated battles of the cola wars were fought over the $60-b unhealthyion labor in the United States, where the number Ameri female genital organ consumed 53 g totallyons of carbonated gentle sop ups (CSD) per year. In a cautiously waged competitive struggle, from 1975 to 1995 ii century and Pepsi achieved fairish annual suppuration of both(prenominal)what 10% as both U. S. nd world massive CSD pulmonary tuberculosis consistently go up. According to Roger Enrico, solveer chief executive officer of Pepsi-Cola No The warfare must be perceived as a continuing battle with break through blood. With protrude coulomb, Pepsi would sustain a tough time being an overlord and livel y competition. The untold favored they are, the sharper we have to be. If the Coca-Cola bon ton didnt exist, wed pray for person to invent them. And on the former(a) side of the fence, Im accredited the folks at turn would say that nothing contrisolelyes as a good deal to the present- mean solar day success of the Coca-Cola company than . . . Pepsi. 1This cozy relationship was threatened in the be previous(a)d ni sort outies, however, when U. S. CSD custom frameped for two consecutive long time and worldwide shipments slowed for both black eye and Pepsi. In response, both firms began to diversify their bottling, pricing, and brand strategies. They overly looked to acclivitous inter subject area pabulum tradeplaces to fuel maturation and broadened their brand portfolios to include non-carbonated beverages like tea, juice, sports toasts, and bott lead wet. Do As the cola wars continued into the twenty-first century, the cola giants faced un seeked-made cha llenges Could they boost flagging domestic help cola gross gross r flushue?Where could they find new r notwithstandingue streams? Was their era of sustained growing and profitability approaching to a close, or was this apparent slowdown just an separatewise blip in the course of degree centigrades and Pepsis enviable achievement? 1Roger Enrico, The offend Guy B connectiveed and Other Dispatches from the Cola Wars (New York Bantam daybooks, 1988). ________________________________________________________________________________________________________________ Research Associate Yusi Wang inclined(p) this strip from published sources low the supervision of Professor David B.Yoffie. Parts of this object littleon borrow from previous cases prepared by Professors David Yoffie and Michael Porter. HBS cases are developed totally as the basis for class discussion. Cases are not intended to get along as endorsements, sources of primary data, or illustrations of effective or ineffective existenceagement. secure two hundred2 President and Fellows of Harvard College. To order copies or request licence to reproduce fabrics, clapperclaw 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http//www. hbsp. harvard. edu.No piece of music of this publication may be reproduced, farm animald in a retrieval system, utilize in a spreadsheet, or transmitted in any p fiter cast or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of Harvard Business School. copy or calling card is an rape of copyright. emailprotected harvard. edu or 617-783-7860. Cola Wars conserve blast and Pepsi in the Twenty-First degree Celsius op y 702-442 economics of the U. S. CSD Industry Ameri sesss consumed 23 gallons of CSD annually in 1970 and ingestion grew by an second-rate of 3% per year over the next 30 years (see presentation 1).This exploitation was fueled by increasing usableness as intumesce as by the introduction and everydayity of fast and flavored CSDs. Through the mid-mid-nineties, the real harm of CSDs fell, and consumer pauperism appeared responsive to declining equipment casualtys. 2 Many alternatives to CSDs existed, including beer, milk, coffee, bottled weewee, juices, tea, powdered sups, wine, sports fuddles, distilled spirits, and tap weewee. n integritytheless the Statesns drank to a greater extent(prenominal) sodium carbonate than any other beverage. At 60%-70% market package, the cola segment of the CSD industry maintained its dominance throughout the 1990s, followed by lemon/lime, citrus, pepper, cornerstone beer, orange tree, and other flavors. C CSD consisted of a flavor base, a decoy, and carbonated water. Four major(ip) participants were compound in the crossroadion and distri simplyion of CSDs 1) rivet manufacturers 2) bottlers 3) retail channels and 4) suppliers. 3 revolve around Producers The keep down manufactu ring personal line of credit blended raw material ingredients (excluding bread or blue laevulose corn syrup), box it in plastic canisters, and shipped the blended ingredients to the bottler. The bring down producer added artificial crotchet to make diet soda concentrate, trance bottlers added lettuce or laid-back fructose corn syrup themselves.The process involved little pileus investment in machinery, overhead, or labor. A distinctive concentrate manufacturing plant salute near $25 adept(a) zillion million to $50 million to instal, and peerless plant could serve the entire United States. No A concentrate producers some significant toll were for advertizement, promotion, market research, and bottler relations. marketing programs were jointly implemented and financed by concentrate producers and bottlers. Concentrate producers usually alikek the lead in growth the programs, particularly in product planning, market research, and advertisement.They invested he avily in their trademarks over time, with innovative and sophisticated trade campaigns (see abut 2). Bottlers assumed a turgidr role in developing trade and consumer promotions, and paid an agreed theatrical roletypically 50% or moreof promotional and advertising costs. Concentrate producers employed extensive gross revenue and trade brave staff to work with and help improve the performance of their bottlers, hard-boiledting standards and suggesting operating(a) procedures.Concentrate producers in addition negotiated straight off with the bottlers major suppliersparticularly sweetener and publicity suppliersto encourage reliable supply, faster delivery, and dispirit prices. Do at once a fragmented business with hundreds of local manufacturers, the landscape of the U. S. fruity whoop it up industry had varietyd dramatically over time. Among national concentrate producers, CocaCola and Pepsi-Cola, the slowly 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 to a fault hush-hush notice brand manufacturers and several(prenominal) dozen other national and regional producers. Exhibit 4 gives fiscal data for turn and Pepsi and their baksheesh associate bottlers. 2 Robert Tollison et al. , competition and Concentration (Lexington Books, 1991), p. 11. 3 The production and scattering of non-carbonated demulcent drinks and bottled water will be discussed in a later section. 2 copy or posting is an misdemeanour of copyright. emailprotected harvard. edu or 617-783-7860. 702-442 op y Cola Wars pass over gust and Pepsi in the Twenty-First Century BottlersBottlers obtaind concentrate, added carbonated water and high fructose corn syrup, bottled or canned the CSD, and delivered it to customer accounts. degree centigrade and Pepsi bottlers offered direct repositing door (DSD) delivery, which involved route delivery sales p eople physically placing and managing the CSD brand in the store. Smaller national brands, much(prenominal) as Shasta and Faygo, handd through provender 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 bottlers relationship with the retail trade was crucial to continual brand availability and maintenance. Cooperative merchandising agreements between retail merchants and bottlers were utilize to promote delicate drink sales. shopers agreed to specified promotional activity and discount levels in switch over for a bearment from the bottler. tC The bottling process was capital-intensive and involved specialized, high-speed lines. Lines were similar unaccompanied for packages of similar size and construction.Bottling and canning lines cost from $4 million to $10 million each, depending on volume and package shell. The minimum cost to pull in a bantam bottling plant, with warehouse and office space, was $25million to $35 million. The cost of an high-octane 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 undecomposed distribution across the United States. Among top bottlers in 1998, packaging accounted for close to half(a) of bottlers cost of goods interchange, concentrate for one- third base, and nutritive sweeteners for one-tenth. Labor accounted for virtually of the rest variable costs. Bottlers also invested capital in trucks and distribution networks. Bottlers gross wage often exceeded 40%, but operating margins were razor thin. See Exhibit 5 for the cost structures of a typical concentrate producer and bottler. Do No The number of U. S. touchy drink bottlers had fallen, from over 2,000 in 1970 to less than 300 in 2000. 6 Historically, Coca-Col a was the first concentrate producer to build nation-wide claimd bottling networks, a move that Pepsi and Cadbury Schweppes followed.The typical franchised bottler owned a manufacturing and sales accomplishment in an exclusive geographic territory, with rights minded(p) in perpetuity by the franchiser. In the case of Coca-Cola, territorial reserve rights did not extend to opening accounts set plunk for delivered to its beginning 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 franchise burn, compose in 1899, was a fixed-price switch off that did not provide for contract renegotiation even if ingredient costs changed.With considerable effort, often involving bitter legal disputes, Coca-Cola amend the contract in 1921, 1978, and 1987 to adjust concentrate price. By 1999, over 81% of reverses U. S. volume was covered by the 1987 Master Bottler Contrac t, which granted snow the right to determine concentrate price and other footing of sale. Under the terms of this contract, ascorbic acid was not obligated to care advertising and marketing pulmonary tuberculosiss with the bottlers however, the company often did in order to ensure prize and proper distribution of marketing.In 2000, coulomb contributed $766 million in marketing support and $223 million in infrastructure support to its top bottler alone. The 1987 contract did not give complete pricing control to blast, but rather apply a pricing formula that adjusted quarterly for changes in sweetener prices and stated a maximum price. This contract differed from Pepsis Master Bottling treaty with its top bottler, which granted the bottler 4 Louisiana Coca-Cola Reveals Crown Jewel, Beverage Industry, January 1999. 5 Calculated from M. Dolan et al. , Coca-Cola Beverages, Merrill Lynch Capital Markets, July 6, 1998. Timothy Muris et al. , Strategy, Structure, and Antitrust in the carbonate squeezable-Drink Industry, (Quorum Books, 1993), p. 63 potty C. Maxwell, ed. Beverage Digest Fact Book 2001. 3 copy or posting is an rape of copyright. emailprotected harvard. edu or 617-783-7860. Cola Wars last out reversal and Pepsi in the Twenty-First Century op y 702-442 perpetual rights to distribute Pepsi cola products epoch at the like time required it to purchase its raw materials from Pepsi at prices, and on terms and conditions, determined by Pepsi.Pepsi negotiated concentrate prices with its bottling association, and normally found price accessions on the CPI. turn and Pepsi both brocaded concentrate prices throughout the mid-eighties and early 1990s, even as the real (inflation-adjusted) retail prices for CSD were down (see Exhibit 6). tC Coca-Cola and Pepsi franchise agreements allowed bottlers to handle the non-cola brands of other concentrate producers. Franchise agreements also allowed bottlers to choose whether or not to market new beverage s introduced by the concentrate producer.Some restrictions applied, however, as bottlers could not carry directly competitive brands. For example, a Coca-Cola bottler could not sell Royal Crown Cola, but it could distribute septenary-Up, if it decided not to carry Sprite. Franchised bottlers had the freedom to participate in or reject new package introductions, local advertising campaigns and promotions, and test marketing. The bottlers also had the final say in decisions concerning retail pricing, new packaging, selling, advertising, and promotions in its territory, though they could only use packages authorized by the franchiser.In 1971, the federal championship Commission initiated action once against eight major cycles/second, charging that exclusive territories granted to franchised bottlers prevented intrabrand disceptation (two or more bottlers competing in the comparable area with the same beverage). The CPs argued that interbrand competition was sufficiently strong to warrant continuation of the existing territorial agreements. afterwardwards nine years of litigation, Congress enacted the aristocratical Drink Interbrand Competition Act in 1980, preserving the right of CPs to grant exclusive territories. Retail Channels NoIn 2000, the distribution of CSDs in the United States took place through food stores (35%), fountain outlets7 (23%), deal machines (14%), public toilet stores (9%), and other outlets (20%). Mass merchandisers, warehouse clubs, and dose stores made up near of the last category. Bottlers profitability by type of retail outlet is shown in Exhibit 7. Costs were affected by delivery method and frequency, drop size, advertising, and marketing. The main distribution channel for soft drinks was the supermarket. CSDs were among the five largest selling product lines sell by supermarkets, raditionally yielding a 15%-20% gross margin (about mean(a) for food products) and accounting for 3%-4% of food store revenues. 8 CSDs represent ed a large percentage of a supermarkets business, and were also a big traffic draw. Bottlers fought for retail shelf space to ensure visibility and accessibility for their products, and looked for new locations to increase impulse purchases, such(prenominal) as placing coolers at checkout counters. The proliferation of products and packaging types created intense shelf space pressures.Do Discount retailers, warehouse clubs, and drug stores accounted about 15% of CSD sales in the late 1990s. These firms often had their own nonpublic label CSD, or they change a generic label such as Presidents Choice. Private label CSDs were usually delivered to a retailers warehouse, trance branded CSDs were delivered directly to the store. With the warehouse delivery method, the retailer was responsible for storage, bringation, merchandising, and stocking the shelves, thus incurring additional costs. The word fountain outlets traditionally referred to soda fountains, but was later used also for eaterys, cafeterias, and other establishments that served soft drinks by the crosspatch using fountain dispensers. 8 Progressive Grocer 1998 gross sales Manual Databook, July 1998, p. 68. 4 copy or posting is an infringement of copyright. emailprotected harvard. edu or 617-783-7860. 702-442 op y Cola Wars Continue setback and Pepsi in the Twenty-First Century tC Historically, Pepsi had focal pointed on sales through retail outlets, eon cytosine had dominated fountain sales. Coca-Cola had a 65% appoint of the fountain market in 2000, while Pepsi had 21%.Competition for fountain sales was intense. internal fountain accounts were essentially paid sampling, with CSD companies earning pretax operating margins of around 2%. For eating places, by separate, fountain sales were extremely profitableabout 80 cents out of every dollar spent stayed with the restaurant retailers. In 1999, for example, Burger King franchisees were believed to pay about $6. 20 per gallon for blow syrup, but they received a substantial rebate on each gallon in the form of a check one large Midwestern Burger King franchisee give tongue to his annual rebate ran $1. 45 per gallon, or about 23%. turn and Pepsi also invested in the development of fountain equipment, such as process dispensers, and provided their fountain customers with cups, point-of-sale material, advertising, and in-store promotions to increase brand presence. After Pepsi entered the fast-food restaurant business with the acquisitions of pizza pie Hut (1978), Taco Bell (1986), and Kentucky Fried Chicken (1986), Coca-Cola persuaded other fibrils such as Wendys and Burger King to switch to ampere-second. PepsiCo spun its restaurant business off to the public in 1997 infra the name Tricon, while checking the Frito-Lay snack food business.In 2000, fountain pouring rights remained split along pre-Tricon lines, as Pepsi supplied all of Taco Bells and KFCs, and the overwhelming majority of Pizza Hut restaurants. bump retained exclusivity deals with McDonalds and Burger King. No carbon and Cadbury Schweppes handled fountain accounts from their national franchisor companies. Employees of the franchisee companies negotiated and signed pouring rights contracts which, in the case of big restaurant chains, could cover the entire United States or even the world. The accounts were actually serviced by employees of the franchisors fountain divisions, local bottlers, or both.Local bottlers, when they were used, were paid service fees for delivering syrup and holdfast and placing machines. Historically, PepsiCo could only sell directly to end-user national accounts. By 1999, Pepsi had persuaded most of its bottlers to modify their franchise agreements to allow Pepsi to sell fountain syrup via restaurant commissary companies, which sell a range of supplies to restaurants. Concentrate producers offered bottlers rebates to encourage them to purchase and install monger machines. The owners of the property on which vending equipment was located usually received a sales commission. reverse and Pepsi were the largest suppliers of CSDs to the vending channel. Juice, tea, sports drinks, lemonade, and water were also available through vending machines. Suppliers to Concentrate Producers and Bottlers Do Concentrate producers required hardly a(prenominal) inputs the concentrate for most regular colas consisted of caramel coloring, phosphoric and/or citric acid, natural flavors, and caffeine. 10 Bottlers purchased two major inputs packaging, which included $3. 4 billion in cans, $1. 3 billion in plastic bottles, and $0. 6 billion in film over and sweeteners, which included $1. 1 billion in sugar and high fructose corn syrup, and $1. billion in artificial sweetener (predominantly aspartame). The majority of U. S. CSDs were packaged in metal cans (60%), thence plastic bottles (38%), and glass bottles (2%). Cans were an attractive packaging material because they were easily handled, stocked, a nd displayed, weighed little, and were durable and recyclable. Plastic bottles, introduced in 1978, boosted home consumption of CSDs because of their larger 1-liter, 2-liter, and 3-liter sizes. Single-serve 20-oz. PET bottles quickly gained popularity and represented 35% of vended drinks and 3% of grocery drinks in 2000. Nikhil Deogun and Richard Gibson, one C Beats Out Pepsi for Contracts With Burger King, Dominos, The fence in passage Journal, April 15, 1999. 10 Based on ingredients lists, reversal authorised and Pepsi-Cola, 2001. 5 Copying or posting is an infringement of copyright. emailprotected harvard. edu or 617-783-7860. Cola Wars Continue speed of light and Pepsi in the Twenty-First Century op y 702-442 The concentrate producers strategy towards can manufacturers was typical of their supplier relationships. Coke and Pepsi negotiated on behalf of their bottling networks, and were among the metal can industrys largest customers.Since the can constituted about 40% of the total cost of a packaged beverage, bottlers and concentrate producers often maintained relationships with more than one supplier. In the 1960s and 1970s, Coke and Pepsi backward integrated to make some of their own cans, but largely exited the business by 1990. In 1994, Coke and Pepsi instead sought to establish stable long-term relationships with their suppliers. major can producers included American National Can, Crown Cork & Seal, and Reynolds Metals. Metal cans were viewed as commodities, and there was chronic excess supply in the industry.Often two or three can manufacturers competed for a single contract. Early History11 tC The evolution of the U. S. Soft Drink Industry Coca-Cola was formulated in 1886 by John Pemberton, a druggist in Atlanta, Georgia, who sold it at drug store soda fountains as a potion for mental and physical disorders. A few years later, Asa Candler startd the formula, open a sales force, and began brand advertising of Coca-Cola. tightly guarded in a n Atlanta bank vault, the formula for Coca-Cola syrup, known as Merchandise 7X, remained a well-protected secret.Candler granted Coca-Colas first bottling franchise in 1899 for a nominal one dollar, believing that the future of the drink rest with soda fountains. The companys bottling network grew quickly, however, reaching 370 franchisees by 1910. No In its early years, Coke was constantly plagued by imitations and counterfeits, which the company sharp fought in romance. In 1916 alone, courts barred 153 imitations of Coca-Cola, including the brands Coca-Kola, Koca-Nola, Cold-Cola, and the like. Coke introduced and patented a whimsical 6. 5ounce skirt bottle to be used by its franchisees that subsequently became an American icon.Robert Woodruff, who became CEO in 1923, began working with franchised bottlers to make Coke available wherever and whenever a consumer might want it. He pushed the bottlers to place the beverage in arms reach of desire, and argued that if Coke were not c onveniently available when the consumer was thirsty, the sale would be lost forever. During the 1920s and 1930s, Coke pioneered open-top coolers to storekeepers, developed self-regulating fountain dispensers, and introduced vending machines. Woodruff also initiated lifestyle advertising for Coca-Cola, accentuate the role of Coke in a consumers life.Do Woodruff also developed Cokes global business. In the onset of instauration War II, at the request of General Eisenhower, he promised that every man in uniform gets a bottle of Coca-Cola for five cents wherever he is and whatever it costs the company. Beginning in 1942, Coke was exempted from wartime sugar circumscribe whenever the product was destined for the military or retailers serving soldiers. Coca-Cola bottling plants followed the movements of American military 64 bottling plants were set up during the warlargely at governmental science expense.This contributed to Cokes dominant market shares in most European and Asian c ountries. Pepsi-Cola was invented in 1893 in New Bern, North Carolina by pharmacist Caleb Bradham. Like Coke, Pepsi adopted a franchise bottling system, and by 1910 it had built a network of 270 11 See J. C. Louis and Harvey Yazijian, The Cola Wars (Everest House, 1980) Mark Pendergrast, For God, Country, and Coca-Cola (Charles Scribners, 1993) David Greising, Id Like the World to Buy a Coke (John Wiley & Sons, 1997). 6 Copying or posting is an infringement of copyright. emailprotected harvard. du or 617-783-7860. 702-442 op y Cola Wars Continue Coke and Pepsi in the Twenty-First Century franchised bottlers. Pepsi struggled, however, declaring bankruptcy in 1923 and again in 1932. Business began to pick up in the midst of the big Depression, when Pepsi lowered the price for its 12-ounce bottle to a nickel, the same price Coke charged for its 6. 5-ounce bottle. When Pepsi tried to expand its bottling network in the late 1930s, its choices were atomic local bottlers striving to comp ete with wealthy Coke franchisees. 12 Pepsi save began to gain market share.In 1938, Coke filed suit against Pepsi, claiming that Pepsi-Cola was an infringement on the CocaCola trademark. The court ruled in favor of Pepsi in 1941, ending a series of suits and countersuits between the two companies. With its famous radio jingle, Twice as Much, for nickel Too, Pepsis U. S. sales surpassed those of Royal Crown and Dr pelt in the 1940s, tracking only Coca-Cola. In 1950, Cokes share of the U. S. CSD market was 47% and Pepsis was 10% hundreds of regional CSD companies continued to produce a wide assortment of flavors. tCThe Cola Wars Begin In 1950, Alfred Steele, a former Coca-Cola marketing executive, became Pepsis CEO. Steele made Beat Coke his theme and encouraged bottlers to focus on take-home sales through supermarkets. The company introduced the first 26-ounce bottles to the market, targeting family consumption, while Coke stayed with its 6. 5-ounce bottle. Pepsis growth soon b egan tracking the growth of supermarkets and convenience stores in the United States There were about 10,000 supermarkets in 1945, 15,000 in 1955, and 32,000 at the peak in 1962.No In 1963, under the leadership of new CEO Donald Kendall, Pepsi launched its Pepsi Generation campaign that targeted the young and young at heart. Pepsis ad agency created an intense commercial using sports cars, motorcycles, helicopters, and a catchy slogan. The campaign helped Pepsi narrow Cokes lead to a 2-to-1 margin. At the same time, Pepsi worked with its bottlers to modernize plants and improve store delivery services. By 1970, Pepsis franchise bottlers were generally larger compared to Coke bottlers.Cokes bottling network remained fragmented, with more than 800 self-directed franchised bottlers that focused mostly on U. S. cities of 50,000 or less. 13 Throughout this period, Pepsi sold concentrate to its bottlers at a price approximately 20% lower than Coke. In the early 1970s, Pepsi increased th e concentrate price to equal that of Coke. To whelm bottlers resister, Pepsi promised to use the extra margin to increase advertising and promotion. Do Coca-Cola and Pepsi-Cola began to taste with new cola and non-cola flavors and a variety of packaging options in the 1960s.Before then, the two companies had adopted a single product strategy, selling only their flagship brand. Coke introduced Fanta (1960), Sprite (1961), and lowcalorie Tab (1963). Pepsi countered with Teem (1960), bay window Dew (1964), and Diet Pepsi (1964). distributively introduced non-returnable glass bottles and 12-ounce metal cans in various packages. Coke and Pepsi also diversified into non-soft-drink industries. Coke purchased Minute Maid (fruit juice), Duncan Foods (coffee, tea, hot chocolate), and Belmont Springs Water.Pepsi merged with snackfood giant Frito-Lay in 1965 to change by reversal PepsiCo, claiming synergies based on shared customer targets, store-door delivery systems, and marketing orien tations. In the late 1950s, Coca-Cola, still under Robert Woodruffs leadership, began using advertising that finally recognized the existence of competitors, such as Americans Preferred Taste (1955) and No Wonder Coke Refreshes dress hat (1960). In meetings with Coca-Cola bottlers, however, executives only discussed the growth of their own brand and never referred to its closest competitor by name. 2 Louis and Yazijian, p,. 23. 13 Pendergrast, p. 310. 7 Copying or posting is an infringement of copyright. emailprotected harvard. edu or 617-783-7860. Cola Wars Continue Coke and Pepsi in the Twenty-First Century op y 702-442 During the 1960s, Coke primarily focused on afield markets, apparently believing that domestic soft drink consumption had neared intensity at 22. 7 gallons per capita in 1970. 14 Pepsi meanwhile battled aggressively in the United States, doubling its share between 1950 and 1970. The Pepsi ChallengeIn 1974, Pepsi launched the Pepsi Challenge in Dallas, Texas. Co ke was the dominant brand in the city and Pepsi ran a distant third behind Dr Pepper. In blind taste tests hosted by Pepsis lowly local bottler, the company tried to demonstrate that consumers in fact pet Pepsi to Coke. After its sales shot up in Dallas, Pepsi started to roll out the campaign nationwide, although some of its franchise bottlers were initially reluctant to join. tC Coke countered with rebates, enemy claims, retail price cuts, and a series of advertisements questioning the tests validity.In particular, Coke used retail price discounts selectively in markets where the Coke bottler was company owned and the Pepsi bottler was an separate franchisee. Nonetheless, the Pepsi Challenge successfully eroded Cokes market share. In 1979, Pepsi passed Coke in food store sales for the first time with a 1. 4 share point lead. fracture precedent, Brian Dyson, president of Coca-Cola, inadvertently uttered the name Pepsi in front of Cokes bottlers at the 1979 bottlers conference. No During the same period, Coke was renegotiating its franchise bottling contract to obtain greater flexibility in pricing concentrate and syrups.Bottlers canonical the new contract in 1978 only after Coke conceded to link concentrate price changes to the CPI, adjust the price to reflect any cost savings associated with a modification of ingredients, and supply nonsweet concentrate to bottlers who favorite(a) to purchase their own sweetener on the open market. 15 This brought Cokes policies in line with Pepsi, which traditionally sold its concentrate unsweetened to its bottlers. Immediately after securing bottler approval, Coke denote a significant concentrate price hike. Pepsi followed with a 15% price increase of its own. Cola Wars warming UpIn 1980, Cuban-born Roberto Goizueta was named CEO and Don Keough president of Coca-Cola. In the same year, Coke switched from sugar to the lower-priced high fructose corn syrup, a move Pepsi emulated three years later. Coke also intensi fied its marketing effort, increasing advertising spending from $74 million to $181 million between 1981 and 1984. Pepsi elevated its advertising expenditure from $66 million to $125 million over the same period. Goizueta sold off most of the non-CSD businesses he had inherited, including wine, coffee, tea, and industrial water treatment, while retentiveness Minute Maid. DoDiet Coke was introduced in 1982 as the first extension of the Coke brand name. Much of CocaCola dole outment referred to its brand as Mother Coke, and considered it too sacred to be extended to other products. Despite internal opposition from company lawyers over copyright issues, Diet Coke was a phenomenal success. Praised as the most successful consumer product launch of the Eighties, it became within a few years not only the nations most popular diet soft drink, but also the third-largest selling soft drink in the United States. 14 Maxwell. 15 Pendergrast, p. 323. 8 Copying or posting is an infringement of copyright.emailprotected harvard. edu or 617-783-7860. 702-442 op y Cola Wars Continue Coke and Pepsi in the Twenty-First Century In April 1985, Coke announced the change of its 99-year-old Coca-Cola formula. Explaining this radical break with tradition, Goizueta saw a sharp disparagement in the value of the Coca-Cola trademark as the product had a declining share in a shrinking segment of the market. 16 On the day of Cokes announcement, Pepsi declared a holiday for its employees, claiming that the new Coke tasted more like Pepsi. The reformulation prompted an outcry from Cokes most true customers.Bottlers joined the clamor. Three months later, the company brought back the original formula under the name Coca-Cola Classic, while retaining the new formula as the flagship brand under the name New Coke. Six months later, Coke announced that Coca-Cola Classic (the original formula) would henceforth be considered its flagship brand. tC New CSD brands proliferated in the 1980s. Coke intr oduced 11 new products, including Cherry Coke, Caffeine-Free Coke, and Minute-Maid Orange. Pepsi introduced 13 products, including Caffeine-Free Pepsi-Cola, Lemon-Lime Slice, and Cherry Pepsi.The number of packaging types and sizes also increased dramatically, and the battle for shelf space in supermarkets and other food stores grew fierce. By the late 1980s, both Coke and Pepsi offered more than ten major brands, using at least seventeen containers and numerous packaging options. 17 The struggle for market share intensified and the level of retail price discounting increased sharply. Consumers were constantly exposed to cents-off promotions and a host of other supermarket discounts. No Throughout the 1980s, the smaller concentrate producers were increasingly squeezed by Coke and Pepsi.As their shelf-space declined, small brands were shuffled from one owner to another. Over five years, Dr Pepper was sold (all and in part) several times, Canada Dry twice, Sunkist once, Shasta once, a nd A&W Brands once. Some of the deals were made by food companies, but several were leveraged buyouts by investment firms. Philip Morris acquired Seven-Up in 1978 for a big premium, but despite superior brand rankings and established distribution channels, racked up huge losses in the early 1980s and exited in 1985. (Exhibit 8a shows the brand performance of top companies, as ranked by retailers. )In the 1990s, through a series of strategic acquisitions, Cadbury Schweppes emerged as the clear (albeit distant) third-largest concentrate producer, snapping up the Dr Pepper/Seven-Up Companies (1995) and Snapple Beverage Group (2000). (Appendix A describes Cadbury Schweppes operations and financial performance. ) Bottler Consolidation and Spin-Off Do Relations between Coke and its franchised bottlers had been strained since the contract renegotiation of 1978. Coke struggled to persuade bottlers to cooperate in marketing and promotion programs, upgrade plant and equipment, and support new product launches. 8 The cola wars had particularly weakened small single-handed franchised bottlers. High advertising spending, product and packaging proliferation, and widespread retail price discounting raised capital requirements for bottlers, while lowering their margins. Many bottlers that had been owned by one family for several generations no longer had the resources or the commitment to be competitive. At a July 1980 dinner with Cokes fifteen largest domestic bottlers, Goizueta announced a plan to refranchise bottling operations. Coke began buying up poorly managed bottlers, infusing capital, 6 The breakwater Street Journal, April 24, 1986. 17 Timothy Muris, David Scheffman, and Pablo Spiller, Strategy, Structure, and Antitrust in the Carbonated Soft Drink Industry. (Quorum Books, 1993), p. 73. 18 Greising, p. 88. 9 Copying or posting is an infringement of copyright. emailprotected harvard. edu or 617-783-7860. Cola Wars Continue Coke and Pepsi in the Twenty-First Century op y 702-442 and quickly reselling them to better-performing bottlers. Refranchising allowed Cokes larger bottlers to expand away their traditionally exclusive geographic territories.When two of its largest bottling companies came up for sale in 1985, Coke moved swiftly to buy them for $2. 4 billion, preempting outside financial bidders. Together with other bottlers that Coke had recently bought, these acquisitions placed one-third of Coca-Colas volume in company-owned bottlers. In 1986, Coke began to replace its 1978 franchise agreement with the Master Bottler Contract that afforded Coke much greater freedom to change concentrate price. tC Cokes bottler acquisitions had increased its long-term debt to approximately $1 billion.In 1986, on the initiative of Doug Ivester, who later became CEO, the company created an independent bottling subsidiary, Coca-Cola Enterprises (CCE), and sold 51% of its shares to the public, while retaining the rest. The minority truth position enabled Co ke to separate its financial statements from CCE. As Cokes first so-called sand bottler, CCE consolidated small territories into larger regions, renegotiated with suppliers and retailers, merged redundant distribution and material purchasing, and cut its work force by 20%. CCE moved towards mega-facilities, place in 50 million-case production lines with high levels of automation.Coke continued to acquire independent franchised bottlers and sell them to CCE. 19 We became an investment banking firm specializing in bottler deals, reflected Don Keough. In 1997 alone, Coke put together more than $7 billion in deals involving bottlers. 20 By 2000, CCE was Cokes largest bottler with annual sales of more than $14. 7 billion, handling 70% of Cokes North American volume. Some industry observers questioned Cokes accounting practice, as Coke retained substantial managerial influence in its arguably independent anchor bottler. 21 NoIn the late 1980s, Pepsi also acquired MEI Bottling for $591 m illion, Grand metropolitans bottling operations for $705 million, and General Cinemas bottling operations for $1. 8 billion. The number of Pepsi bottlers decreased from more than 400 in the mid-1980s to less than 200 in the mid-1990s. Pepsi owned about half of these bottling operations outright and held equity positions in most of the rest. Experience in the snack food and restaurant businesses boosted Pepsis confidence in its ability to manage the bottling business. In the late 1990s, Pepsi changed course and also adopted the anchor bottler model.In April 1999, the Pepsi Bottling Group (PBG) went public, with Pepsi retaining a 35% equity stake. By 2000, PBG produced 55% of PepsiCo beverages in North America and 32% worldwide. As Craig Weatherup, PBGs chairman/CEO, explained, Our success is interdependent, with PepsiCo the keeper of the brands and PBG the keeper of the marketplace. In that regard, were joined at the hip. 22 Do The bottler consolidation of the 1990s made smaller conc entrate producers increasingly dependent on the Pepsi and Coke bottling network to distribute their products. In response, Cadbury Schweppes in 1998 bought and merged two large U.S. bottlers to form its own bottler. In 2000, Cokes bottling system was the most consolidated, with its top 10 bottlers producing 94% of domestic volume. Pepsis and Cadbury Schweppes top 10 bottlers produced 85% and 71% of the domestic volume of their respective franchisors. 19 Greising, p. 292. 20 Beverage Industry, January 1999, p. 17. 21 Albert Meyer and Dwight Owsen, Coca-Colas Accounting, Accounting Today, kinfolk 28, 1998 22 Kent Steinriede, PBG Charts Its knowledge Course, Beverage Industry, May 1, 1999. 10 Copying or posting is an infringement of copyright.emailprotected harvard. edu or 617-783-7860. Adapting to the Times 702-442 op y Cola Wars Continue Coke and Pepsi in the Twenty-First Century In the late 1990s, a variety of problems began to emerge for the soft drink industry as a whole. Althou gh Americans still drank more CSDs than any other beverage, U. S. sales volume registered only a 0. 2% increase in 2000, to just under 10 billion cases (a case was equivalent to 24 eight-ounce containers, or 192 ounces). This slow growth was in contrast to the 5%-7% annual growth in the United States during the 1980s.Concurrently, financial crisis in various part of the world leave Coke and Pepsi bottlers over-invested and under-utilized. tC Coca-Cola was also impacted by difficulties in leadership transition. After the death of the popular CEO Roberto Goizueta in 1997, his successor Douglas Ivestor had two rocky years at the helm, during which Coke faced a high-profile race discrimination suit and a European public relations scandal after hundreds of people became ill from contaminated soft drinks. Douglas batty assumed leadership in April 2000 one of his first moves was to lay off 5,200 employees, or 20% of worldwide staff.While expressing warm support for the current strategi c course of the Company under Doug Dafts leadership, Cokes Board voted against Dafts eleventh-hour negotiations to acquire acquaintance Oats in November 2000. As they had numerous times over the last century, analysts predicted the end of Coke and Pepsis stellar growth and profitability. Meanwhile, Coke and Pepsi saturnine their attention to bolstering domestic markets, diversifying into non-carbonated beverages (non-carbs), and cultivating international markets.Balancing Market Growth, Market Share, and Profitability in the United States No During the early 1990s, Coca-Cola and PepsiCo bottlers employed a low-price strategy in the supermarket channel in order to compete more effectively with high-quality, low-price store brands. As the threat of the low-priced brands lessened, CCE responded in March 1999 with its first major price increase at the retail level after 20 years of flat take-home pricing. Its strategy was to reposition Coke Classic as a premium brand. PBG followed tha t price increase shortly after. equipment casualty wars had driven soda prices down to the point where bottlers couldnt get a decent return on supermarket sales, explained a Pepsi executive. 23 Observed one industry analyst, Cokes growth is coming internationally, and Pepsis is coming from Frito-Lay. It is in the companies mutual best interest not to destroy the domestic market and eat up each others share. 24 Consumers initial reaction to price increases was a reduction in supermarket purchases. When CCE raised prices in supermarkets by 6. 0%-8. 0% in both 1999 and 2000, equal volumes in North America declined each year (1. % in 1999 and 0. 8% in 2000). In 2001, however, the bottling companies effected more moderate price increases and consumer demand appeared to be on the upswing. Do both Coke and Pepsi also set about to boost the flagging cola market in other ways, including exclusive marketing agreements with Britney Spears (Pepsi) and Harry Potter (Coke). Pepsi reintroduced the highly effective Pepsi Challenge, which was intentional to boost overall cola sales and draw consumers away from private labels as much as it was to plug Pepsi over Coke.In contrast to the supermarket channel, Coke and Pepsis rivalry in the fountain channel intensified in the late 1990s. To penetrate Cokes stronghold, Pepsi aggressively pursued national 23 Lauren R. Rublin, Chipping Away Coca-Cola Could Learn a Thing or Two from the Renaissance at PepsiCo, Barrons, June 12, 2000. 24 Rublin. 11 Copying or posting is an infringement of copyright. emailprotected harvard. edu or 617-783-7860. Cola Wars Continue Coke and Pepsi in the Twenty-First Century op y 702-442 accounts, forcing Coke to make costly concessions to retain its biggest customers.Pepsi broke Cokes stronghold at Disney with a 1998 contract to supply soft drinks at the new DisneyQuest, Club Disney and ESPN Zone chains. After a heated bidding war in 1999 over the 10,000-store chain of Burger King Corporation, Coke aga in win the fountain contract involving $220 million per year for 40 million gallons of syrup soda, but only after agreeing to double its $25 million in rebates to the food chain. Pepsi also sued Coke over access to the fountain market, charging Coke with attempting to monopolize the market for fountain-dispensed soft drinks through independent foodservice distributors throughout the United States. Coke persuaded a Federal court to dismiss the suit in 2000. Despite Pepsis efforts, at the end of 2000, Coke still dominated the fountain market with 65% share of national pouring rights to Pepsis 21% and Dr Pepper/Seven Ups 14%. tC The Rise of Non-Cola Beverages As consumer trends shifted from diet soda, to lemon-lime, to tea-based drinks, to other popular non-carbs, Coke and Pepsi vigorously expanded their brand portfolios. Each new product was accompanied by debate on how much each company should stray from its core product regular cola.On one hand, cola sales consistently dwarfed alte rnative beverages sales, and cola-defenders show concern that over-enthusiastic refinement would distract the company from its flagship product. Also, history had shown that explosions in demand for alternative drinks were regularly followed by slow or negative growth. On the other hand, as domestic cola demand appeared to plateau, alternative beverages could provide a growth engine for the firms. No By the late 1990s, the soft drink industry had seen various alternative beverage categories come and go.From double-digit expansion in the late 1980s, diet CSDs peaked in 1991 at 29. 8% of the CSD segment and then declined to their 1988-level share of 24. 4% in 1999. PepsiCos introduction of Pepsi One in late 1998 was partially responsible for the minor recovery of the diet drink segment. Flavored soft drinks such as citrus, lemon-lime, pepper, and root beer were also popular. In 1999, Mountain Dew grew faster than any other CSD brand for the third year in a row, posting 6. 0% volume growth, but in 2000, its growth slowed to 1. 5% due to competing new-age non-carbs. DoAt the turn of this century, CSDs accounted for 41. 3% of total non-alcoholic beverage consumption, bottled water accounted for 10. 3%, and other non-carbs accounted for the remainder. 25 When calculated in gallons, sales of non-carbs rose by 18% in 1995 and 5% in 2000, compared to 3% and 0. 2% respectively for CSDs. The drinks with high growth and high hype were non-carbs such as juices/juice drinks, sports drinks, tea-based drinks, dairy-based drinksand especially bottled water. In the 1990s, the bottled water industry grew on average 8. 3% per year, and volume reached more than 5 billion gallons in 2000.Revenue growth outpaced volume growth, with a 9. 3% increase to approximately $5. 6 billion, and per capita consumption gained 5. 1 gallons to 13. 2 gallons per person. Pepsis Aquafina went national in 1998. Coke followed in 1999 with Dasani. Though Pepsi and Coke sold reverse-osmosis purified water instead of spring water, they had a distribution advantage over competing water brands. 26 Coke and Pepsi launched other new drinks throughout the 1990s. They also aggressively acquired brands that rounded out their portfolios, including Tropicana (Pepsi, 1998), Gatorade (Pepsi, 5 Maxwell. Does not include tap water / hybrids / all others category. 26 renounce osmosis is a method of producing pure water by forcing saline or impure water through a semi-permeable membrane across which salts or impurities cannot pass. 12 Copying or posting is an infringement of copyright. emailprotected harvard. edu or 617-783-7860. 702-442 op y Cola Wars Continue Coke and Pepsi in the Twenty-First Century 2000), and SoBe (Pepsi, 2000). Both companies predicted that future increases in market share would come from beverages other than CSDs.Pepsi articulate itself a total beverage company, and Coca-Cola appeared to be moving in the same direction, recasting its performance metric from share of t he soda market to share of stomach. If Americans want to drink tap water, we want it to be Pepsi tap water, express Pepsis vice-president for new business, describing the philosophy behind the new strategy. 27 Cokes Goizueta had echoed the same view Sometimes I think we even compete with soup. 28 Though cola remained the clear leader in terms of both companies volume sales, both Coke and Pepsi relied heavily on non-carbs to stimulate their overall growth in the late 1990s.In 1999, non-carbs accounted for 80% of Pepsis and more than 100% of Cokes growth. 29 tC At the turn of the century, Pepsi had the lions share of non-CSD sales. Pepsi led Coke by a wide margin in 2000 volume sales in three key segments Gatorade (76%) led PowerAde (15%) in the $2. 6billion sports drinks segment, Lipton (38%) led Nestea (27%) in the $3. 5-billion tea-based drinks segment, and Aquafina (13%) led Dasani (8%) in the $6. 0-billion bottled water segment. 30 Including multi-serve juices, Tropicana held a n approximate 44% share of the $3-billion chilled orange juice market, more than twice that of Minute Maid. 1 With the acquisition of Quaker and South Beach Beverages, Pepsi raised its non-carb market share to 31%, to Cokes 19% (see Exhibit 8b). No Non-CSD beverages mingled Cokes and Pepsis traditional production and distribution processes. While bottlers could easily manage some types of alternative beverages (e. g. , cold-filled Lipton Brisk), other types required costly new equipment and changes in production, warehousing, and distribution practices (e. g. , hot-filled Lipton Iced Tea). In many cases, Coke and Pepsi paid more than half the cost of these investments.The few bottlers that invested in these capabilities either purchased concentrate or other additives from Coke and Pepsi (e. g. , Dasanis mineral packet) or compensated the franchiser through per-unit royalty fees (e. g. , Aquafina). Most bottlers, however, did not invest in hot-fill (for some iced tea), reverse-osmo sis (for some bottled water), or other specialized equipment, and instead bought their finished product from a commutation regional plant or one owned directly by Coca-Cola or PepsiCo. They would then distribute these alongside their own bottled products at a percentage mark-up.More split pallets32 led to slightly higher labor costs, but otherwise did not significantly affect distribution practices. Despite these complicated and evolving arrangements, higher retail prices for alternative beverages meant that margins for the franchiser, bottler, and distributor were consistently higher than on CSDs. Internationalizing the Cola Wars Do As domestic demand appeared to plateau, Coke and Pepsi increasingly looked overseas for new growth. Throughout the 1990s, new access to markets in China, India, and east Europe stimulated some of the most intense battles of the cola wars.In many international markets, per capita consumption levels remained a fraction of those in the United States. For example, while the 27 Marcy Magiera, Pepsi Moving Fast To Get Beyond Colas, Advertising Age, July 5, 1993. 28 Greising, p. 233. 29 Bonnie Herzog, PepsiCo, Inc. The Joy of Growth, Credit Suisse First Boston Corporation, September 8, 2000. 30 Maxwell, p. 152-3. 31 Betsy McKay, Juiced Up Pepsi Edges Past Coke, and It has Nothing to Do With Cola, The debate Street Journal, November 6, 2000. 32 Pallets are hard beds, usually of wood, used to organize, store, and transport products.A split pallet carries more than one product type. 13 Copying or posting is an infringement of copyright. emailprotected harvard. edu or 617-783-7860. Cola Wars Continue Coke and Pepsi in the Twenty-First Century op y 702-442 average American drank 874 eight-ounce cans of CSDs in 1999, the average Chinese drank 22. In 1999, Coke held a world market share of 53%, compared to Pepsis 21% and Cadbury Schweppes 6%. Among major overseas markets, Coke dominated in Western Europe and much of Latin America, while Peps i had marked presence in the Middle East and selenium Asia (see Exhibit 9). C By the end of World War II, Coca-Cola was the largest international producer of soft drinks. Coke steadily expanded its overseas operations in the 1950s, and the name Coca-Cola soon became a synonym for American culture. Coke built brand presence in developing markets where soft drink consumption was low but potential was large, such as Indonesia With 200 million inhabitants, a median age of 18, and per capita consumption of 9 eight-ounce cans of soda a year, one Coke executive noted that they sit square on the equator and everybodys young. Its soft drink heaven. 33 By the early 1990s, Cokes CEO Roberto Goizueta said, Coca-Cola used to be an American company with a large international business. Now we are a large international company with a sizable American business. 34 No Following Coke, Pepsi entered Europe soon after World War II, andbenefiting from Arab and Soviet exclusion of Cokeinto the Middle Ea st and Soviet bloc in the early 1970s. However, Pepsi put less emphasis on its international operations during the subsequent decade. In 1980, international sales accounted for 62% of Cokes soft drink volume, versus 20% for Pepsi.Pepsi rejoined the international battles in the late 1980s, realizing that many of its foreign bottling operations were inefficiently run and woefully uncompetitive. 35 In the early 1990s, Pepsi utilized a niche strategy which targeted geographic areas where per capitas were relatively established and the markets presented high volume and profit opportunities. These were often Coke fortresses, and Pepsi put its guerilla tactics to work, noting that as big as Coca-Cola is, you for certain dont want a shootout at high noon, said Wayne Calloway, then CEO of PepsiCo. 6 Coke struck back in one high-profile coup in 1996, Pepsis longtime bottler in Venezuela defected to Coke, temporarily reducing Pepsis 80% share of the cola market to nearly nothing overnight. I n the late 1990s, Pepsi moved even shape up away from head-to-head competition and instead concentrated on uphill markets that were still up for grabs. We kept beating our heads in markets that Coke won 20 years ago, explained Calloways successor, Roger Enrico. That is a very difficult proposition. 37 In 1999, PepsiCos bottler sales were up 5% internationally and its operating profit from overseas was up 37%. Market share gains were describe in most of Pepsi-Cola Internationals top 25 markets, including increases of 10% in India, 16% in China, and more than 100% in Russia. By 2000, international sales accounted for 62% of Cokes and 9% of Pepsis revenues. Do Concentrate producers encountered various obstacles in international operations, including cultural differences, political instability, regulations, price controls, advertising restrictions, foreign exchange controls, and lack of infrastructure.When Coke seek to acquire Cadbury Schweppes international practice, for example, it ran into regulatory roadblocks in Europe and in Mexico and Australia, where Cokes market shares exceed 50%. On the other hand, Japanese domestic-protection price controls in the 1950s greased the skids for Cokes high concentrate prices and high profitability, and in India, mandatory certification for bottled drinking water caused several local brands to fold. 33 John Huey, The Worlds Best Brand, Fortune, May 31, 1993. 34John Huey, The Worlds Best Brand, Fortune, May 31, 1993. 5 Larry Jabbonsky, get on to Run, Beverage World, August 1993. 36The Wall Street Journal, June 13, 1991. 37 John Byrne, PepsiCos New Formula How Roger Enrico is Remaking the Company and Himself, BusinessWeek, April 10, 2000. 14 Copying or posting is an infringement of copyright. emailprotected harvard. edu or 617-783-7860. 702-442 op y Cola Wars Continue Coke and Pepsi in the Twenty-First Century To cope with immature distribution networks, Coke and Pepsi created their own ground-up, and often novel, systems. Coke introduced vending machines to Japan, a channel that eventually accounted for more than half of Cokes Japanese sales. 38 In India, Pepsi base the most prominent businessman in town and gave him exclusive distribution rights, tapping his connections to drive growth. Significantly, both Coke and Pepsi recognized local-market demands for non-cola products. In 2000, Coke carried more than 200 brands in Japan alone, most of which were teas, coffees, juices, and flavored water.In Brazil, Coke offered two brands of guarana, a popular caffeinated carbonated berry drink accounting for one-quarter of that countrys CSD sales, despite rivals TV ads ridiculing gringo guarana. tC When the economy foundered in certain parts of the world during the late 1990s, annual consumption declined in many regions. Major financial quakes in East Asia in 1997, Russia in 1998 and Brazil in 1999 shook the cola giants, who had invested heavily in bottler infrastructure. From 1995 to 2000, Cokes top line sl owed to an average annual growth of less than 3%.Profits actually fell from $3. 0 billion in 1995 to $2. 2 billion in 2000. In Russia, where Coke invested more than $700 million from 1991 to 1999, the collapse of the economy caused sales to drop by as much as 60% and left Cokes seven bottling plants operating at 50% capacity. In Brazil, its third-largest market, Coke lost more than 10% of its 54% market share to low-cost local drinks produced by family-owned bottlers exempt from that countrys relatiative soft-drink taxes. In 1998, Coke estimated that a strong dollar cut into net sales by 9%.Pepsi, with its relatively lower overseas presence, was less affected by the crises. Nonetheless, Pepsi also subsidized its bottlers while experiencing a drop in sales. No Despite these financial setbacks, both Coke and Pepsi expressed confidence in the future growth of international consumption and used the downturn as an opportunity to snatch up bottlers, distribution, and even rival brands. T o increase sales, they tried to make their products more affordable through measures such as refundable glass packaging (instead of plastic) and cheaper 6. ounce bottles. The End of an Era? At the turn of the century, growth of cola sales in the United States appeared to have plateaued. Coke and Pepsi were investing hundreds of millions of dollars to shore up international bottlers operating at low capacity. The companies overall growth in soft drink sales were falling short of precedent and of investors expectations. Was the fundamental nature of the cola wars ever-changing? Would the parameters of this new rivalry include reduced profitability and stagnant growth inconceivable under the old form of rivalry? DoOr, were the troubles of the late 1990s just another step in the evolution of two of Americas most successful companies? In 2001, non-cola, non-carbs, and even convenience foods offered diversification and growth potential. Low international per capita soft drink consumption figures hinted at tremendous opportunity in the competition for worldwide throat share. observe a Coke executive in 2000, the cola wars are passing to be played now across a lot of dissimilar battlefields. 39 38 June Preston, Things May Go Better for Coke amid Asia Crisis, capital of Singapore Bottler Says, Journal of Commerce, June 29, 1998, . A3. 39 Betsy McKay, Juiced Up Pepsi Edges Past Coke, and It has Nothing to Do With Cola, The Wall Street Journal, November 6, 2000. 15 Copying or posting is an infringement of copyright. emailprotected harvard. edu or 617-783-7860. Do Exhibit 1 702-442 Copying or posting is an infringement of copyright. emailprotected harvard. edu or 617-783-7860. No U. S. Industry Consumption Statistics 1970 1975 1981 1985 1990 1992 1994 1995 1996 1998 1999 2000 Historical Carbonated Soft Drink Consumption Cases (millions) Gallons/capita As a % of total beverage consumption 3,090 22. 7 2. 4 3,780 26. 3 14. 4 5,180 34. 2 18. 7 6,500 40. 3 22. 4 7,914 46. 9 26. 1 8,160 47. 2 26. 3 8,608 50. 0 27. 2 8,952 50. 9 28. 1 9,489 52. 0 28. 8 9,880 54. 0 30. 0 9,930 53. 6 29. 4 9,950 53. 0 29. 0 22. 7 22. 8 18. 5 35. 7 6. 5 5. 2 1. 3 1. 8 26. 3 21. 8 21. 6 33 1. 2 6. 8 7. 3 4. 8 1. 7 2 34. 2 20. 6 24. 3 27. 2 2. 7 6. 9 7. 3 6 2. 1 2 40. 3 24. 0 25. 0 26. 9 4. 5 7. 8 7. 3 6. 2 2. 4 1. 8 46. 9 24. 3 24. 2 26. 2 8. 1 8. 8 7. 0 5. 4 2. 0 1. 5 47. 2 23. 3 23. 8 26. 5 8. 2 9. 1 6. 8 5. 4 2. 0 0. 6 1. 4 50. 0 22. 8 23. 2 23. 3 9. 6 9. 4 7. 1 4. 8 1. 7 0. 9 1. 3 50. 9 22. 3 22. 8 1. 3 10. 1 9. 5 6. 8 4. 9 1. 8 1. 1 1. 2 52. 0 22. 3 22. 7 20. 2 11. 0 9. 7 6. 9 4. 8 1. 8 1. 1 1. 2 54. 0 22. 1 22. 0 18. 0 11. 8 10. 0 6. 9 4. 7 2. 0 1. 3 1. 3 53. 6 22. 2 21. 9 17. 2 12. 6 10. 2 7. 0 4. 6 2. 0 1. 4 1. 3 53. 0 22. 2 21. 7 16. 8 13. 2 10. 4 7. 0 4. 6 2. 0 1. 5 1. 2 114. 5 126. 5 133. 3 146. 2 154. 4 154. 3 154. 0 152. 6 153. 6 154. 1 153. 8 153. 6 68 56 49. 2 36. 3 28. 1 28. 2 28. 5 29. 9 28. 9 28. 4 28. 7 28. 9 182. 5 182. 5 182. 5 182. 5 182. 5 182. 5 18 2. 5 182. 5 182. 5 182. 5 182. 5 182. 5 U. S. Liquid Consumption Trends (gallons/capita) Carbonated soft drinksBeer Milk Coffeea Bottled Waterb Juices Teaa Powdered drinks Wine Sports Drinksc Distilled spirits Subtotal ping water/hybrids/all others Totald tC opy Source John C. Maxwell, Beverage Digest Fact Book 2001, and The Maxwell Consumer Report, Feb. 3, 1994 Adams Liquor Handbook, casewriter estimates. aFrom 1985, coffee and tea data are based on a three-year moving average to counter-balance inventory swings, thereby depiction consumption more realistically. bBottled water includes all packages, single-serve, and bulk. cSports drinks included in Tap water/hybids/all others pre-1992. This analysis assumes that each person consumes on average one-half gallon of liquid per day. -16- Cola Wars Continue Coke and Pepsi in the Twenty-First Century Advertisement Spending for the Top 10 CSD Brands ($ millions) op y Exhibit 2 Share of market 2000 Total market 20. 4 13. 6 8. 7 7. 2 6. 6 6. 3 5. 3 2. 0 1. 7 1. 1 1999 20. 3 13. 8 8. 5 7. 1 6. 8 3. 6 5. 1 2. 1 1. 8 1. 1 Advertisement Spendinga per 2000 2000 1999 share point 207. 3 130. 0 1. 2 50. 5 84. 0 83. 6 0. 5 44. 5 NA 2. 7 148. 9 91. 1 25. 5 37. 1 68. 4 71. 3 0. 8 39. 2 NA 2. 9 tC Coke ClassicPepsi-Cola Diet Coke Mountain Dew Sprite Dr Pepper Diet Pepsi 7UP Caffeine Free Diet Coke Barqs root beer Total top 10 702-442 72. 9 72. 9 10. 2 9. 6 0. 1 7. 0 12. 7 13. 3 0. 1 22. 3 NA 2. 4 604. 2 485. 2 8. 3 707. 6 650. 0 NA Source Top 10 Soft-Drink Brands, Advertising Age, September 24, 2001 casewriter estimates. aAdvertisement spending measured in 11 media channels from CMR. Brands and total market in 192-oz cases from Do No Beverage Digest/Maxwell. Case volume from all channels. 17 Copying or posting is an infringement of copyright. emailprotected arvard. edu or 617-783-7860. 702-442 Cola Wars Continue Coke and Pepsi in the Twenty-First Century U. S. Soft Drink Market Share by Case Volume (percent) 1966 op y Exhibit 3 1970 1975 1980 1985 1990 1995 1998 2000E 27. 7 1. 5 1. 4 2. 8 33. 4 28. 4 1. 8 1. 3 3. 2 34. 7 26. 2 2. 6 2. 6 3. 9 35. 3 2