Pepsi Vs Coca Cola - Case Answers

This paper will detail the historical conflict between PepsiCo and Coca Cola, and the evolution of soft-drinks industry. The paper will also attempt to answer numerous questions, including - why concentrate producers yielded higher returns during 1950s, 1960s, and early 1970s; did the national launch of Pepsi challenge in 1977 change the nature of competition in the industry, how and did it harm or benefit Pepsi? Why Coca-Cola gained market share back from Pepsi and became more profitable in 1990s, and why Coca-Cola holds such a dominant position over Pepsi in the international marketplace.

The flagship product of The Coca-Cola Company - Coca-Cola was formulated in 1886 by a pharmacist named John Pemberton. The company expanded rapidly through independent bottling franchises, numbering 370 in 1910. Pepsi Cola was invented in 1893 by Caleb Bradham, also a pharmacist, and adopted Coca-Cola's expansion methods. By 1910, Pepsi had a network of 270 franchised bottlers. Unlike Coca-Cola, PepsiCo struggled and declared bankruptcy twice - once in 1923, and again in 1932. The company rebounded in the midst of Great Depression by lowering price for its 12-ounce bottle to a nickel, compared to a nickel for 6.5 ounce bottle offered by Coca-Cola. As PepsiCo began gaining market share, Coca-Cola filed suit again PepsiCo claiming trademark infringement in 1938. After numerous lawsuits and counter-lawsuits, the case was ruled in favor of Pepsi in 1941. By 1940s, Pepsi surpassed Royal Crown and Dr Pepper, and only trailed Coca-Cola in terms of market share.
With the appointment of Alfred Steele, a former Coca-Cola executive in 1950, Pepsi adopted aggressive tactics against Coca-Cola in terms of gaining market share. The company targeted family consumption by introducing new 26-ounce bottles, positioned itself as a product for youth or "young at heart" with catchy slogans and intense commercials, and persuaded its bottlers to modernize their plants, and improve store delivery services. The new strategies paid off, and Pepsi narrowed Coke's lead by 2-to-1 margin. Pepsi raised stakes further in 1972 by introducing the "Pepsi Challenge". The company ran a marketing campaign in Dallas, Texas where people participated in blind taste tests. The marketing campaign was successful, and Pepsi used it to show that consumers preferred Pepsi over Coca-Cola. The marketing campaign led to sales rise in Dallas, and Pepsi eventually rolled out the campaign nationwide. The "Pepsi Challenge" eventually led Pepsi to pass Coke in food start sales for the first time.
Rapidly declining market share led Coca-Cola to introduce Diet Coke in 1982. The new brand became a phenomenal success and became the third largest selling soft drink in US. Coca-Cola attempted to imitate the taste of Pepsi, and introduced a new flagship product abandoning its 99-year old formula. The action led to wide scale consumer backlash, forcing the company to reintroduce its old flagship cola drink as Coke Classic. The Coke Classic eventually led to sales increase, and became the flagship product of the company.
To expand further, both companies started offering products besides their flagship cola drinks in 1960s, essentially abandoning their one product strategy. Coca-Cola introduced Fanta, Sprite, and low-calorie Tab. PepsiCo followed suit by offering Teem, Mountain Dew, and Diet Pepsi. Both companies also introduced 12-ounce metal cans, and further diversified into non-soft drink industries. In 1960s, Coca-Cola felt that the domestic demand for soft-drinks saturated, and thus focused on overseas market instead. Pepsi on the other hand, focused aggressively on the domestic market, and doubled its market shared between 1950 and 1970.
In 1980s, Coca-Cola and PepsiCo attempted to reorganize their fragmented and independent franchised bottlers. Both companies attempted to streamline their bottlers by buying up loss-making or inefficient bottlers and reselling them to profitable franchisors. Eventually, all bottling franchisees were merged and new bottling companies were spun-off. In 1986, Coca Cola established CCE, and PepsiCo established Pepsi Bottling Group. Both of the new companies handled majority of their respective parent companies bottling requirements.
During the 1950s, 1960s, and early 1970s, concentrate producers such as PepsiCo and Coca-Cola yielded high returns. Numerous reasons are responsible for such high returns. The primary costs incurred by concentrate producers were advertising, promotion, market research, and bottler relations. As the costs for promoting products, developing trade and consumer promotions were shared with bottlers - typically at 50%, concentrate producers didn't bear significant advertising, and marketing costs. The costs for establishing a concentrate manufacturing plant were also quite low, at $5-$10 million compared to $75 million to build a large efficient bottling plant. One concentrate manufacturing plant could serve the entire US domestic market, while it took 80-85 plants to serve the US domestic market. Thus PepsiCo could build one concentration manufacturing plant that could serve the entire US, and the costs associated with advertising and promoting the products were shared with bottlers, concentrate producers had higher gross margins compared to bottlers. Bottlers were also responsible for adding sweeteners to the drinks, and the costs associated with sugar or high-fructose was borne by the bottlers. So, if the price of sugar or high-fructose rose, bottlers would be forced to absorb the costs, while the price of the product would remain the same, essential leaving the gross margins of concentrate producers unaffected by growing costs of input.
As mentioned earlier, PepsiCo launched "Pepsi Challenge" in 1974 in Dallas, Texas. The campaign led to eroding of Coca-Cola's market share, and making PepsiCo the dominant beverage company in food store sales. The campaign changed the dynamics of the nation of competition the soft drinks industry. For the first time, Coca-Cola acknowledged a competitor, and offered rebates, retail price cuts, and questioned the validity of PepsiCo's assertions.
The decline in market share led Coca-Cola to change Coke's taste. This led to an outcry among consumers, forcing the company to reintroduce its flagship. In retrospect, the nationwide campaign had both a positive and negative effect on Pepsi. The challenge led Pepsi to garner a market share of 20.4% in 1980 compared to 17% in 1970. Coca-Cola on the other hand lost market share, from 28.4% in 1970 to 25.3% in 1980. The reintroduction of original Coca-Cola led to increased popularity of the soft-drink, and eventually caused Pepsi to lose its market share to 17.3% in 1990s.

During 1990s, Coca Cola became increasingly profitable, and gained significant market share at the expense of PepsiCo. Its flagship product controlled a steady market share of 20% while PepsiCo declined from 17.3% in 1990 to 14.5% in 1998. Coca-Cola had a global market share of 51% compared to Pepsi's 21%. As consumption in US declined from 6% in 1980's to 3% in 1990's, Coca-Cola was able to offset lower domestic sales with higher revenues from abroad. As PepsiCo concentrated on the domestic market, its margins declined due to changing trend within the US economy. Also Coca-Cola entered foreign markets with large and experience bottlers in their respective companies and held a minority stake, and concentrated on streamlining local bottling networks. Pepsi on the other hand entered foreign markets through joint ventures, and many a times shared only 50% revenue on sales.

Two primary reasons contributed to domination of Coca Cola in the international market, with one as mentioned above was the strategy Coca-Cola used when investing in a foreign market. Coca-Cola entered foreign markets differently than Pepsi, providing it an edge over Pepsi. While Pepsi invested heavily in foreign markets, Coca-Cola's appointed bottlers with significant experience easily neutralized any threat PepsiCo could pose. The second reason Coca-Cola holds such a dominant position in world market is due to World War II. During World War II, Coca-Cola offered American servicemen its product for 5 Cents, wherever they were and whatever the costs the company would incur. The company would establish bottling plants (subsidized by US government), and send its product overseas wherever US troops went. With its inexpensive price, and widespread popularity among servicemen, coupled with the eventual victory of US in Europe and Asia, the product was widely adopted throughout Europe and Asia. Due to familiarity of the product, Coca-Cola still retains a dominant position throughout Europe and Asia.

Author Name: Bhaskar Chitraju