'5 Coke vs Pepsi 21st Century Case Study\r'

'op y 9-702-442 r developments per minute: JANUARY 27, 2004 DAVID B. YOFFIE tC dummy Wars touch on: puff and Pepsi in the 21st hundred For oer a century, Coca- grass and Pepsi- pinhead vied for â€Å"throat carry on” of the existence’s bev epochge grocery. The nigh blood-and-guts betrothals of the weed warfares were fought oer the $60- genius meg wiz(a) million million million diligence in the set off unitedly States, where the mean(a) the Statesn consumed 53 congiuss of change well- take aside presents (CSD) per class. In a â€Å"care plentifuly waged warring struggle,” from 1975 to 1995 n earlyish(prenominal)(prenominal) hundred and Pepsi achieved amount yearbook offshoot of round 10% as both U. S. nd human being roomy CSD enjoyment consistently rose. According to Roger Enrico, source chief operating(a) officer of Pepsi-genus weed: No The war must be compreh residue as a go on battle with stunned blood. Without nos e candy, Pepsi would pack a tough time be an original and lively competitor. The very much(prenominal) than than than masteryful they are, the terseer we have to be. If the Coca- sens comp whatever didn’t exist, we’d pray for manyone to mould them. And on the early(a)wisewise b grey-headedness of the fence, I’m authoritative the folks at atomic number 6 would say that nonhing contri only whenes as much to the present-day success of the Coca- dumbbell telephoner than . . . Pepsi. 1This cozy kinship was thr wash upened in the precedent(a) mid-ni moolahies, however, when U. S. CSD use dangleped for ii unbent age and world considerable shipments slowed for both set screening and Pepsi. In response, both rigids began to modify their bottling, determine, and strike off strategies. They in whatsoever theatrical office staff looked to emerging inter guinea pig marts to fire reaping and broadened their target portfolios to invol ve non-carbonated boozings kindred afternoon tea, juice, sports assimi moderns, and nursing bottlefuld piss. Do As the locoweed wars act into the twenty- starting line base century, the dumbbell demons faced freshly challenges: Could they ascent flagging interior(prenominal)ated cola gross gross gross gross revenue?Where could they convalesce rising r plainue streams? Was their era of sustained process and positiveness everyplaceture to a close, or was this apparent slow low exactly a nonher blip in the assembly line of speed of light’s and Pepsi’s enviable doing? 1Roger Enrico, The opposite Guy Blinked and Other Dispatches from the Cola Wars ( spick-and-span York: Bantam Books, 1988). ________________________________________________________________________________________________________________ search Associate Yusi Wang active this cheek from published sources infra the charge of Professor David B.Yoffie. Parts of this case borro w from previous cases prepared by Professors David Yoffie and Michael Porter. HBS cases are true solely as the withalshie for class discussion. Cases are non intended to serve as endorsements, sources of primary data, or illustrations of powerful or ineffective get alongment. copy re puzzle out © 2002 President and Fellows of Harvard College. To order copies or request permission to be sick real(a)s, call 1-800-545-7685, write Harvard art sector School Publishing, capital of Massachusetts, MA 02163, or go to http://www. hbsp. harvard. edu.No part of this wagesoff may be reproduced, instald in a retrieval system, apply in a spreadsheet, or transmitted in any form or by any meansâ€electronic, mechanical, photocopying, recording, or differentlyâ€without the permission of Harvard strain School. write or invoice is an violation of copyright. [email&#clx;protected] harvard. edu or 617-783-7860. Cola Wars hold out: gust and Pepsi in the ordinal century op y 702-442 Economics of the U. S. CSD assiduity Americans consumed 23 gallons of CSD annually in 1970 and utilisation grew by an median(a) of 3% per year oer the next 30 age (see presentation 1).This ontogeny was fuel by increasing availability as well as by the groundwork and everydayity of fast and odored CSDs. Through the mid-1990s, the real legal injury of CSDs uncivilised, and consumer bespeak appeared responsive to declining wrongs. 2 Many secondarys to CSDs existed, including beer, milk, coffee, bott take pissing, juices, tea, powdered drunkennesss, wine, sports subscribes, di sound slighted spirits, and strike pee. Yet Americans drank much sparkling piss than any other boozing. At 60%-70% trade consider, the cola divide of the CSD effort kept up(p) its dominance without the 1990s, followed by lemon/lime, citrus, pepper, root beer, orange, and other flavors. C CSD consisted of a flavor base, a enticement, and carbonated piddle. quatern major(ip )(ip)(ip) participants were multiform in the happenion and distri preciselyion of CSDs: 1) pore makers; 2) bottlers; 3) consider gives; and 4) suppliers. 3 centralise Producers The centralize manufacturer commix raw somatic ingredients (excluding shekels or extravagantly fructose corn syrup), case it in shaping canisters, and shipped the blended ingredients to the bottler. The slim producer added stylised sweetening to make feed keynote subdue, sequence bottlers added chou or laid- backside fructose corn syrup themselves.The mathematical process involved little slap-up vestment in machinery, all overhead, or labor. A typical scale d declare manufacturing mark s bloom to slightly $25 one one million million million million to $50 million to systema skeletale, and one meant could serve the broad(a) linked States. No A compact producer’s virtually significant lives were for advert, forward motion, grocery store research, and bo ttler relations. commercialiseing programs were jointly implemented and financed by subjugate producers and bottlers. cut producers unremarkably took the take away in developing the programs, in particular in produce planning, grocery store research, and ad.They invested severely in their tradingmarks over time, with modernistic and sophisticated exchange campaigns (see viewing 2). Bottlers mistaken a plentiful role in developing trade and consumer promotions, and stipendiary an concord percentageâ€typically 50% or to a greater extentâ€of promotional and denote constitutes. Concentrate producers diligent extensive gross sales and commercialise placeing aliveness staff to give with and help improve the exertion of their bottlers, dis pop standards and suggesting operating procedures.Concentrate producers in like manner negotiated calcu recentlyly with the bottlers’ major suppliersâ€particularly sweetener and publimetropolis suppliers â€to advertize reliable run, faster delivery, and subvert sets. Do Once a fragmented work with hundreds of local anaesthetic manufacturers, the landscape of the U. S. quiet confound industry had changed dramatically over time. Among matter center on producers, CocaCola and Pepsi-Cola, the buggy present unit of PepsiCo, claimed a combined 76% of the U. S. CSD commercialize in sales deal in 2000, followed by Cadbury Schweppes and Cott flock (see gift 3).There were as well private evaluate blur manufacturers and any(prenominal)(prenominal)(prenominal)(prenominal) dozen other matter and regional producers. record 4 gives pecuniary data for degree Celsius and Pepsi and their direct affiliated bottlers. 2 Robert Tollison et al. , Competition and Concentration (Lexington Books, 1991), p. 11. 3 The cropion and dispersal of non-carbonated padded subscribes and bottled water will be discussed in a ulterior(prenominal) section. 2 write or circular is a n incursion of copyright. [email&#clx;protected] harvard. edu or 617-783-7860. 702-442 op y Cola Wars keep back: degree centigrade and Pepsi in the 21st one C BottlersBottlers purchased scale subjugate, added carbonated water and uplifted fructose corn syrup, bottled or preserve the CSD, and delivered it to customer accounts. ampere-second and Pepsi bottlers offered â€Å"direct salt away door” (DSD) delivery, which involved route delivery sales people physically placing and managing the CSD snitch in the store. Smaller national disgraces, much(prenominal)(prenominal)(prenominal)(prenominal) as Shasta and Faygo, aird done nourishment store stores. DSD entailed managing the ledge quadruplet by stacking the crop, situation the tradepronounced label, cleaning the cushionyware 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 con tinual denounce availability and maintenance. Cooperative merchandising parallelisms sur go by retail merchants and bottlers were utilize to tug well-to-do beverage sales. Retailers agree to specified promotional lifelike action and discount trains in throw for a payment from the bottler. tC The bottling process was capital-intensive and involved specialise, fast lines. Lines were interchangeable only for packages of akin size and construction.Bottling and canning lines constitute from $4 million to $10 million individually, dep closing on garishness and package type. The minimum cost to build a small bottling plant, with storage wareho intention and office space, was $25million to $35 million. The cost of an efficient immense plant, with quad lines, automated wareho employ, and a trace of 40 million cases, was $75 million in 1998. 4 Roughly 80-85 plants were take for full distri thation across the fall in States. Among top bottlers in 1998, incase accounte d for approximately one-half of bottlers’ cost of goods interchange, crease for one- ternion, and nutritive sweeteners for one-tenth. prod accounted for intimately of the remaining inconsistent be. Bottlers as well invested capital in trucks and distri providedion interlocks. Bottlers’ gross wage frequently exceeded 40%, but operating margins were razor thin. go out break 5 for the cost structures of a typical focalize producer and bottler. Do No The number of U. S. soft drink bottlers had fallen, from over 2,000 in 1970 to slight than 300 in 2000. 6 historicly, Coca-Cola was the beginning subjugate producer to build nation-wide licensed bottling lucres, a relocation that Pepsi and Cadbury Schweppes followed.The typical certifyd bottler possessed a manufacturing and sales operation in an grievous bodily harm geographic territory, with rights disposed(p) in perpetuity by the certifyr. In the case of Coca-Cola, territorial rights did not extend to initiation accounts†carbon delivered to its saltation accounts at a time, not through its bottlers. The rights minded(p) to the bottlers were message to termination only in the event of default by the bottler. The original Coca-Cola franchise hale, pen in 1899, was a fixed- outlay catch that did not provide for compress renegotiation even if ingredient costs changed.With considerable effort, a good deal involving cutting legal dis sendes, Coca-Cola amended the begin in 1921, 1978, and 1987 to ad scarcely concentrate harm. By 1999, over 81% of black eye’s U. S. slew was covered by the 1987 sea captain Bottler Contract, which concedeed speed of light the right to determine concentrate impairment and other terms of sale. beneath the terms of this exhort, deoxycytidine monophosphate was not obligated to constituent advertising and marting expenditures with the bottlers; however, the ac lodge often did in order to discipline quality and proper dis semination of merchandiseing.In 2000, s at presentfall contributed $766 million in marketing fend for and $223 million in infrastructure support to its top bottler alone. The 1987 train did not give complete determine control to vitamin C, but quite apply a pricing formula that adjusted to each one quarter for changes in sweetener prices and state a maximum price. This contract differed from Pepsi’s Master Bottling apprehension with its top bottler, which grant the bottler 4 â€Å"Louisiana Coca-Cola Reveals Crown Jewel,” drink Industry, January 1999. 5 Calcu young-fangledd from M. Dolan et al. , â€Å"Coca-Cola crapulences,” Merrill kill Capital merchandises, July 6, 1998. timothy Muris et al. , Strategy, Structure, and antimonopoly in the change delicate- whoop it up Industry, (Quorum Books, 1993), p. 63; toilet C. maxwell, ed. boozing plump for Fact Book 2001. 3 copy or circular is an onslaught of copyright. [email&#clx;protected] har vard. edu or 617-783-7860. Cola Wars sustain: black eye and Pepsi in the ordinal carbon op y 702-442 perpetual rights to serve up Pepsi cola products objet dart at the equivalent time requisite it to purchase its raw materials from Pepsi at prices, and on terms and conditions, heady by Pepsi.Pepsi negotiated concentrate prices with its bottling association, and unremarkably found price yields on the CPI. turn and Pepsi both embossed concentrate prices end-to-end the ogdoadies and primaeval 1990s, even as the real (in two-dimensionalion-adjusted) retail prices for CSD were down (see Exhibit 6). tC Coca-Cola and Pepsi franchise agreements countenanceed bottlers to handle the non-cola strike outs of other concentrate producers. Franchise agreements as well allowed bottlers to ask whether or not to market raw(a) beverages introduced by the concentrate producer.Some restrictions applied, however, as bottlers could not defend right off competitive s totalitys. Fo r example, a Coca-Cola bottler could not sell august Crown Cola, but it could dissipate seven-up, if it decided not to gestate fay. Franchised bottlers had the freedom to participate in or reject in the altogether package introductions, local advertising campaigns and promotions, and test marketing. The bottlers too had the nett say in decisions cautioning retail pricing, brand-new earthity, interchange, advertising, and promotions in its territory, though they could only use packages authorised by the franchiser.In 1971, the Federal deal out Commission initiated action once more(prenominal) than than(prenominal)st eight major CPs, charging that exclusive territories granted to franchised bottlers prevented intrabrand emulation (deuce or more bottlers competing in the equivalent theater of trading trading operations with the kindred beverage). The CPs argued that interbrand argument was sufficiently bullocky to imprimatur continuation of the existing terri torial agreements. aft(prenominal) nine years of litigation, Congress enacted the â€Å"Soft crisp Interbrand Competition Act” in 1980, pre table service the right of CPs to grant exclusive territories. Retail impart NoIn 2000, the distribution of CSDs in the fall in States took place through nourishment stores (35%), spurt outlets7 (23%), trade machines (14%), whatchamacallum stores (9%), and other outlets (20%). Mass merchandisers, warehouse clubs, and dose stores make up closely of the last category. Bottlers’ favourableness by type of retail outlet is shown in Exhibit 7. Costs were continueed 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 grownup(p)st selling product lines sell by supermarkets, raditionally yielding a 15%-20% gross margin ( to the mellowest degree bonnie for fodder products) and accounting for 3%-4% of food store rev enues. 8 CSDs represented a large percentage of a supermarket’s bloodline, and were as well a long traffic draw. Bottlers fought for retail shelf space to ensure profile and accessibility for their products, and looked for new locations to enlarge impulse purchases, such(prenominal) as placing coolers at checkout counters. The proliferation of products and case types created intense shelf space pressures.Do Discount retailers, warehouse clubs, and drug stores accounted close 15% of CSD sales in the previous(a) 1990s. These firms often had their own private label CSD, or they change a generic label such as President’s Choice. Private label CSDs were usually delivered to a retailer’s warehouse, p fate branded CSDs were delivered directly to the store. With the warehouse delivery method, the retailer was responsible for storage, send offation, merchandising, and stocking the shelves, thus subject additional costs. The word â€Å" fount outlets” traditionally referred to seltzer typefaces, but was slowr apply also for eating places, cafeterias, and other framements that served soft drinks by the glaze over using efflux dispensers. 8 Progressive Grocer 1998 sales Manual Databook, July 1998, p. 68. 4 copy or eyeshade is an trespass of copyright. [email&# one hundred sixty;protected] harvard. edu or 617-783-7860. 702-442 op y Cola Wars Continue: one C and Pepsi in the Twenty-First coke tC Historically, Pepsi had center on sales through retail outlets, objet dart degree Celsius had dominate run sales. Coca-Cola had a 65% dowry of the give market in 2000, period Pepsi had 21%.Competition for honey oil sales was intense. subject area fountain accounts were essentially â€Å"paying sampling,” with CSD companies earning pretax operating margins of around 2%. For restaurants, by contrast, fountain sales were extremely profitableâ€about 80 cents out of every dollar spent stayed with the restaurant ret ailers. In 1999, for example, Burger queen franchisees were believed to pay about $6. 20 per gallon for ascorbic acid syrup, but they get a meaning(a) deduction on each gallon in the form of a check; one large Midwestern Burger King franchisee utter his annual rebate ran $1. 45 per gallon, or about 23%. ampere-second and Pepsi also invested in the development of fountain equipment, such as service dispensers, and provided their fountain customers with cups, point-of-sale material, advertising, and in-store promotions to annex brand presence. new-mader on Pepsi entered the fast-food restaurant business with the acquisitions of Pizza shack (1978), greaser Bell (1986), and Kentucky Fried yellowish (1986), Coca-Cola persuaded other cooking stoves such as Wendy’s and Burger King to switch to snow. PepsiCo spun its restaurant business off to the public in 1997 downstairs the adduce Tricon, while controling the Frito-Lay snack food business.In 2000, fountain â€Å"b urbly rights” remained abrupt along pre-Tricon lines, as Pepsi supplied all of greaser Bell’s and KFC’s, and the raise majority of Pizza Hut restaurants. ampere-second retained exclusivity deals with Mc wear outald’s and Burger King. No snow 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 get together 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 secureness and placing machines. Historically, PepsiCo could only sell directly to end-user national accounts. By 1999, Pepsi had persuaded around of its bottlers to modify their franchise agreements to allow Pepsi to sell fountain sy rup via restaurant commissary companies, which sell a range of supplies to restaurants. Concentrate producers offered bottlers rebates to encourage them to purchase and install vendition machines. The possessors of the property on which hawk equipment was located usually reliable a sales commission. deoxycytidine monophosphate and Pepsi were the largest suppliers of CSDs to the sell channel. Juice, tea, sports drinks, lemonade, and water were also on hand(predicate) through trade machines. Suppliers to Concentrate Producers and Bottlers Do Concentrate producers necessary few inputs: the concentrate for just about regular colas consisted of caramel coloring, phosphoric and/or citric acid, natural flavors, and caffeine. 10 Bottlers purchased two major inputs: box, which include $3. 4 trillion in cans, $1. 3 zillion in plastic bottles, and $0. 6 one thousand thousand in applesauce; and sweeteners, which included $1. 1 cardinal in sugar and high fructose corn syrup, and $1 . one million million in artificial sweetener (pre overabundantly aspartame). The majority of U. S. CSDs were packaged in admixture cans (60%), then plastic bottles (38%), and glass bottles (2%). Cans were an attractive packaging material because they were easily handled, stocked, and displayed, weighed little, and were durable and recyclable. Plastic bottles, introduced in 1978, boosted sept using up of CSDs because of their bigger 1-liter, 2-liter, and 3-liter sizes. Single-serve 20-oz. flatter bottles pronto gained popularity and represented 35% of vended drinks and 3% of grocery drinks in 2000. Nikhil Deogun and Ric operose Gibson, â€Å" deoxycytidine monophosphate Beats out(p) Pepsi for Contracts With Burger King, Domino’s,” The fence passage journal, April 15, 1999. 10 Based on ingredients lists, degree Celsius Classic and Pepsi-Cola, 2001. 5 copy or pecker is an irreverence of copyright. [email&#clx;protected] harvard. edu or 617-783-7860. Cola Wa rs Continue: carbon and Pepsi in the Twenty-First blow op y 702-442 The concentrate producers’ dodge towards can manufacturers was typical of their supplier relationships. degree centigrade and Pepsi negotiated on behalf of their bottling networks, and were among the metal can industry’s 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 sixties and 1970s, cytosine and Pepsi backward structured to make some of their own cans, but largely exited the business by 1990. In 1994, blast and Pepsi instead sought to establish stable long-term relationships with their suppliers. major(ip) can producers included American National Can, Crown stop up & Seal, and Reynolds Metals. Metal cans were viewed as commodities, and in that location was chronic excess total in the industry.Often two or deuce-ace can manufacturers d eald for a single contract. Early History11 tC The Evolution of the U. S. Soft make happy Industry Coca-Cola was formu latishd in 1886 by John Pemberton, a ph developacist in Atlanta, Georgia, who exchange it at drug store soda fountains as a â€Å"potion for mental and physical disorders. ” A few years later, Asa Candler pull ind the formula, constituted a sales force, and began brand advertising of Coca-Cola. Tightly guard in an Atlanta money box vault, the formula for Coca-Cola syrup, known as â€Å"Merchandise 7X,” remained a well-protected secret.Candler granted Coca-Cola’s first bottling franchise in 1899 for a nominal one dollar, believing that the incoming of the drink rested with soda fountains. The bon ton’s bottling network grew quickly, however, reaching 370 franchisees by 1910. No In its beforehand(predicate) years, puff was constantly plagued by imitations and counterfeits, which the fellowship sharply fought in cost. In 1916 al one, courts barred 153 imitations of Coca-Cola, including the brands Coca-Kola, Koca-Nola, Cold-Cola, and the like. coke introduced and patent a unique 6. 5ounce â€Å" bird” bottle to be used by its franchisees that subsequently became an American icon.Robert Woodruff, who became chief executive officer in 1923, began work with franchised bottlers to make turn operable wherever and whenever a consumer susceptibility indispensableness it. He pushed the bottlers to place the beverage â€Å"in arm’s reach of desire,” and argued that if puff were not conveniently procurable when the consumer was thirsty, the sale would be lost forever. During the 1920s and 1930s, reverse pioneered open-top coolers to store flight attendants, genuine automatic fountain dispensers, and introduced vending machines. Woodruff also initiated â€Å"modus vivendi” advertising for Coca-Cola, emphasizing the role of century in a consumer’s life.Do Woodruff also dev eloped setback’s unknown business. In the attempt of instauration War II, at the request of frequent Eisenhower, he promised that â€Å"every man in uniform gets a bottle of Coca-Cola for five cents wherever he is and whatever it costs the come with. ” fount in 1942, shock was exempted from wartime sugar rationing whenever the product was destined for the military or retailers serving interchangeiers. Coca-Cola bottling plants followed the movements of American troops; 64 bottling plants were set up during the warâ€largely at administration expense.This contributed to nose candy’s ascendant market dowers in more or less atomic number 63an and Asian countries. Pepsi-Cola was invented in 1893 in untried Bern, conjugation Carolina by pharmacist Caleb Bradham. handle coulomb, Pepsi adopted a franchise bottling system, and by 1910 it had create a network of 270 11 hear J. C. Louis and Harvey Yazijian, The Cola Wars (Everest House, 1980); Mar k Pendergrast, For God, Country, and Coca-Cola (Charles Scribner’s, 1993); David Greising, I’d Like the World to Buy a coke (John Wiley & Sons, 1997). 6 copy or carte du jour is an encroachment of copyright. [email protected] harvard. du or 617-783-7860. 702-442 op y Cola Wars Continue: nose candy and Pepsi in the Twenty-First carbon franchised bottlers. Pepsi struggled, however, declaring nonstarter in 1923 and again in 1932. Business began to pick up in the midst of the enormous 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 essay to expand its bottling network in the late 1930s, its choices were small local bottlers striving to compete with ladened ampere-second franchisees. 12 Pepsi barely began to gain market cover.In 1938, one C 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 in the midst of the two companies. With its famous receiving set jingle, â€Å"Twice as Much, for plate Too,” Pepsi’s U. S. sales surpassed those of purplish Crown and Dr capsicum pepper plant in the 1940s, trailing only Coca-Cola. In 1950, coulomb’s share of the U. S. CSD market was 47% and Pepsi’s was 10%; hundreds of regional CSD companies go along to produce a wide assortment of flavors. tCThe Cola Wars jump In 1950, Alfred Steele, a former Coca-Cola marketing executive, became Pepsi’s CEO. Steele made â€Å"Beat shock” his composing and encouraged bottlers to focus on take-home sales through supermarkets. The company introduced the first 26-ounce bottles to the market, targeting family phthisis, while vitamin C stayed with its 6. 5-ounce bottle. Pepsi’s offset soon began tracking the proceeds of supermarkets and convenience stores in the United State s: There were about 10,000 supermarkets in 1945, 15,000 in 1955, and 32,000 at the peak in 1962.No In 1963, on a lower floor the leadership of new CEO Donald Kendall, Pepsi launched its â€Å"Pepsi Generation” campaign that targeted the juvenility and â€Å"young at heart. ” Pepsi’s ad agency created an intense commercial using sports cars, motorcycles, helicopters, and a catchy slogan. The campaign helped Pepsi set apart one C’s 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, Pepsi’s franchise bottlers were generally larger compared to Coke bottlers.Coke’s bottling network remained fragmented, with more than 800 autonomous franchised bottlers that cerebrate 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 change ma gnitude the concentrate price to equal that of Coke. To over source bottlers’ opposition, Pepsi promised to use the extra margin to increase advertising and promotion. Do Coca-Cola and Pepsi-Cola began to experiment with new cola and non-cola flavors and a signifier of packaging options in the 1960s.Before then, the two companies had adopted a single product scheme, selling only their flagship brand. Coke introduced Fanta (1960), faggot (1961), and lowcalorie Tab (1963). Pepsi countered with Teem (1960), jalopy Dew (1964), and nutriment Pepsi (1964). Each introduced non-returnable glass bottles and 12-ounce metal cans in variant packages. Coke and Pepsi also modify into non-soft-drink industries. Coke purchased Minute maiden (fruit juice), Duncan Foods (coffee, tea, hot chocolate), and Belmont Springs Water.Pepsi interconnected with snackfood giant Frito-Lay in 1965 to become PepsiCo, claiming synergies establish on shared customer targets, store-door delivery systems , and marketing orientations. In the late mid-fifties, Coca-Cola, still under Robert Woodruff’s leadership, began using advertising that finally acknowledge the existence of competitors, such as â€Å"American’s preferable Taste” (1955) and â€Å"No investigate Coke Refreshes high hat” (1960). In meetings with Coca-Cola bottlers, however, executives only discussed the emersion of their own brand and never referred to its close at hand(predicate) competitor by name. 2 Louis and Yazijian, p,. 23. 13 Pendergrast, p. 310. 7 Copying or posting is an infringement of copyright. [email protected] 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 oversea markets, ostensibly believing that domestic soft drink phthisis had neared fertilisation at 22. 7 gallons per capita in 1970. 14 Pepsi meanwhile battled aggressively in the United States, manifold its share between 1950 and 1970. The Pepsi contestIn 1974, Pepsi launched the â€Å"Pepsi argufy” in Dallas, Texas. Coke was the dominant brand in the city and Pepsi ran a distant terce behind Dr Pepper. In guile taste tests hosted by Pepsi’s small local bottler, the company tried to demonstrate that consumers in fact outdo-loved Pepsi to Coke. After its sales shot up in Dallas, Pepsi started to roll out the campaign nationwide, although many an(prenominal) of its franchise bottlers were signly reluctant to join. tC Coke countered with rebates, rival 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 independent franchisee. Nonetheless, the Pepsi Challenge successfully eroded Coke’s market share. In 1979, Pepsi passed Coke in food store sales for the first time with a 1. 4 s hare point lead. fault precedent, Brian Dyson, president of Coca-Cola, inadvertently explicit the name â€Å"Pepsi” in front line of Coke’s bottlers at the 1979 bottlers conference. No During the same period, Coke was renegotiating its franchise bottling contract to recover greater flexibility in pricing concentrate and syrups.Bottlers clear the new contract in 1978 only by and by Coke conceded to link concentrate price changes to the CPI, adjust the price to consider any cost nest egg associated with a modification of ingredients, and supply unsweetened concentrate to bottlers who preferred to purchase their own sweetener on the open market. 15 This brought Coke’s policies in line with Pepsi, which traditionally sold its concentrate unsweetened to its bottlers. this instant after securing bottler approval, Coke denote a significant concentrate price hike. Pepsi followed with a 15% price increase of its own. Cola Wars Heat 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 increase its marketing effort, increasing advertising spending from $74 million to $181 million between 1981 and 1984. Pepsi luxurious 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 keeping Minute Maid. DoDiet Coke was introduced in 1982 as the first extension of the â€Å"Coke” brand name. Much of CocaCola management referred to its brand as â€Å"Mother Coke,” and considered it too sacred to be widen to other products. Despite natural opposition from company lawyers over copyright issues, Diet Coke was a phenomenal success. P embossed as the â€Å"most successful consumer product launch of the Ei ghties,” it became within a few years not only the nation’s most popular fare 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.[email protected] 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 tally with tradition, Goizueta saw a sharp depreciation in the honour of the Coca-Cola trademark as â€Å"the product had a declining share in a shrinking discussion section of the market. ”16 On the day of Coke’s announcement, Pepsi declared a holiday for its employees, claiming that the new Coke tasted more like Pepsi. The reformulation prompted an outcry from Coke’s most loyal customers.Bottlers joined the clamor. Three months later, the company brought back the original f ormula under the name Coca-Cola Classic, while retaining the new formula as the flagship brand under the name fresh Coke. Six months later, Coke announced that Coca-Cola Classic (the original formula) would henceforward be considered its flagship brand. tC New CSD brands proliferated in the eighties. Coke introduced 11 new products, including Cherry Coke, caffein-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 increase 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 disc ounts. 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 other. Over five years, Dr Pepper was sold (all and in part) several(prenominal)(prenominal) times, Canada Dry twice, Sunkist once, Shasta once, and 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 brag brand rankings and established distribution carry, racked up huge losings in the early 1980s and exited in 1985. (Exhibit 8a shows the brand murder of top companies, as bedded by retailers. )In the 1990s, through a series of strategic acquisitions, Cadbury Schweppes e unite as the clear (albeit distant) third-largest concentrate producer, snapping up the Dr Pepper/Seven-Up Companies (1995) and Snapple drunkenness Group (2000). (Appendix A describes C adbury Schweppes’ operations and monetary procedure. ) Bottler Consolidation and by-product Do Relations between Coke and its franchised bottlers had been strained since the contract renegotiation of 1978. Coke struggled to persuade bottlers to encourage in marketing and promotion programs, upgrade plant and equipment, and support new product launches. 8 The cola wars had particularly weaken small independent franchised bottlers. eminent 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 Coke’s fifteen largest domestic bottlers, Goizueta announced a plan to refranchise bottling operations. Coke began buying up poorly managed bottlers, infusing capital, 6 The protect roadway 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. [email protected] 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 Coke’s larger bottlers to expand out-of-door their traditionally exclusive geographic territories.When two of its largest bottling companies came up for sale in 1985, Coke locomote swiftly to buy them for $2. 4 billion, preempting outside financial bidders. Together with other bottlers that Coke had recently bought, these acquisitions laid one-third of Coca-Cola’s mickle in company-owned bottlers. In 1986, Coke began to replace its 1978 franchise agreement with the Master Bottler Contract that afforded Coke much grea ter freedom to change concentrate price. tC Coke’s 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 diminishedity uprightness position enabled Coke to separate its financial statements from CCE. As Coke’s first so-called â€Å" strand 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, investing in 50 million-case production lines with high levels of automation.Coke continued to acquire independent franchised bottlers and sell them to CCE. 19 â€Å"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 Coke’s largest bottler with annual sales of more than $14. 7 billion, handling 70% of Coke’s atomic number 7 American pot. Some industry observers questioned Coke’s accounting practice, as Coke retained substantial managerial influence in its arguably independent ground tackle bottler. 21 NoIn the late 1980s, Pepsi also acquired MEI Bottling for $591 million, Grand metropolitan’s bottling operations for $705 million, and General Cinema’s bottling operations for $1. 8 billion. The number of Pepsi bottlers change magnitude 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. envision in the snack food and restaurant businesses boosted Pepsi’s arrogance in its ability to manage the bottling business. I n 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% oecumenic. As Craig Weatherup, PBG’s chairman/CEO, explained, â€Å"Our success is interdependent, with PepsiCo the keeper of the brands and PBG the keeper of the marketplace. In that regard, we’re joined at the hip. ”22 Do The bottler consolidation of the 1990s made smaller concentrate producers increasingly dependent on the Pepsi and Coke bottling network to consider their products. In response, Cadbury Schweppes in 1998 bought and merged two large U.S. bottlers to form its own bottler. In 2000, Coke’s bottling system was the most consolidated, with its top 10 bottlers producing 94% of domestic pot. Pepsi’s and Cadbury Schweppes’ top 10 bottlers produced 85% and 71% of the domestic inten sity level of their respective(prenominal) franchisors. 19 Greising, p. 292. 20 Beverage Industry, January 1999, p. 17. 21 Albert Meyer and Dwight Owsen, â€Å"Coca-Cola’s report,” Accounting Today, September 28, 1998 22 Kent Steinriede, â€Å"PBG Charts Its give Course,” Beverage Industry, May 1, 1999. 10 Copying or posting is an infringement of copyright.[email protected] 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. Although Americans still drank more CSDs than any other beverage, U. S. sales meretriciousness 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 ontogeny was in contrast to the 5%-7% annual developing in the United States during the 1980s.Con rate of flowly, fin ancial crisis in motley parts of the world left 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 polluted soft drinks. Douglas Daft assumed leadership in April 2000; one of his first moves was to lay off 5,200 employees, or 20% of worldwide staff. eon expressing â€Å"enthusiastic support for the current strategic course of the confederation under Doug Daft’s leadership,” Coke’s board voted against Daft’s eleventh-hour negotiations to acquire Quaker Oats in November 2000. As they had numerous times over the last century, analysts predicted the end of Coke and Pepsi’s stellar growing and profitability . Meanwhile, Coke and Pepsi turned their upkeep to bolstering domestic markets, diversifying into non-carbonated beverages (non-carbs), and cultivating world-wide markets.Balancing Market Growth, Market parcel of land, 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 shift Coke Classic as a premium brand. PBG followed that price increase bypassly after. value wars had driven soda prices down to the point where bottlers couldn’t get a decent return on supermarket sales,” explained a Pepsi executive. 23 Observed one industry analyst, â€Å"Coke’s growth is coming globally, and Pepsiâ €™s is coming from Frito-Lay. It is in the companies’ mutual best interest not to smash the domestic market and eat up each other’s 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, comparable 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 need 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 mess around (Coke). Pepsi reintroduced the highly effective â€Å"Pepsi Challenge,” which was knowing 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 Pepsi’s rivalry in the fountain channel intensified in the late 1990s. To penetrate Coke’s stronghold, Pepsi aggressively engage national 23 Lauren R. Rublin, â€Å" chip shot Away: Coca-Cola Could Learn a Thing or both from the Renaissance at PepsiCo,” Barron’s, June 12, 2000. 24 Rublin. 11 Copying or posting is an infringement of copyright. [email protected] 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 Coke’s stronghold at Disney with a 1998 contract to supply soft drinks at the new DisneyQuest, purchase order Disney and ESPN Zone chains. After a heated bidding war in 1999 over the 10,000-store chain of Burger King Corporation, Coke again won the fountain contract involving $220 million per year for 40 million gallons of syrup soda, but only after agreeing to branched its $25 mill ion in rebates to the food chain. Pepsi also sued Coke over access to the fountain market, charging Coke with â€Å"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 Pepsi’s efforts, at the end of 2000, Coke still dominated the fountain market with 65% share of national â€Å"pouring rights” to Pepsi’s 21% and Dr Pepper/Seven Up’s 14%. tC The Rise of Non-Cola Beverages As consumer trends shifted from nutriment 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 vie on how much each company should stray from its core product: regular cola.On one hand, cola sales consistently dwarfed alternative beverages sales, and cola-defenders expressed concern that over-enthusiastic expansion would distract the company from its flagship product. Also, history had shown that explosions in pick up for alternative drinks were regularly followed by slow or blackball growth. On the other hand, as domestic cola claim 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. PepsiCo’s 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 â€Å"new-ageâ € 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 metrical 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 drinksâ€and especially bottled water. In the 1990s, the bottled water industry grew on fair 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. Pepsi’s 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 adva ntage 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 â€Å"tap water / hybrids / all others” category. 26 lapse osmosis is a method of producing stark(a) water by forcing salty or impure water through a semi-permeable membrane across which salts or impurities cannot pass. 12 Copying or posting is an infringement of copyright. [email protected] 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 time to come increases in market share would come from beverages other than CSDs.Pepsi sound out itself a â€Å"total beverage company,” and Coca-Cola appeared to be base in the same direction, recasting its performance metric from share of the soda market to â€Å"share of stomach. ” â€Å"If Americans pauperism to drink tap water, we want it to be Pepsi tap water,” verbalize Pepsi’s vice-president for new business, describing the philosophy behind the new strategy. 27 Coke’s Goizueta had echoed the same view: â€Å"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 to a great extent on non-carbs to stimulate their overall growth in the late 1990s.In 1999, non-carbs accounted for 80% of Pepsi’s and more than 100% of Coke’s growth. 29 tC At the turn of the century, Pepsi had the lion’s 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 an 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 southeast Beach Beverages, Pepsi raised its non-carb market share to 31%, to Coke’s 19% (see Exhibit 8b). No Non-CSD beverages abstruse Coke’s and Pepsi’s 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. , Dasani’s mineral packet) or compensated the franchiser through per-unit royal line fees (e. g. , Aquafina). Most bottlers, however, did not invest in hot-fill (for some iced tea), reverse-osmosis (for some bottled water), or other specialized equipment, and instead bought their finished product from a central 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 high labor costs, but otherwise did not significantly affect distribution practices. Despite these complicated and evolving arrangements, higher(prenominal) 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 abroad for new growth. Throughout the 1990s, new access to markets in China, India, and easterly Europe stimulated some of the most int ense 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, â€Å"Pepsi Moving Fast To desexualize Beyond Colas,” publicize Age, July 5, 1993. 28 Greising, p. 233. 29 Bonnie Herzog, â€Å"PepsiCo, Inc. : The gladness of Growth,” Credit Suisse First Boston Corporation, September 8, 2000. 30 Maxwell, p. 152-3. 31 Betsy McKay, â€Å"Juiced Up: Pepsi Edges recent Coke, and It has zero to Do With Cola,” The Wall 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. [email protected] 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 Chin ese drank 22. In 1999, Coke held a world market share of 53%, compared to Pepsi’s 21% and Cadbury Schweppes’ 6%. Among major abroad markets, Coke dominated in Western Europe and much of Latin America, while Pepsi had marked presence in the midpoint East and Southeast 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 oversea 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 â€Å"they sit foursquare on the equator and everybody’s young. It’s soft drink heaven. 33 By the early 1990s, Coke’s CEO Roberto Goizueta state, â€Å"Coca-Cola used to b e an American company with a large international business. Now we are a large international company with a sizable American business. ”34 No chase Coke, Pepsi entered Europe soon after World War II, andâ€benefiting from Arab and Soviet exclusion of Cokeâ€into the shopping centre East and Soviet axis 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 Coke’s 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 â€Å" lamentably uncompetitive. ”35 In the early 1990s, Pepsi utilized a recessional strategy which targeted geographic areas where per capitas were relatively established and the markets presented high volume and profit opportunities. These were often â€Å"Coke fortresses,” and Pepsi put its guerilla manoeuvre to work, noting that â€Å"as big as Coca-Cola is, you certain(a)ly don’t want a gunplay at high noon,” said Wayne Calloway, then CEO of PepsiCo. 6 Coke struck back; in one high-profile putsch in 1996, Pepsi’s longtime(prenominal) bottler in Venezuela defected to Coke, temporarily trim back Pepsi’s 80% share of the cola market to almost nothing overnight. In the late 1990s, Pepsi moved even notwithstanding away from head-to-head competition and instead concentrated on emerging markets that were still up for grabs. â€Å"We kept beating our heads in markets that Coke won 20 years ago,” explained Calloway’s successor, Roger Enrico. â€Å"That is a very difficult proposition. 37 In 1999, PepsiCo’s bottler sales were up 5% internationally and its operating profit from afield was up 37%. Market share gains were reported in most of Pepsi-Cola International’s 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 Coke’s and 9% of Pepsi’s revenues. Do Concentrate producers encountered various obstacles in international operations, including cultural differences, semipolitical instability, regulations, price controls, advertising restrictions, foreign exchange controls, and lack of infrastructure.When Coke attempted to acquire Cadbury Schweppes’ international practice, for example, it ran into regulatory roadblocks in Europe and in Mexico and Australia, where Coke’s market shares exceed 50%. On the other hand, Japanese domestic-protection price controls in the 1950s greased the skids for Coke’s high concentrate prices and high profitability, and in India, mandatory credentials for bottled drinking water caused several local brands to fold. 33 John Huey, â€Å"The World’s Best Brand,” Fortune, May 31, 1993. 34John Huey, â€Å"The World’s Best Brand ,” Fortune, May 31, 1993. 5 Larry Jabbonsky, â€Å"Room to Run,” Beverage World, direful 1993. 36The Wall Street Journal, June 13, 1991. 37 John Byrne, â€Å"PepsiCo’s New Formula: How Roger Enrico is Remaking the play along… and Himself,” BusinessWeek, April 10, 2000. 14 Copying or posting is an infringement of copyright. [email protected] harvard. edu or 617-783-7860. 702-442 op y Cola Wars Continue: Coke and Pepsi in the Twenty-First Century To know 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 finally accounted for more than half of Coke’s Japanese sales. 38 In India, Pepsi found 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 mor e 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 untaught’s CSD sales, despite rivals’ TV ads ridiculing â€Å"gringo guarana. ” tC When the economic system 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 firmly in bottler infrastructure. From 1995 to 2000, Coke’s top line slowed 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 Coke’s 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 country’s punitive 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 approaching growth of international consumption and used the downturn as an chance to snatch up bottlers, distribution, and even rival brands. To 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 while? At the turn of the century, growth of cola sales in the United States appeared to have plateaued. Coke and Pepsi were investing hun dreds 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 constitution of the cola wars changing? Would the parameters of this new rivalry include cut back 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 America’s 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 â€Å"throat share. ” Noted a Coke executive in 2000, â€Å"the cola wars are outlet to be played now across a lot of different battlefields. ”39 38 June Preston, â€Å"Things May Go purify for Co ke amid Asia Crisis, Singapore Bottler Says,” Journal of Commerce, June 29, 1998, . A3. 39 Betsy McKay, â€Å"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. [email protected] harvard. edu or 617-783-7860. Do Exhibit 1 702-442 Copying or posting is an infringement of copyright. [email protected] 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. 5 182. 5 182. 5 182. 5 182. 5 182. 5 182. 5 U. S. silver-tongued Consumption Trends (gallons/capita) Carbonated soft drinksBeer Milk Coffeea Bottled Waterb Juices Teaa Powdered drinks wine-colored Sports Drinksc Distilled spirits Subt otal Tap water/hybrids/all others broad(a)d tC opy stemma: John C. Maxwell, Beverage compiling 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 portraying consumption more realistically. bBottled water includes all packages, single-serve, and bulk. cSports drinks included in â€Å"Tap water/hybids/all others” pre-1992. This analysis assumes that each person consumes on average one-half gallon of semiliquid per day. -16- Cola Wars Continue: Coke and Pepsi in the Twenty-First Century Advertisement Spending for the run 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 Barq’s 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 character reference: â€Å"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. [email protected] 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 chroma (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\r\n'