Case Study: Cola Wars Continue
Coca-Cola and Pepsi-Cola have long competed for market share of the world’s beverage market. As the cola wars continued into the twenty-first century, Coke and Pepsi faced new challenges: Could they boost flagging domestic cola sales? Where could they find new revenue streams? Was their era of sustained growth and profitability coming to a close, or was this apparent slowdown just another blip in the course of Coke’s and Pepsi’s enviable performance? The soft drink industry has remained profitable for several reasons. Entry into the market is difficult due to franchise agreements with Bottler’s, limited access to distribution, high brand loyalty, and extensive amount of advertising and marketing spending required. Substitutes have not been close enough to take away significant market share from Coke and Pepsi. Concentrate producers are more profitable than bottlers for many reasons. The concentrate process involves little capital investment whereas the bottling process is capital intensive and involves specialized, high-speed lines. Most costs in the concentrate industry are for advertising, promotion, market research, and bottler relations. Concentrate producers invest heavily in trademarks and innovative and sophisticated marketing campaigns. There are many bottlers when compared to concentrate producers, this fosters competition and reduces margins in the bottling industry. Costs for distribution and production in the bottling industry account for 65% of sales compared to 17% in the concentrate industry. The value added by the bottler is much less than that of the concentrate producer which results in smaller profits compared to concentrate producers. Most of the brand equity created in the business remains with concentrate producers.
During the early 1990’s bottlers of coke and Pepsi employed low price strategies in the supermarket channel in order to compete