Cola Wars Continue: Coke and Pepsi in 2006

1
Cola Wars ContinueCoke and Pepsi in 2006
Presented by Tigers Team Spring 2008
2
Overview

• History
• Historical Industry Profitability
• Concentrate vs. Bottler Profitability
• Competition between Coke and Pepsi
• Sustaining Profits

3
History of Pepsi

• Pepsi was created in 1893 in North Carolina by
  Pharmacist Caleb Bradham.
• By 1910 Pepsi had built a network of 270
  bottlers.
• Pepsi struggled and declared bankruptcy twice
• During Great Depression grew in popularity due
  to price decrease to a nickel.
• In 1938, Coke sued Pepsi-Cola brand for
  infringement on Coca-Colas trademark.

4
History of Coca-Cola

• Coca-Cola was formulated in 1886 by pharmacist
  John Pemperton who sold the product at drug
  stores as potion for mental and physical
  disorders.
• In 1891, Asa Candler acquired the formula,
  established a sales force and began brand
  advertising of Coca-Cola.
• In 1919, went public under control of Robert
  Woodruff expanded and developed in national and
  international markets.
• Successful during WWII with the high CSD
  consumption from the U.S soldiers.

5
Industry Profitability Porters Five Forces

• Rivalry
• Coke
• Pepsi
• Cadbury

• Substitutes
• Alliances
• Acquisitions
• Product Innovation

6
Porters Five Forces (Cont.)

• Barriers to Entry
• Exclusive Territories
• Substantial Investment
• Current Market Presence

• Power of Suppliers
• Sugar
• Packaging

7
Porters Five Forces (Cont.)

• Power of Buyers
• Super Markets
• Convenience and Gas
• Mass Merchandisers
• Fountain

• Vending
• Fast Food
• Profitability of the CSD Industry

8
Concentrate Business vs. Bottling Business

• Concentrate Producers
• Blend raw material ingredients
• Packaged Mixture in plastic canisters
• Shipped to bottlers
• Diet CSDs
• Added artificial sweeteners

9
Concentrate Business vs. Bottling Business

• Bottlers
• Purchased Concentrate
• Added carbonated water and high fructose corn
  syrup
• Bottled CSD product
• Delivered to customers accounts
• Diet CSDs
• Added sugar or high-fructose corn syrup

10
Concentrate Business vs. Bottling Business

• Concentrate Producer
• Little Capital Investment
• Cost of 25 million - 50 million
• One plant to serve US
• Significant cost-advertising, promotion, market
  research and bottler support

• Bottlers
• Capital Intensive
• High-speed production lines
• Bottling costs 4 million to 10 million
• Capacity of 40 million warehouse cost 75
  million
• Coke and Pepsi each require 100 plants
• Pressure from Coke/Pepsi

11
Bottler Consolidation

• Bottler plants decreased in the US
• 2000 plants to 300 from 1970-2004
• Cokes re franchising bottling operations
• Buying Poor managed bottlers
• Infusing with capital
• Selling to large bottling plants
• In 1985, Coke purchased two of the largest
  bottling companies
• Vertical integration

12
Affects on Industrys Profits

• Coke was the first concentrate producer to build
  a nationwide franchise bottling network, that
  Pepsi and Cadbury Schweppes followed suit.
• Franchise agreements with both Coke and Pepsi
  allowed bottlers to handle the non-cola brands of
  other concentrate producers.
• Bottlers could not carry directly competing
  brands.

13
Affects on Industrys Profits (Cont.)

• Throughout the 1980s, the growth of Coke and
  Pepsi put a squeeze on smaller concentrate
  producers
• Shelf space for small brands declined and were
  shuffled from one own to another.

14
Affects on Industrys Profits (Cont.)

• In a five year span, Dr Pepper was sold several
  times, Canada Dry twice, Sunkist once, Shasta
  one, and AW once.
• Phillip Morris acquired Seven-UP in 1978 for a
  big premium, but racked up huge losses in the
  early 1980s, and then left the CSD business in
  1985.

15
Affects on Industrys Profits (Cont.)

• In 1990s, through a series of strategic
  acquisitions, Cadbury Schweppes became the
  third-largest concentrate product.
• Coke has a world market share of 51.4, Pepsi has
  21.8 and Cadbury Schweppes has 6

16
Sustaining Profits

• Shift to non-carbonated beverages (keep up with
  demand of health conscious society)
• Continue on current path and see where it leads

17
U.S. Liquid Consumption Trends
18
THE END