Pepsi/Coca-Cola Case Study
The environment under which the two giant soft drinks companies coke and Pepsi operate makes marketing an interesting activity to undertake; with the forces of marketing at play.
The five forces that are addressed in this paper include;
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Threat to new entry
The power of buyers
The power of suppliers
The threat of substitutes and
The soft drink industry in the USA has experienced all of the five forces that drive a market share and overall development.
For threat to new entry the USA soft drink industry has two major duopolies
For the economies of scale the two companies have ensured bulk production and even in the purchasing of raw materials.
Pepsi and coca-cola take about 74% of the soft drink market thus they automatically become giants while Cadbury Schweppes and Cott corporation take the rest of the market share (David B Yoffie) in a bid to increase their market share Pepsi had to acquire the quarter Oats and intensify its market strategies. This acquisition saw Pepsi improve while coca –cola decline in both sales and growth of its company.
The two companies have intensified efforts for keeping away new entrants by ensuring high cost of entry while also developing many channels of distribution in countries beyond USA borders. Also to bar new entry the soft drink industry in the USA,Pepsi and Coca cola have made sure that they have cost advantages and differentiated products e.g. the launching of smart sport by Pepsi and Cola diet by Coca-cola.
The power of buyers in the soft drink industries in the USA has greatly influenced the two companies. In USA many people prefer to buy the soft drinks like Diet Cola which made a huge increase in the sales of Coke.
The power of suppliers Coca-Cola has ensured that they purchase two bottling companies to ensure that they have more power in the distribution of their brands in the market locally and internationally. The acquisition provides Coke with high volume of company owned operations. The two companies have also worked tirelessly to support their suppliers to ensure that the switching costs are reduced.
In 2005 Pepsi introduced Diet Pepsi as flagship brand; this was done even as competition for the power of brand heated up.
The threat of substitutes came up the in that industry and due to these threats, Coca-Cola
Company moved swiftly to acquire Planet Java coffee drink and the Mad river line of juices in order to remain relevant in the industry. The company also introduced Dasani purified water products to become a leading beverage brand. Pepsi diversified by introducing Aquafina as their purified water product. For competitiveness, the two companies have worked around to ensure the growth of the market share. They produce products that are well distinguished and branded thus making each of the companies to be felt distinctively and as such they have acquired brand identity E.g. Diet Pepsi for Pepsi and Diet Coke for Coca-Cola. For concentration and balance Pepsi and Coca-Cola make sure they maintain their original formulas and concentration. They also continually keep the popular brands in the market while introducing diversified products.
new entrants in soft drink
e.g. juice companies
Threats of New Entrants
Suppliers suppliers industry competitors buyers
Rivalry local buyers
Cadbury Schweppes market
Cot co-operation Age-school buy
more compared to the
Threat of substitute
Coca-cola – entry to non-carbonated beverage “non-carbs”
and Pepsi juices and juice drinks, sports drinks, energy
Co. drinks, tea based drinks and bottled water.
Both companies went into alternatives to curb the threat of
The relationship of Coke and Pepsi with the bottlers has changed in that the bottlers needed more power to ensure continuous distribution of the soft drinks in the relevant markets. Coke for instance made huge investments in its bottling network. To counter this Pepsi gave all the rights of distribution to its major bottlers. The two companies also introduced franchise to allow bottlers to handle non-cola brands of other concentrate producers. This kind of relationship is to ensure that coke and Pepsi maintain their distribution network and increase their sales as well as growth of income.
Also we have seen the purchase of bottlers by Coke and Pepsi to improve on the infrastructure investments. In this case Coke aligned its strategy with bottlers to get to incidence pricing. The alignment of the companies and bottlers are also to see an increase in volumes sales with a reduction in the prices through “immediate consumption” venues. From exhibit for the pretax profit was affected by the concentrate producer and the bottlers. In exhibit 5 the change in retail price due to the acquisitions. Also change in price affects the change in consumption for the period between 1998 and 2004. In exhibit 6, we see the share industry volume high in supermarkets and fountain vending channels that mean the consumers of the products are largely in the supermarkets and the vendors.
Net price is dependant on the channels share of industry volume for example the supermarkets have a lower net price while convenience stores and gas stations have a higher variable profit i.e. 1.86 in the year 2005. The figures indicate variance by channel of both by-volume pricing and by-volume profit.
Evaluation of Strategy
The strategy for Pepsi would deliver a sustainable competitive advantage due to the following reasons: –
The strategy of low price provides the advantages of mass consumption leading to more sales hence greater profitability by use of convenience-and gas channel the company profited immensely where there was immediate consumption.
The strategy to merge and acquire bottlers saw the reduction in marketing expenditure and increase in profitability.
Incidence pricing makes the concentrate price affecting the retail price, that varied according to the price charged by different channels and for different packages.
Stepped up marketing and innovation for Pepsi would see it deliver more sales and have and competitive advantage. The innovation that includes packaging e.g. the fridge mate pack, reconfiguration of pack cans that improve the sales.
The new market segments include: –
Pepsi looked abroad as a new market segment such as Europe with greater benefits from Arab and Soviet executions of Coke. In 2004 the international division of its market improved steadily with a high operating profit. This is one of the ways that the new market strategy benefited the firms. These markets were fit in that the company logged double-digit growth also in marked volume sales in China, India, and Russia.
The strength of Pepsi in its strategy include: –
Ability to identify the markets and venture into them
Large capital base and acquisitions made it easy to launch in new markets.
Creativity and innovation
Repackaging and branding.
Imitation – some failures came due to their imitation of coke’s strategy.
Lack of business survey reports before launching into the new markets, hence greater obstacles in the foreign markets.
The recommendations for Pepsi:
I would recommend that Pepsi Company as the second largest market besides than then it
has to put only emulate the strategies set-up by its own by effectively investing in market research strategies.
Market research coupled with innovation will see it’s sales volumes and profit improve.
Also, venturing in new market areas such as Africa with the brands that suit the 3rd world countries would help in the strategy to acquire a large market share.
Rebranding of some products is also a major step that the firm can take to improve its market and consumption by a greater multitude hence increasing their sales.
These recommendations are best for the company because all through the company has concentrated on wars with Coca-Cola Company instead of formulating strategies of its own. If it takes the initiative of market research, rebranding and exploring the smaller 3rd world countries it will definitely invest less and harvest more.
The risks associated with my recommendations are:
The investment into market research might be greater and the returns less.
Venturing in third world countries might be a risk since some of the countries are not politically stable.
Yoffie, D. B. (2007). Cola Wars Continue: Coke and Pepsi in 2006. Harvard Business School.