The case study describes the competition between Pepsi and Coke, known as the Cola Wars, which started as a classic battle and ended as worldwide competitive warfare at the turn of the century. In the case study, the economics of soft drinks and bottling industries and the history and internationalization of the cola wars is being described.
David B. Yoffie; Sharon Foley
Harvard Business Review (794055-PDF-ENG)
March 08, 1994
Case questions answered:
- Why, historically, has the soft drink industry been so profitable?
- Compare the economics of the concentrate business to the bottling business: why is the profitability so different?
- How has the competition between Coke and Pepsi affected the industry profits?
- How can Coke and Pepsi sustain their profits in the wake of flattening demand and the growing popularity of non-CSDs?
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Case answers for Cola Wars Continue: Coke vs. Pepsi in the 1990s
Executive Summary – Cola Wars Continue: Coke vs. Pepsi in the 1990s
Pepsi and Coke have historically dominated the carbonated soft drink (CSD) market while competing fiercely with each other for market share in the U.S. Hence, the term “Cola Wars Continue” which describes the competition. Until the late 1990s, CSD consumption in the U.S market grew at an annual rate of 3- 6%, which created a duopoly in the CSD market.
However, largely due to health issues related to the consumption of soft drinks, consumption of CSDs in the U.S. has been declining since the late 1990s. Porter’s five forces analysis performed on the CSD industry shows that exclusively focusing on the CSD market will not be a profitable strategy going forward.
Pepsi and Coke focused on producing concentrate, or flavor base, for the beverages while leaving the bottling to franchisees that are present nationwide. The concentrate business was much more profitable than bottling due to lower fixed costs, lower operating costs, and the brand popularity of the concentrate producers.
The concentrate industry has a low threat of entry, low bargaining power for suppliers and low to moderate bargaining power for buyers (whereas bottlers faced very high bargaining power from their suppliers—Coke and Pepsi), and grave market scope for a healthy increase in profits.
Overview – The Cola Wars Continue over the years
For more than a century, Coke and Pepsi competed for market share within the world’s beverage market. The most intense battles were fought over the $74 billion carbonated soft drink (CSD) industry in the United States that lasted until the mid-1990s. The Coca-Cola drink was formulated in 1886 by John Pemberton, a pharmacist in Atlanta, Georgia, who sold it at drug store fountains as a ‘potion for mental and physical disorders’. Pepsi-Cola was invented in 1893 in North Carolina by another pharmacist, Caleb Bradham.
However, the company struggled and declared bankruptcy in 1923 and again in 1932. Business picked up during the Great Depression when Pepsi made its drink almost half the price of Coke’s. By the 21st century, Coke relied on international markets far more than Pepsi, with Coca-Cola being served in more than 200 countries worldwide and 80% of its sales coming from international markets.
Pepsi still depended on the US for roughly half its total sales, but by the early 2000s, it was focusing on emerging markets in Asia, the Middle East, and Africa. Coke’s and Pepsi’s revenues grew annually, as the worldwide CSD consumption rose steadily by an average of 3% per year.
In the early 2000s, however, domestic CSD consumption started to decline in consequence of the evolving linkage between CSDs and health issues such as obesity. Billions of dollars had been spent bringing bottling operations back under Coke’s and Pepsi’s direct control. Declining sales of carbonated soft drinks, decreasing cola sales, and the rapid emergence of non-carbonated drinks appeared to be changing the game in the cola wars.
Political Analysis and Factors
The Food and Drug Administration (FDA) regards non-alcoholic beverages such as Coca-Cola as within the food category. Their manufacturing process and quality control results are heavily regulated by the government. The following are some of the factors that are influencing Coca-Cola’s operations:
- Changes in laws and regulations: There have been considerable changes in the accounting standards, taxation laws, and requirements, environmental laws, and import-export taxes in local and foreign markets.
- Changes in the non-alcoholic business era: There has been considerable emphasis on competitive product and pricing policy pressures and the ability to maintain or earn a share of sales in the international market compared to rivals.
- Political conditions, specifically in international markets: Civil conflict, governmental changes, and restrictions concerning the ability to relocate capital across borders. This also relies on economic and political conditions, such as civil conflict and governmental changes, as well as Coca-Cola’s ability to form effectively strategic business alliances with local bottlers, and to enhance their production amenities, distribution networks, sales equipment, and technology.
Economic Analysis and Factors
During the recession of 2001, the US government took…