HBS---Case-Study---Cola-Wars-Continue-Coke-and-Pep

9-702-442REV:JULY30,2002________________________________________________________________________________________________________________ResearchAssociateYusiWangpreparedthiscasefrompublishedsourcesunderthesupervisionofProfessorDavidB.Yoffie.PartsofthiscaseborrowfrompreviouscasespreparedbyProfessorsDavidYoffieandMichaelPorter.HBScasesaredevelopedsolelyasthebasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffectivemanagement.Copyright©2002PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.DAVIDB.YOFFIEColaWarsContinue:CokeandPepsiintheTwenty-FirstCenturyForoveracentury,Coca-ColaandPepsi-Colaviedfor“throatshare”oftheworld’sbeveragemarket.Themostintensebattlesofthecolawarswerefoughtoverthe$60-billionindustryintheUnitedStates,wheretheaverageAmericanconsumed53gallonsofcarbonatedsoftdrinks(CSD)peryear.Ina“carefullywagedcompetitivestruggle,”from1975to1995bothCokeandPepsiachievedaverageannualgrowthofaround10%asbothU.S.andworldwideCSDconsumptionconsistentlyrose.AccordingtoRogerEnrico,formerCEOofPepsi-Cola:Thewarfaremustbeperceivedasacontinuingbattlewithoutblood.WithoutCoke,Pepsiwouldhaveatoughtimebeinganoriginalandlivelycompetitor.Themoresuccessfultheyare,thesharperwehavetobe.IftheCoca-Colacompanydidn’texist,we’dprayforsomeonetoinventthem.Andontheothersideofthefence,I’msurethefolksatCokewouldsaythatnothingcontributesasmuchtothepresent-daysuccessoftheCoca-Colacompanythan...Pepsi.1Thiscozyrelationshipwasthreatenedinthelate1990s,however,whenU.S.CSDconsumptiondroppedfortwoconsecutiveyearsandworldwideshipmentsslowedforbothCokeandPepsi.Inresponse,bothfirmsbegantomodifytheirbottling,pricing,andbrandstrategies.Theyalsolookedtoemerginginternationalmarketstofuelgrowthandbroadenedtheirbrandportfoliostoincludenon-carbonatedbeveragesliketea,juice,sportsdrinks,andbottledwater.Asthecolawarscontinuedintothetwenty-firstcentury,thecolagiantsfacednewchallenges:Couldtheyboostflaggingdomesticcolasales?Wherecouldtheyfindnewrevenuestreams?Wastheireraofsustainedgrowthandprofitabilitycomingtoaclose,orwasthisapparentslowdownjustanotherblipinthecourseofCoke’sandPepsi’senviableperformance?1RogerEnrico,TheOtherGuyBlinkedandOtherDispatchesfromtheColaWars(NewYork:BantamBooks,1988).702-442ColaWarsContinue:CokeandPepsiintheTwenty-FirstCentury2EconomicsoftheU.S.CSDIndustryAmericansconsumed23gallonsofCSDannuallyin1970andconsumptiongrewbyanaverageof3%peryearoverthenext30years(seeExhibit1).ThisgrowthwasfueledbyincreasingavailabilityaswellasbytheintroductionandpopularityofdietandflavoredCSDs.Throughthemid-1990s,therealpriceofCSDsfell,andconsumerdemandappearedresponsivetodecliningprices.2ManyalternativestoCSDsexisted,includingbeer,milk,coffee,bottledwater,juices,tea,powdereddrinks,wine,sportsdrinks,distilledspirits,andtapwater.YetAmericansdrankmoresodathananyotherbeverage.At60%-70%marketshare,thecolasegmentoftheCSDindustrymaintaineditsdominancethroughoutthe1990s,followedbylemon/lime,citrus,pepper,rootbeer,orange,andotherflavors.CSDconsistedofaflavorbase,asweetener,andcarbonatedwater.FourmajorparticipantswereinvolvedintheproductionanddistributionofCSDs:1)concentrateproducers;2)bottlers;3)retailchannels;and4)suppliers.3ConcentrateProducersTheconcentrateproducerblendedrawmaterialingredients(excludingsugarorhighfructosecornsyrup),packageditinplasticcanisters,andshippedtheblendedingredientstothebottler.Theconcentrateproduceraddedartificialsweetenertomakedietsodaconcentrate,whilebottlersaddedsugarorhighfructosecornsyrupthemselves.Theprocessinvolvedlittlecapitalinvestmentinmachinery,overhead,orlabor.Atypicalconcentratemanufacturingplantcostapproximately$25millionto$50milliontobuild,andoneplantcouldservetheentireUnitedStates.Aconcentrateproducer’smostsignificantcostswereforadvertising,promotion,marketresearch,andbottlerrelations.Marketingprogramswerejointlyimplementedandfinancedbyconcentrateproducersandbottlers.Concentrateproducersusuallytooktheleadindevelopingtheprograms,particularlyinproductplanning,marketresearch,andadvertising.Theyinvestedheavilyintheirtrademarksovertime,withinnovativeandsophisticatedmarketingcampaigns(seeExhibit2).Bottlersassumedalargerroleindevelopingtradeandconsumerpromotions,andpaidanagreedpercentage—typically50%ormore—ofpromotionalandadvertisingcosts.Concentrateproducersemployedextensivesalesandmarketingsupportstafftoworkwithandhelpimprovetheperformanceoftheirbottlers,settingstandardsandsuggestingoperatingprocedures.Concentrateproducersalsonegotiateddirectlywiththebottlers’majorsuppliers—particularlysweetenerandpackagingsuppliers—toencouragereliablesupply,fasterdelivery,andlowerprices.Onceafragmente