Pepsi

The Coca-Cola Company versus PepsiCo, Inc. Andy Berg Ufuoma Omosebi Intermediate Accounting III ACC305 19 November, 2011 Coca Cola and Pepsi are the two most popular and widely recognized beverage brands in the United States. Pepsi and Coca Cola contrast each other on their taste, its associated colors and themes, and ingredients. Even the pension plans and funding status are a competitive comparison. 1. Compare the pension plans of Coca-Cola and PepsiCo, including type of plan and funded status at 2007 year-end. PepsiCo, Inc. as a voluntary defined benefit pension plan that includes all full time U. S. employees and some international employees. This plan is a noncontributory plan; the employer is the only contributor funding the plan therefore they bear the entire cost of the plan. This plan is a qualified pension plan allowing tax incentives for employer contributions which are calculated based on employees years of service or a combination of service and income. In addition, PepsiCo offers medical and life insurance benefits and a retiree medical plan that are only funded on a “pay as you go” basis.

These plans are not generally funded by the employer since they do not fund plans where no tax benefits are received. A specific dollar amount is assigned as a “cap” for employer payments the remaining funds are received from the retiree. Coca Cola has a defined contribution plan that includes all U. S. employees and some international employees. This is a contributory plan; both the employer and the employee make contributions. This plan offers substantial tax benefits for the contributions made by the employer. In addition, Coca Cola also has a defined benefit pension plan.

This plan is considered a nonqualified, unfunded plan primarily for the organizations officers, most U. S. employees, and some international employees. This plan offers no tax benefits for contributions made by the organization. In 2007, Coca Cola amended this plan to reduce exposure. Each organization offers and sponsors 401K pension plans as well as medical and life insurance benefit plans for their employees or associates. Not all employees are eligible for participation in all plans. 2 . Calculate the relevant rates that were used by Coca-Cola and PepsiCo in computing their pension amounts.

Coca-Cola reported “net periodic benefit cost” of $108 million in 2007. PepsiCo reported “pension expense” of $329 million in 2007 for U. S. plans. All of the relevant rates used by Coca Cola and PepsiCo are shown in the notes of the financial statements listed in the comparative analysis. These rates are disclosed so that users of the statements can assess the reasonableness of the assumptions made when calculating pension expenses and liabilities. The discount rate, expected rate of return on plan assets, and rate of compensation are the relevant rates needed to make the necessary assumptions.

The rates below have been taken from the Wiley Companion Website. The discount rate influences pension expense. Coca Cola’s discount rate used to compute pension information for December 31, 2007 is 5. 5% for pension benefits and 6% for other benefits. PepsiCo’s discount rate used to compute pension information for December 31, 2007 is5. 8% for U. S. pensions, 5. 2% for international pensions, and 5. 8% for other benefits. The expected rate of return on plan assets determines how much funding the plan assets will earn for the plan.

This information is crucial for the company because it indicates how much additional funding will have to be provided to the plan above earnings to meet obligations. Coca Cola’s expected rate of return used to compute pension information for December 31, 2007 is7. 75%. PepsiCo’s expected rate of return used to compute pension information for December 31, 2007 is 7. 8%. Pension benefits are determined by considering the employees compensation level at retirement. Therefore, the rate of compensation or expected increase percentage is necessary to determine future compensation levels.

Coca Cola’s rate of compensation or “rate of increase in compensation levels” percentage used to compute pension information for December 21, 2007 is 4. 25%. PepsiCo’s rate of compensation or “rate of increase in compensation levels” percentage used to compute pension information for December 21, 2007 is 4. 7%. 3. Determine which company you would rather invest in if you were a potential shareholder. Justify your answer. PepsiCo, Inc. is also a large company that has been around since 1898. They are also a leader in the beverage market but have diversified into another area; snacks.

The diversity is pretty impressive. They also indicate stability and liquidity with favorable ratios. They have a 53. 15% gross profit margin for 2007 and less than 40% of their net operating revenue comes from operations outside the U. S. Coca Cola is a large company that has been around since 1886. They are primarily marketing and selling one product; beverages. They have a 63. 9% gross profit margin for 2007and show reasonably good ratios indicating stability. For the 46th consecutive year dividends have risen. About 74% of their net operating revenue comes from operations outside of the U.

S. Coke and Pepsi trade in the No. 10 and No. 9 positions at 13. 31 and 16. 67. This may be explained by the relative growth and return on capital positions of the companies. Coke has a ROIC of 23. 91% annually for the last five years, and growth of revenue per share of 9. 29% per year. Pepsi’s ROIC was 19. 96% and revenue per share growth of 13. 43%. Assessing how the market assigns value to Pepsi and Coke may come down to a view that the foods division of Pepsi is more exposed to potential inflation and therefore requires a higher cost of capital to compensate for this risk.

I would invest in Coca-Cola if I were a potential shareholder. The company generates significant return for shareholders. Fundamentally, Coke has generated 16-19% return on assets; 27-40% percent return on equity; and between $1. 6 billion and $3. 2 billion in free cash flow, with all three metrics peaking in 2010. Coke has returned to shareholders $27. 4 billion in cash the last four years in the form of dividends and share buybacks. The stock has provided a total return of 83. 81% from 2006 to 2010. 4. Determine which company you would rather work for if you were a potential employee.

Justify your answer. If I had to choose a company to work for it would be PepsiCo. Benefits are important in any job selection and initially it seems that Coca Cola’s benefits are better however, after my review PepsiCo is a much better company. There is something more important than benefits; it is a feeling of belonging and being cared for in an organization. The entire time I was reading PepsiCo’s statements I got a feeling that they really cared about their employees, the community they serve and the environment.

At one point, they even mentioned they cherished their employees and encouraged personal as well as professional growth. They speak of product innovations; that they want to nourish consumers and reinvent brands to produce more healthy products for consumers. They speak of partnerships with the FDA, The World Health Organization, and Alliance for a Healthier Generation for better focus on these innovations. They have given foundation grants internationally to battle chronic diseases and encourage physical fitness thru exercise and dance.

They even have plants in Arizona that use solar power to produce products. It just seems like a friendlier more positive company. References Kieso, D. E. , Weygandt, J. J. , & Warfield, T. D. (2010). Comparative Analysis Case; The Coca-Cola Company versus PepsiCo, Inc. Intermediate Accounting III, 13thEdition, 1072-1074& 1111. Kennon, Joshua (2011). Adjusting Pension Assumptions to Manipulating Earnings, How to Spot Signs of Aggressive Accounting, Retrieved August 13, 2011, from the website: http://beginnersinvest. about. com/od/gaap/a/aa090704. htm

Q) Why the soft drink industry is so profitable?

A). The soft drink industry is profitable because the industry has concentrated revenues between 2 major players and it is virtually impossible for a new player to compete with the key players. The industry giant’s wielded power over the retail outlets. Convenience stores, vending machines, fountains are widely distributed and hence they don’t have the power to bargain over pricing issues and they also contribute to about 80 % of the sales. This ensures that the companies quote a maximum price and still have the final say in the matter.

Q) Compare the economics of the concentrate business to the bottling business: why is the profitability so different?

A). A concentrate producer has to blend the raw materials and ship them to bottlers in plastic canisters. A typical concentrate manufacturing plant has an initial capital investment of 25-50 million$ and is capable of meeting the needs of an entire nation. Therefore the concentrate producer’s main line of work shifts to advertising, research, and bottler support which ensures them a gross profit of 80%. The concentrate producer also enjoys added value in the form of access to branded names and unique formulas. A bottler manufacturer, on the other hand, has a capital-intensive business on hand, which has high costs to deal with with-concentrate producers and packaging activities being the major costs (up to 90%). The bottler’s profitability is therefore considerably reduced with a gross profit of about 40%. Added to this the bottler also invests in distribution networks as a result of which the operating margins drop drastically to 7-9%. Therefore there is a wide disparity in the profitability of a concentrate manufacturer and a bottler manufacturer.

Q) How has the competition between Coke and Pepsi affected the industry’s profits?

A). The cola giants Coca-Cola and PepsiCo have, through their ‘Cola Wars’, brought about a revolutionary and welcome change in the industry. Both companies in vying with each other for the top spot have managed to create high-quality products spread over a wide range. Kicking off as soft drink manufacturers the companies diversified to other packaged foods and drinks thus increasing their consumer base as well as the industries. The introduction of the diet coke, for example, was lauded as the most successful consumer product launch in the 1980s. The aggressive entry of PepsiCo into the food business in the latter part of the 1990s also contributed handsomely to the company and as a result of the industry’s profit.

Q) Will Coke and Pepsi sustain their profits through the late 1990s? What would you recommend to Coke to ensure its success? To Pepsi?

A). As time has shown the profits of both Pepsi and Coca Cola from the CSD industry hit a plateau in the 1990s. The US soft drink market, which is the largest market for both companies, began to see a slowdown at the time. As a result, the cola giants sought markets elsewhere; the Latin American nations and the largely untapped markets in Asia and Europe provided the breakthrough. Both companies now entered the virgin markets to establish themselves-Coca Cola through its Classic Coke and vending machines and PepsiCo through its flagship drink and its foray into packaged foods. In the last decade, Coca-Cola has faced several execution (or non-execution) problems and lawsuits damaging the goodwill of the company; it must, therefore, concentrate on rebuilding its brand image and more importantly take chances on Mergers & Acquisitions. PepsiCo has been more successful and so needs to just keep up the energy and aggression of the last few years.

Growth rates

Cola Wars Continue: Coke and Pepsi in 2010 A case discussion note January 17, 2012 1. Historically, why has the soft drink industry been so profitable? Historically, the soft carbonated soft drink (CSD) industry has been valued at $74 billion in the United States. In order to understand the reasons why the industry has been hugely profitable despite the ‘Cola Wars’, an examination of the CSD industry with Porter’s five forces analysis will be conducted. As market leaders, the analysis will be centred on both Coke and Pepsi (hereafter “C&P”).

Threat of new competition: Barriers to entry in the CSD industry are extremely high and there are various factors to support this. Firstly, both C&P spend gargantuan amounts of funding of advertisement. According to Exhibit 8, in 2009 alone, both C&P spent $234 million and $145 million respectively in advertising expenditure. Therefore, while the actual initial capital investment needed to start up a CSD company is relatively economic, the amount required by new entrants to continually push their brand and gain visibility is extremely high.

Due to these extreme levels of expenditure on marketing and brand awareness, the two cola companies have accrued exceedingly high levels of brand equity and consumer loyalty worldwide. As such, even with sufficient funds for start-up and subsequent advertising, new entrants are unlikely to sway persisting consumer tastes. Because of the sheer scale of both CSD companies, both C&P have pre-existing contracts with their bottlers, thus limiting their bottlers’ ability to produce similar products with rival brands.

Additionally, through the use of extensive consolidation through the use of acquisitions and re-franchising of their bottlers, both C&P have made it essentially impossible for new entrants to find bottlers for the distribution of their drinks. In the event that the new entrants decide to build their own bottling plants (which is quoted to potentially cost hundreds of millions in the case), they would only find themselves facing insurmountable fixed start-up costs in addition to the ridiculous amount they have to spend on marketing.

Even if new entrants somehow found a way to produce and market their drinks, the incumbents’ (C&P) far-reaching networks would make it impossible for them to secure any form of distribution channels. Shelf spaces in supermarkets were dominated by C&P because supermarkets were given a cut of the profit generated from the sales of their products. These cuts accumulate to a significant amount of profit-generation for the retailers. Additionally, combined, C&P owned 89% of national pouring rights.

The fact that the incumbents had exclusivity in both supermarkets, fountain outlets, and other forms of retail channels would make it almost impossible for new entrants to distribute their products. Bargaining power of consumers: Historically, the two main customers of soft drink producers were supermarkets (29. 1% of distribution) and fountain outlets (23. 1%). In general, retail outlets have been unsuccessful in asserting much bargaining power over the industry.

In part due to the level of fragmentation as well as their reliance on C&P as drivers of customer traffic. Longstanding contracts and acquisition of fountain outlets also serve to weaken consumer’s bargaining power. Bargaining power of suppliers: Major suppliers for C&P provided commodities in the form of cans, sugar, bottles, etc. These products were highly homogenous and could be substituted easily. The aluminium can industry, in particular, depended on firms like C&P because they were majority buyers.

Due to such dependence, suppliers asserted little or no bargaining power over the industry. Intensity of competitive rivalry: Even though C&P are essentially a duopoly in the CSD industry, competition between the two have traditionally centred on marketing efforts like advertising, new products, and promotions rather than pricing. Their rivalry, historically, was also in a market with consistent growth. As such, profits were not adversely affected even though their rivalry was highly documented and publicised.

Threat of substitutes: There are a number of alternative substitutes for soft drinks and these include beer, bottled water, tap water, juices, tea, coffee, wine, powdered drinks, milk, and distilled spirits. Yet, according to Exhibit 1, Americans, historically, consistently drank more CSDs than any other beverage. As such, the threat of substitutes affecting C&P’s profitability was limited. To further nullify the effects of substitutes, they also produced and promoted their own range of substitutes to reduce potential losses. 2. Compare the conomics of the concentrate business with that of the bottling business. Why is the profitability so different? Using data from Exhibit 4, we are able to see that the operating income of a concentrate producer is 32% of its net sales while that of a bottler is only 8%. The reason the bottling business earns significantly lesser than its concentrate counterpart can be attributed to two main factors – significantly higher cost of goods sold (COGS) and the existence of selling and delivery expense. We see that the COGS of a bottler are at 58%, much higher than the concentrate producer’s 22%.

The reason for this difference is predominantly due to Master Bottler Contracts established to allow for a certain level of “price fixing” on the concentrate producers’ part. Additionally, as mentioned previously, raw materials for concentrate producers are abundant and homogenous; hence COGS for them will be significantly lower. Also, the bottler is in charge of selling and delivery, and hence incurs an 18% selling and delivery expense while there is no such expense on the concentrate producer’s part. These reasons explain why the concentrate business has a more profitable business model than the bottling business. . How has the growing popularity of non-carbonated soft drinks influenced the industry? Non-carbonated soft drinks have been gaining popularity in the past decade, increasing from 13% in 2000 to 17% in 2009. This growing popularity has resulted in the generation of both local and global strategies by CSD firms unwilling to lose out on the budding market. In order to capitalize on the opportunity, both C&P greatly expanded their lines of beverages to include sports drinks like Gatorade and tea-based drinks like Lipton. Majority of drinks introduced during this time were non-CSDs.

Besides creating new products, Coke also aggressively gained market share through acquisitions and extending their fountain services to include coffee and tea. The non-CSD opportunities globally were also aggressively pursued by companies like C&P. To gain localized expertise, however, the soft drink companies did not merely think to introduce new products into foreign markets. Instead, they resorted to acquiring the respective market leading, non-CSD companies in the countries they chose to invest in. The companies of choice were usually major fruit juice producers.

Beyond takeovers, C&P also tried their hands at innovation and localization of beverages. These mainly came in the form of integration of local drinks (e. g. blended green tea with Sprite) or utilization of local ingredients in the production of new drinks (e. g. beverages with Chinese herbs). The emergence and rapidly growing popularity of the non-CSD has garnered much retaliation from major players in the CSD industry. In order to get their share of the pie, they have formulated expansion strategies both locally and globally which seem to center around acquisition.

Earlier this year, Pepsi USA was seen to have teamed with Amazon MP3 to offer free music to its consumers. Pepsi Stuff points could be obtained from Pepsi bottle caps. Amazon and Pepsi vowed to give away $1 billion in prizes to Pepsi consumers (Harris, 2008). The advertisement for Pepsi Stuff revealed young and popular names and faces in the music industry. In fact, the Pepsi Stuff promotion seemed to have been developed for the youths of America alone (“Pepsi Stuff”).

Unless the consumer knows about the health impact of Pepsi, there is nothing that may be termed as unethical in the Pepsi Stuff advertisement available on the Internet: http://pepsistuff. amazon. com/gp/pepsistuff/home. html. The advertisement shows a music player with moving snapshots of popular music albums (“Pepsi Stuff”). However, there is no mention of the fact that Pepsi may seriously damage the health of its consumers, be they young or old.

Hickman (2007) writes that Pepsi may be one of those soft drinks with “the ability to switch off vital parts of DNA. ” As a matter of fact, the health problems posed by Pepsi and many other soft drinks are akin to problems typically associated with aging as well as alcoholism. Parkinson’s disease and other degenerative diseases have been linked to Pepsi and its likes. Other health problems are possible, too (Hickman). Nevertheless, the Pepsi Stuff promotion does not present a health warning as do advertisements for cigarettes.

In order to create perfectly ethical advertisements, Pepsi must write health warnings with its ads. Thus far, neither Coca Cola nor Pepsi have taken the initiative. Of a certainty, if Pepsi refuses to write a health warning with all its advertisements, it would be promoting a product that damages health and is therefore unethical to promote without a health warning. The Pepsi Stuff promotion is no different (“Pepsi Stuff”).

References

• Harris, M. (2008, Jan 17). Amazon and Pepsi to Offer Free MP3 Music. About.
• Retrieved Nov 18, 2008, from http://mp3. about. com/b/2008/01/17/amazon-and-pepsi-to-offer-free-mp3-music. htm. Hickman, M. (2007, May 27). Caution: Some Soft Drinks May Seriously Harm Your Health. The Independent.
• Retrieved Nov 18, 2008, from http://www. independent. co. uk/life-style/health-and-wellbeing/health-news/caution-some-soft-drinks-may-seriously-harm-your-health-450593. html. Pepsi Stuff. Pepsi USA.
• Retrieved Nov 18, 2008, from http://pepsistuff. amazon. com/gp/pepsistuff/home. html.

Pepsi a soft drink manufactured by PepsiCo was first introduced in 1898 (Hoover, 2002), and has grown to be a leading global brand as a carbonated soft drink. Pepsi continues to be the leading icon of this Foods and Beverage Company. To strategically position itself against its rival competitor Coca-cola, Pepsi has had to undertake major and very expensive campaigns. In light of this, this paper outlines the campaign objectives of Pepsi brand in creating brand awareness, image improvement and interest among its consumers.

This paper will also outline the cost implications and budget required in realizations of these objectives. One of the objectives of Pepsi has been to increase its global brand awareness and reach more consumers. Pepsi acquired the services of Arnell group, a company specializing in brand creation and product innovation to help uplift its brand image globally. By visiting different countries to explore emerging markets and global product drivers, the company has been able to get the purchase intentions of its consumers. Its youthful consumers needed a brand that is fun and brings the aspect of adventure.

With the goal of increasing its global market, Pepsi ventured in a different campaign strategy. By leaving the TV program super bowl to launch the Pepsi refresh program, the campaign would be instrumental in increasing its brand awareness globally. Apart from being a global promotional strategy, the $20 million program will push the Pepsi image higher because it identifies programs that Pepsi would fund in local communities worldwide (Warren, 2010). Another objective of Pepsi is to identify itself with the aspirations of its target customers.

Pepsi has defined its target market as the youth and has come up with campaigns such as the 1963 “you are the Pepsi generation” (Romanik, 2007). By having a variety in packaging of the soft drink, Pepsi has captured the youth who are adventurous and like variety. Also by contracting musician such as Britney Spears to promote Pepsi, the soft drink has been able to associate itself and develop interest among the youth . As Mike Doyle the creative director at Arnell group says “Pepsi speaks to the youth in their language” Through the Pepsi refresh program which is also philanthropic, Pepsi has objective of making the world a better place.

By choosing viable and needy projects to fund spending an amount of $20 million pepsi will be making the world a better place to live in (Warren, 2010). This campaign raises global awareness of pepsi as a brand and cultivates a good attitude of the customers to the brand. Marketing communications as cited in Czinkota & Ronkainen (1998, p. 360), is the manner in which a firm makes an attempt to remind, inform or persuade consumers-directly on their brand. With reference to social media campaigns which should partake the marketing costs of an organization, the estimated cost depends on what needs to be done and how much the firm can afford.

The range availed for an ad campaign goes to about $5,000 to $250,000,000. Looking at the PR campaign, it can cost $2,500 to $100,000 per month depending on the overall marketing budget, the tactics employed and how much money is being redirected to a specific target market. A typical budget would also incorporate social media postings, landing page generation as well as analysis and other miscellaneous costs that need to be accounted for (Khera-Communications, 1998). Referring to Pepsi refresh project, the total cost of the campaign was about $20 million (Warren, 2010).

The best budget method for this campaign would be the zero-based budget method. This type of budgeting allocates no funds unless each activity to be funded is justified fully without regarding the previous budget. This type of budgeting would account for every cent to be spent on the campaign. Unlike what would happen in the traditional budgeting, this method would not consider past campaigns that have been undertaken. Each campaign would be treated unique with money and other resources allocated according to needs and the expected benefits of the campaign as outlined by the relevant managers.

One advantage of this budgeting method is the minimization of wastage and allocation of funds based on the needs of the campaign. When blind-taste tests were conducted between Pepsi and the coke of Coca-cola, consumers would choose Pepsi as the better tasting drink. This indicates that with the right campaign Pepsi would enjoy a bigger market share as opposed to today when Coca-cola soft drink outweighs it globally. This type of campaign with a global reach would be very effective in creating brand awareness and improving the image of Pepsi worldwide.

References: Hoover, G. (2002). Hoover’s Handbook of American Business. Austin: Hoover’s, Incorporated. Khera-Communications. (1998). Sample marketing plan. Retrieved May 26, 2010, from http://www. ignitesocialmedia. com/what-should-a-social-media-marketing-campaign-cost/ Romanik, R. (2007). pepsi Global Strategy. Retrieved May 26, 2010, from http://article. unipack. ru/eng/18573/ Warren, C. (2010). Pepsi to Skip Super Bowl Ads in Favor of $20M Social Media Campaign. Retrieved May 25, 2010, from http://mashable. com/2009/12/23/pepsi-super-bowl/

There are many companies that make products that go head to head. Coca Cola and Pepsi are an example of such reveries. There has been many taste test and competitions that involved the soda kings. This reverie has been going on for over a century. (See appendix 1) The start of this long standing soda war began 1886 when creator John S. Pembroke developed the original recipe for Coke. Then 13 years later Pepsi creator pharmacist Caleb Abraham developed his formula. By this time Coca-Cola was already fulfilling order that totaled a million gallons per year.

Coke then continue to develop its iconic bottle in 1921, they then secured huge name endorsements deals, expanded to Europe and Cuba, Canada and Panama. In the Interim, Pepsi went bankrupt because of WWW In 1923. Pepsi Is fully revived fully In 1931 and begin a campaign to rival coke back and forward. Although Pepsi never really tops Coke in soda sales the Pepsi Company is still more profitable than Coke due to their diversity of the many other products they sell. Coke spends a half a billion more on advertising than Pepsi. See appendix 2) (Basin, 2013) Corporate Culture Performance with a purpose is the PepsiCo corporate culture motto. The PepsiCo CEO, Indri K. Nylon, states: Ethics and growth are connected is a broadly shared understanding in today’s business world. But these words appeared In the PepsiCo Annual Report back in 1968?Just three years after the Pepsi-Cola Company and the Frito-Lay Company merged to form PepsiCo. It is a testament to how long we have treasured the belief that corporate capabilities and corporate character are not Just Integrated. But inseparable. (Company T _ P. 2013) Here she is stating that ethics is an intricate part of PepsiCo culture and it has been for many, many years. This is before it has been before it has been set and a tankard in the business world today. She goes on to speak about how this ideal has made Pepsi the Innovator and leader In such areas from civil rights to scholarships to recycling. The Pepsi Company believes that its investment in the future by way of environmental protection, investing back into the community and performance with purpose keeps the company ahead of the global challenges shaping the Industry.

Coca Cola Company’s President and COO Glen Walter states that: Since our flirts soda fountain sales in 1886, we have been a driver of marketplace innovation and an investor in local economies. Today we lead the beverage industry with more than 500 beverage brands Including four of the world’s top-five sparkling brands. But while our business opportunities are enormous, our commitment to our consumers and the communities in which we operate is even greater. According to the website the company’s focus is Sustainability and growth.

The company strives to continue to be a leader of the soda world. The mission statement reads: Our Roadman starts with our mission, which Is enduring. It declares our purpose as a company and serves as the standard against which we weigh our actions and decisions. To refresh the world… 1 OFF To create value and make a difference. (company T. C. , 2013) It seems that the Coca Cola Co does not talk about it ties and comments to the community and the future but Just to the sustainability of the company.

The advisements appear to be community based it does not seem to resonate through the corporate culture. The difference of corporate culture seems to be Pepsi seems to embody forwardness of the company and community since sass’s. Whereas on the other had Coca Cola seems to Just in the recent 20 years or so adopted the immunity with the development of its Coca Cola Foundation. Benefits of competition The battle between the two great giants has sparked new and innovative ways to stay above the competition.

One example of a intense exchange that take place during the Cola Wars was Coca-Cola deciding to a strategic retreat minion, by publicizing its plans to bring back the original coke recipe after the introduction of New Coke. The wars also lead to Pepsi realizing that its grip on the soda world was not as evident and they decided in 1965 to diversify and acquired ownership of Frito-lay Company. Basin, 2013) Another benefit of the wars are the introduction in the late asses, Pepsi launched its most profitable long-term strategy of the Cola Wars, called Pepsi Stuff.

This was a point system where Pepsi consumers drank Pepsi and received points to buy free Pepsi lifestyle merchandise. After researching the company launched the program and it gained instant success. Millions of patrons take part in the program. This move also made Pepsi highly popular and it outperformed Coke during the summer of the Atlanta Olympics which is in the hometown of Coke. Later n 2005 Coca-Cola and Pepsi started a “cyber-war” with the re-introduction of Pepsi Stuff in 2005 & Coca-Cola strikes back with Coke Rewards.

A third benefit is in 1985, Coca-Cola and Pepsi were launched into space aboard the Space Shuttle Challenger. The companies had invented special cans to test packaging and dispensing systems for use in zero G conditions. The experiment was classified a failure by the shuttle crew, primarily due to the lack of both refrigeration and gravity. But this pushed the companies and it lead to the invention of the Coca-Cola fountain dispenser. (Russell, 012) Continue to Thrive I speculate that Pepsi will continue to bill there brand threw the food brand versus just focusing on the soda side of things.

Spenser Garrison Strategic Management 3/17/10 Case 1: Cola Wars Continue: Coke and Pepsi in 2006 The soft drink industry is very competitive for all companies involved. Recently the competition between established firms has only increased with the market nearing its saturation point. All companies in the industry, especially those thinking about entering, have to think about Porter’s 5-Forces model and the pressures it outlines; rivalry among establish firms, risk of entry by potential competitors, substitute products, suppliers, and buyers.

When talking about market share, PepsiCo and Coca-Cola have the lions share. They have dominated the industry over the past 40 years with Coca-Cola leading in the category in 2004 (C256). With little resistance from Cadbury Schweppes, the distant third largest company in the industry, the two companies’ main focus was to increase market demand by outdoing each other in promotions, advertisements, and corporate acquisitions. Rivalry and power struggle have defined the existence of PepsiCo and Coca-Cola, looking for a competitive advantage to gain an edge on the competition.

This rivalry has been to the benefit to the companies, the industry, and its consumers as a whole. Both have learned to not only stay afloat, but flourish in an industry that has constantly grown since Coca-Cola began advertising in 1891 (C258). They did this by increasing the demand in their products, and gaining brand loyalty by their consumers. In some instances, they were selling cases of Dasani (Coca-Cola) and Aquafina (PepsiCo) for less than the cost of bottling it (C267). The risk of entry by potential competitors isn’t a strong competitive pressure in the industry.

PepsiCo and Coca-Cola dominate the industry with their brand name and distribution channels, which makes it difficult for new entrants to compete with these existing firms. High fixed costs of production facilities, logistics, and economies of scale also deter entry. It’s difficult for a new firm with a small production capacity, and a high cost structure to compete when, as soon as their product is introduced to the market, the two leading firms drop prices below your cost structure.

Pepsi and Coke’s economies of scale allows them to do this since it costs so much less for them to produce their products than it would a new company. Substitute products come from competitors outside of the soft drink industry. These include: coffee, sports drinks, bottled water, tea, and juices. This is an increasingly growing force since consumers are becoming more health conscious in society. Most people are thinking about what carbonated soft drinks do to their bodies and replace them with sports drinks which appear to be healthier.

These drinks also allow for a larger variety of flavors the appeal to different consumers (C263). Coffee and tea may also be substitutes for the consumer who drinks soda for the caffeine they contain. Consumers can switch to coffee to decrease the amount of sugar and carbonation. These also come in a larger variety of flavors provided companies, such as Starbucks, that have become extremely popular over the past 20 years. These substitutes are a large and powerful force in the industry, especially since the switching costs (the cost to switch from one product to the next) are essentially zero.

Supplies to the industry don’t hold much competitive pressure. Bottling and packaging of the product don’t hold much of a bargaining position in the industry. Coca-Cola’s CEO Roberto Goizueta looked to consolidate a large number of bottlers in 1986, creating an independent bottling subsidiary called Coca-Cola Enterprises (CCE), went public and sold 51% of its shares while retaining the remaining which enables Coke to have separate financial statements from CCE (C261). This vertical integration essentially made Coke its own bottler, which almost cut out suppliers entirely.

PepsiCo soon followed suit in the late 1980s with the Pepsi Bottling Group (PBG) and went public in 1999, retaining 35% of its shares (C261). By 2004 Coca-Cola had CCE bottling 80% of its North American bottle and can volume, while PepsiCo had PBG bottling 57% of their beverages in the region (C261). These consolidations took away much of suppliers’ bargaining power. The buyers of soft drinks range from Supermarkets, to mass retailers and supercenters, to gas stations. Soft drinks are sold to these stores which are, in turn, resold to customers.

Buyer power in the industry is very strong. Larger stores purchase soft drink in large volumes allowing them to buy at low prices. Gas stations have less bargaining power since they buy smaller quantities. Although soft drink demand is beginning to plateau which could cause a shift in bargaining power to the buyer because of decreasing demands in both Pepsi and Coke. Porter’s 5-Forces model completely encompasses all factors of the soft drink industry. It has shown that industry has been very profitable in earlier years, especially to Pepsi and Coke.

Demand for soft drinks is beginning to level off because of a new health conscious trend by the consumer which will inevitably affect profits. The industry has also been defined by intense rivalry by the two largest firms which leave little room for new entrants. The soft drink industry has reached its peak in society and will soon begin to decline soon because of the consumers decrease in demand for the product and increased demand in other healthier products. For both companies to stay profitable, they will have to curtail their products to the new health conscious trend of the consumer.

The value created by the soft drink industry is apparent and distributed across the industry in a variety of ways. Pepsi and Coke at first only produced their cola products, two companies each with one product line. The success of both companies led them to diversify their production capabilities and produce different flavors of soda; Fanta, Sprite, and Tab (1960-63) from Coke, and Teem, Mountain Dew, and Diet Pepsi (1960-64) from Pepsi (C259). These expanded product lines proved to be highly profitable and were continued and expanded on in the years to come.

By the late 1980s Coke and Pepsi each offered more than 10 major brands of soda in 17 or more sizes (C261). This product proliferationincreased profitability, rivalry, and barriers to entry. Soon both companies would break into markets other than carbonated soft drinks. Sports drinks such as Gatorade and Powerade, juices and juice drinks, energy drinks, tea based drinks, and bottled water. These new product lines all had substitute products from the other company to battle with. Pepsi and Coke had a vast understanding on game theory and demonstrated it with their sequential and simultaneous move games.

This led to an enormous selection for the consumer, whose only problem was choosing a flavor. Both Pepsi and Coke both have secret recipes to their flagship cola. Coke was the first to be imitated in its early years. The company constantly fought trademark infringements in court. There were as many as 153 barred imitation of Coca-Cola in 1916 alone (C259). When Pepsi proved to be a viable competitor to Coke, the company filed a suit against Pepsi claiming it was an infringement on the Coca-Cola Trademark.

From that point on the two companies engaged in competitive marketing campaigns to gain market share. In 1950, Coke controlled 47% of the US market, while Pepsi’s was only 10%. Coke and Pepsi are two gigantic companies that have flourished throughout their existence. They can be described as the definition of rivalry and competition in the modern business world. They are exact substitutes of each other and have battled to control the carbonated soft drink industry for over a century.

From the 1950s-present, the carbonated soft drink industry has steadily increased in terms of consumption by person in the US (C251). Both companies have spent billions in marketing, research, acquisitions, and promotions to meticulously exchange percentage points in the $66 billion a year industry that they have created (C250). Unfortunately times are changing, and the superiority that the carbonated soft drink industry once held among beverages is slowly fading. Schools are banning sodas from being sold in them, claiming they are unhealthy for children (C263).

People in today’s society are more health conscious than they were in prior years. This is why you see a health clubs left and right, and “0g Trans Fat” labeled on snack foods. A majority of the US population is very health conscious, which leaves little room for the sugary carbonated soft drinks that used to dominated beverage consumption. The stability of the Soft drink Industry as a whole is in jeopardy. Coke and Pepsi will have to find alternatives to increase market share, or break into new markets, if they want sales to keep increasing like they have in the past.

Non-carbonated beverages, such as juices, sports drinks, and energy drinks, are beginning to grow more rapidly than when they first were introduced, while carbonated beverages are leveling off. This health conscious shift will lead Coca-Cola and Pepsi executives to focus in these once thought auxiliary components of their business to pick up the slack that the carbonated industry is leaving behind. Coke and Pepsi will not be able to repeat their success with carbonated beverages in the water segment. Water can’t differ like soft drinks can.

There are simply too many similar substitutes for customers to turn to, and the brand loyalty diminishes. A mere 10% of consumers say they choose a brand of water because “it’s my favorite brand” when compared to the 37% of carbonated beverage consumers (C267). To compete in this new market, Coke and Pepsi will need a new competitive dynamic to stay profitable, one that won’t end in price wars. Fortunately for the market it is much cheaper to bottle and sell water than it is carbonated soft drinks, so competitive advantage will need to inevitably be realized in other parts of the business.