Pepsi and Coke Competition

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Porter’s five forces

The degree of rivalry in the carbonated soft industry is highlighted by two major brands: Pepsi and Coke. These two companies account for 72% of market share while the rest of the market is covered by other organizations such as Dr. Pepper, Snapple Group and Cott Corporation.

Some private label products also contribute a small portion to the sales in this industry. Pepsi has eroded Coke’s market share in the past through low prices and aggressive promotion efforts.

In the 60s and 70s, Pepsi marketed itself as being the preferred brand, which caused a substantial reduction in Coke’s market share. Coke on the other hand has altered its product contents and prompted Pepsi to do so as well.

In terms of substitution as a Porter’s-five force, Coke and Pepsi have to deal with numerous substitutes for carbonated drinks.

Some of them may include bottled water, juice, tap water, powdered drinks, milk, beer, spirits, sports drinks and coffee. In the past, these substitutes were not a threat because consumers stayed loyal to Pepsi and Coke.

However, the substitutes are a strong factor in the industry because of health and environmental consumers.

Pepsi and Coke have responded to the threat of substitutes by producing those products themselves. The firms have ventured into juice, bottled water and coffee over the past few years.

Pepsi and Coke’s main buyers are bottlers, who purchase concentrate and package it in plastic or canned containers. The bottlers do not have as much power as the concentrate makers because they cannot negotiate concentrate prices.

Coke has a contract that establishes maximum prices for its concentrate while Pepsi determines prices on the basis of the consumer price index. It often exceeds market rates and thus has the final say.

Furthermore, because Coke and Pepsi give bottlers exclusive territorial rights, then bottlers cannot diversify their portfolio by selling products from competing brands. Their buyers are restricted to their either Coke or Pepsi.

One of the most significant barriers to entry in the carbonated soft industry is trademark domination. Coke and Pepsi have invested substantial amounts in development of their trademarks through intense advertising, bottler support, and product development.

New companies do not have the capital or ability to match such strategies. Negotiations made between the two major carbonated soft drink makers (Pepsi and Coke) and national retailers like Wal-Mart ensure that these firms dominate shelf space. New players may find it difficult to penetrate into such airtight deals.

The main suppliers in the carbonated industry are high fructose corn syrup manufacturers, food coloring industrialists, citric acid producers, caffeine makers and flavor manufacturers.

The citric acid or the food coloring industry has several small players who make it difficult for them to exert influence on large buyers like Coke and Pepsi. Therefore, supplier power is relatively weak in the soft drink industry.

Responses

How Coke and Pepsi compete

The two companies initially competed as friendly rivals (between 1970 and the mid 1990s). Pepsi prompted Coke to avoid complacency and continually improve its business efforts. Likewise, Coke caused Pepsi to become more innovative and thus successful.

This level of friendliness was permissible because both companies enjoyed increasing profits. However, that competiveness lost its agreeableness when both firms lost market share among the carbonated soft drink consumers.

In the 1970s, Coke altered its marketing strategies in response to the efforts made by Pepsi. It changed concentrate pricing and advertising strategies when Pepsi claimed to offer a superior cola to theirs.

Pepsi on the other raised the prices of its concentrate shortly after Coke did. Therefore, these companies compete through alteration of products, supply chain and distributional management and changes in marketing.

Product differentiations

In terms of carbonated drinks, Coke’s main product was its cola brand, but it has several other flavors such as Sprite, Fanta, Diet Coke and Tab. Similarly, Pepsi also started with the cola version then introduced other flavors such as Diet Pepsi, Teem, and Mountain Dew.

Both companies also diversified into non-carbonated drinks such as Minute Maid, Belmont Water and Duncan Foods for Coke and Lipton and Gatorade for Pepsi. Both firms have also introduced a number of diet products such as Diet Coke and Diet Pepsi. In the past decade, Pepsi and Coke have entered into the bottled water market.

Regardless of large investments in various soft drink and non carbonated industries, the most successful products are still the initial ones. Pepsi Cola and Coca Cola are still the most profitable products for both organizations.

The move into unconventional drinks was driven by changes in market trends as well as pressure from the US government.

Channels used by Pepsi and Coke

Both companies have a distribution channel that consists of bottlers and retail channels. However, the organization of these channels differs substantially in both companies. Pepsi has a preference for retail outlets while Coke has sold its products through fountain sales (dominates 69% of this market).

Nonetheless, both firms have competed for fountain sales by acquiring restaurant franchises. Coke worked hand in hand with McDonalds and Burger King while Pepsi purchased KFC, Pizza Hut and Taco Bell.

Both organizations purchased fountain equipment for these restaurants, as well. Pepsi and Coke also utilize the vending channel for distribution and have both done relatively well here.

Bottlers are also a crucial part of the distribution channel for both companies. At Pepsi, deals with bottlers are more flexible, especially in terms of pricing. Coke tends to exert greater control over prices by charging flat prices for concentrate.

These organizations have retained control over their bottling networks through consolidation. Coke started by created a bottling subsidiary in 1986 that would purchase ailing bottling franchises and revive them.

Currently about three quarter of Coke’s bottling is handling by this subsidiary. Similarly, Pepsi also started bottling consolidation by purchasing most of its bottlers like MEI Bottling and General Cinema. Now, 56% of Pepsi’s bottling is done internally.

Why the soft drink industry has been so profitable and whether it is changing

Profitability stemmed from a number of factors. First, the distributional arrangements were made in a way that favored concentrate makers. They had control over concentrate pricing, location of bottlers as well as advertising and promotion.

Pepsi and Coke were also successful because at the time, carbonated drinks were a favorite for most North Americans. Few of them had objections with the product content and there were minimal alternatives in the market.

Profitability has reduced dramatically in the soft drink industry. This stems from health concerns. Numerous consumers feel that high fructose corn syrup is detrimental to their health. Government programs are designed to punish soft drink makers through excessive taxation.

These charges stem from initiatives aimed at fighting obesity. Furthermore, traditional institutions, such as high schools, that sold most of Coke and Pepsi’s vending machines have banned them. Now the organizations have minimum distributional avenues for their products.

Both firms have also ventured into non carbonated drinks such as bottled water and juices. These new ventures do not elicit as much brand loyalty as carbonated drinks.

Therefore, the companies dedicated a substantial share of their resources to these new products, yet they did not enjoy anticipated returns. Non profitability of products other than soft drinks affects the success of soft drinks because little capital is left to invest in them.

Non profitability has also emerged from the poor management of international business. Some countries impose excessive foreign exchange controls, unfavorable trade regulations and advertizing restrictions.

How Coke and Pepsi can stay profitable

The major cause of concern among both organizations is the health campaign against soft drinks. Pepsi and Coke ought to identify the sources of high sugar content in its products and then work on developing alternatives.

However, the companies should still maintain the taste that made those products so likeable initially. Pepsi is already doing this through its Pepsi Throwback brand and Mountain Dew Throwback brand.

Now the company ought to go back to the public and inform them about the changes it has made to these products. Coke has also initiated its own changes through the use of a stevia-based additive. Aggressive marketing campaigns should be done to win back traditional clients such as school institutions.

Both organizations have already realized that non-carbs have a lot of growth potential. This can be seen by their acquisition of energy drink companies as well as vitamin water firms.

The two organizations now need to build their brands around these sectors by following the same strategies that they employed to make their carbonated drinks so popular.

Consumers need to recognize the zero-carbs products in the same way that they recognized the other ones in the past.

Although diversifying into other products is a plausible idea, these organizations should not focus on bottled water. There is minimal room for differentiation in the bottled-water industry as the product is quite basic.

In fact, low differentiation explains why consumer loyalty for Coke and Pepsi’s water declined sharply over the past few years. Consumers tend to buy the least expensive brand if a product is not highly differentiated.

Pepsi and Coke should also deal with some of the environmental concerns that customers have about their products. They need to place their products in biodegradable packages.

Product development experts should also anticipate consumer complaints through market research and respond to demand before the external environment forces them to do so.

The two companies need to refine their international expansion strategies. These organizations need to rethink their bottling strategies in global markets. Most North American bottling is directly handled by the company’s bottling subsidiary, and this has given the company reasonable control over its product.

The same model should be replicated in different international markets. This would mean that the company will not lose any of its profits to third parties who keep demanding for new things. The company should start with developed nations and then transfer consolidation to developing ones.

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