Strategic marketing plan

APPENDIX

APPENDIX A

Harvard Business School, 9-7-11-46, pp. 1 - 22

A.1

For more then a centaury Coca-Cola and Pepsi vied for ‘throat share’ of the worlds beverage market.

Most competitive time spanned from 1975 – mid 1990’s, and was fought over the $74 billion carbonated soft drink (CSD) industry. Both coke and Pepsi achieved average annual revenue growth of around 10%, as both US and worldwide consumption rose steadily year after year.

A.3

The competition between Pepsi and Coke fed each companies success, the more successful coke was the sharper Pepsi had to be and visa versa.

Competitive relationship started to fray in 2000s, however as the US consumption started to decline  by 2009 the average American drank 46gallos of CSD a year (lowest CSD consumption since 1989)

A.5

Heading into 21st centaury coke and Pepsi faced new challenges:

Could they compete against non-CSD beverages that demanded different bottling, pricing and brand strategies?

A.6

ECONOMICS OF THE US CSD INSUSTRY

Alternatives to CSDs including beer, milk, bottled water, juice, tea, powdered drinks, wine, sports drinks, distilled spirits and tap water.

Within the CSD category the cola segment maintained its dominance, although its market share dropped from 71% in 1990 to 55% in 2009.

A.7

Concentrate producers blend the raw ingredients, package the mixture in plastic canisters and ship canisters to be to the bottler.

Most significant costs of the concentrate producers Inc: advertising, promotion, market research and bottler support.

A.8

Purchase the concentrate, add carbonated water and high fructose corn syrup bottle or can the CSD product and delivers it to consumer accounts.

Franchise agreements  both coke and Pepsi allow bottler to handle non-cola brands of other concentrate producers. Bottlers could choose whether to market new beverages introduced by a concentrate producer.

Bottlers couldn’t carry directly competing brands

A.9

RETAIL CHANNELS

Costs and profitability in each channel varied by delivery method and frequency, drop size advertising and marketing.

CSDs accounted for $12 billion or 4% total store sales in the US and were also a big traffic draw for supermarkets.

Historically Pepsi dominated sales through retail outlets, while coke commanded the lead in retail sales.

In the 1990s competition for fountain accounts = intense, in 1999 burger king franchises believed to pay $6.20 per gallon of coke syrup (received substantial rebate on each gallon).

After Pepsi entered the fast food restaurant business acquiring Pizza Hut (1978), Taco Bell (1986) and KFC (1986), coke perused competing chains such as Wendy’s and Burger King to switch to coke

In the vending channel bottlers took charge of buying, installing and servicing machines (also negotiating contracts with the property owners typically received a sales commission in exchange for accommodating their machine)

A.10

Coke was formulated in 1886, Pepsi invented in 1893.

The cola war begins

1950 Alfred Steele, former Coke marketing executive became the CEO of Pepsi and made “beat coke” his motto. Pepsi growth began to follow the post-war growth in a number of supermarkets and convenience stores in the united states: there was about 10,000 supermarkets in 1945, 15,000 in 1955 and 32,000 in 1962 at the peak of its growth curve.

The Pepsi Challenge

1974 Pepsi launched “the Pepsi challenge” in Dallas, Texas. Coke was the dominant branding that city and Pepsi ran a distant third behind Dr Pepper. Blind taste tests which where conducted by Pepsi’s small bottler, the company tried to demonstrate how consumers liked the taste of Pepsi better then that of Coke; after this it rolled out Nation wide.

Coke countered with rebates, retail price cuts and a series of advertisements questioning the tests reliability/validity.

Pepsi challenge successfully eroded the cokes market share, in 1994 Pepsi past coke in food store sales for the first time, opening up a 1.4 share lead.

Cola war heats up

1985 coke announced it was changing its 99-year old formula, the radical break with tradition cited a sharp depreciation in the value of coca-cola as a brand/trademark. On that day Pepsi declared a holiday for its employees.

Three months later the company brought back the original formula under the name of coca-cola classic.

New CSD products proliferated in the 1980s; coke introduced 11 new products including caffeine free and cherry coke. Pepsi introduced 13 producers inc. lemon line slice and canine free Pepsi cola.

1980s the growth of Pepsi and coke put the squeeze on smaller concentrate prodycers as their shelf space declined, smaller products where shuffled from one owner to another.

ADAPTING WITH THE TIMES

Starting late 1990s the soft drink industry (STI) encountered new challenges  suggested possible long-term shift in the market place.

Americans still drank CSDs (more then any other beverage) at US consumption started to fizzle that stood contrast to annual growth rates of 3% to 7% during the 1980s and early 1990s.

The shift in consumption patterns evolved the linkage to growing health issues such as obesity.

A.11

Expanding the product mix offered other avenues for growth diet sodas rose to capture 30% of the CSD market in 2009 compared to 24% a decade ago. Coke zero became a successful new product.

Both coke and Pepsi intensified their efforts to use alternative sweeteners. Despite some success of diet drinks, coke and Pepsi realised that growth lied in ‘non crabs’, this category included juices, sport drinks, energy drinks and tea based drinks also bottled water.

Initially Pepsi was more aggressive in shifting into non-CSD products that outsold cokes rival products in several key categories including Lipton iced tea and Gatorade sports drink.

In 2007 77% of Pepsi’s new products released in the US where non carb, compared to Coke 56%

A.12

Increasing popularity of CSD alternatives was brewing complications for CSD maker’s tradition production and distribution practices.

Concentrate companies become more directly involved with the manufacturing of non-CSD beverages such as Gatorade and Lipton iced tea. These finished goods required a smaller but specialized production process that was challenging for the bottlers to accommodate with the existing infrastructure.

Bottlers were becoming frustrated that they where not fully participating in the new growth businesses. Pepsi and Coke sold the finished goods to their bottlers, who distributed them alongside their own bottled products at a parentage mark-up.

In addition, coke and Pepsi distributed some non-CSD directly to retailer warehouses bypassing bottlers.

All CSD companies faced the challenge of achieving pricing power in the take-home channels. In particular the rapid growth of the mass-merchandisers, led by wall mart and other club stores which posed a threat to the profitability of Coke and Pepsi.

In addition bottlers had to manage an ever-rising number of stock-keeping units (SKU). Many non-CSD sold at a relatively low volume leading to an increase use of split pallets.

Bottlers incurred higher distribution and sales costs; some of Cokes biggest bottlers saw their costs of goods sold (inc operating expenses) reach 90% of their sales.

Not surprisingly bottlers complained over Coke’s charging a flat rate for its concentrate in the US market, cokes profits were tied to volume growth whilst the bottlers profits were drive by package types and where the drinks were sold.
A.13

FUTURE OF COLA WARS

Declining CSD sales, declining cola sales, rapid emergence of non-carbonated drinks appeared to be changing the game.