Cola Wars Continue:

Coke and Pepsi in 2006

Presented by Group D
Why, historically, has the soft drinks industry
been so profitable?
QUESTION 1
Porter’s Five Force Analysis
 Threat Of New Entrants - Low
• Concentrate manufacturing involves little
capital investment
• Bottling – capital intensive
• Access to distribution is limited
• High brand loyalty
 Threat Of New Entrants
• Bottling Network
- Have franchisee agreements with their existing
bottler’s who have rights in a certain geographic
area in perpetuity.
- Backward integration with bottling companies.
• Advertising Spend
-  Huge advertising and marketing spend required.
Around $450 million by Coke and Pepsi put
together in 2004
 Bargaining Power Of Suppliers -Low

 Commodity Ingredients
• Concentrate Producers
- Caramel coloring, phosphoric or citric acid,
natural flavors and caffeine
• Inputs for Bottlers
- Packaging
- Sweeteners
 Bargaining Power Of Suppliers
• Majority of the U.S. Carbonated Soft Drinks
(CSDs) were packed in metal cans (56%)
- Coke and Pepsi were among the largest customers
for metal can industry
- Cans are commodity, 2-3 manufacturers
competed for single contract
• Plastic Bottles represented 42% of CSD packaging
- Bargaining power of plastic bottle suppliers was
low
Bargaining Power Of Buyers- Moderate

Retail Channels

Supermarkets

Convenience stores/ Gas

31% stations
34%
Supercenters

Mass retailers

Club stores

Drug Stores

3%
Fountain ans Vending
15% machines
4%
4%
9%
 Bargaining Power Of Buyers
• Supermarkets
- Several chain stores and few local supermarkets
- Intense competition for shelf space
- Offer premium shelf space thus command lower prices
• Mass merchandiser
- Extremely fragmented
- Have private label CSDs
• Fountain Account
- Intense competition for these accounts
- Sacrificed Profits to land and keep accounts
 Threat Of Substitutes - Low
• Large number of substitutes were available –
bottled water, beer, milk, coffee, juice etc.
• Americans drank more soda than any other
beverage with cola market share 71% in 1990
• Huge advertising, brand equity, and making
easy availability of product reduced the threat
of substitutes
 Extent Of Rivalry - High
• Concentrate Producer Industry – DUOPOLY
• Rest of the competition too small to cause any
upheaval of pricing or industry structure
• Strategic convergence
• Head-to-Head Competition between both
Coke and Pepsi reinforced brand
recognition of each other.
 Conclusion
• Americans drank more soda than any other
beverage
• Head-to-Head Competition between both Coke
and Pepsi reinforced brand
recognition of each other.
• Since the Threat of New Entrant, Bargaining
Power of Supplier, Threat of Substitutes were all
low, the soft drink industry enjoyed high
profitability
Compare the economics of the concentrate business to that of the
bottling business: why is the profitability so different?

QUESTION 2
 Concentrate Producers
• Blend raw material ingredients, packaged the mixture
and shipped those to the container bottler.
• A typical manufacturing plan costs $25 million to $ 50
million.
• Significant costs were for advertising, promotion ,
market research and bottler relations.
• Coca-Cola and Pepsi claimed a combined 74.8% of the
US CSD market sales.
• Concentrate producers earn more profit than bottlers.
 Bottlers
• Cost of sale is more in bottlers than concentrate
producers.
• Added carbonated water and high-fructose corn
syrup.
• Bottled or canned is the resulting CSD product.
• Delivered it to customer account.
• Bottling process is capital intensive.
Operating Margins for Concentrate Producers
& Bottlers
Concentrate Producers
Coca Cola Pepsi
Revenue 21719 8313
Operating Profit 30.72% 23.00%
Bottlers
CCE PBG
Revenue 18158 10906
Operating Profit 7.90% 9%
 Cost Structure
  Concentrate Producer Bottler
  $ per case % of Sales $ per case % of Sales
Net sales 0.97 100 4.7 100
Cost of Sales 0.16 17 2.82 60
Gross Profit 0.81 83 1.88 40
Selling and
Delivery 0.02 2 1.18 25
Marketing 0.42 43 0.09 2
General
Administration 0.08 8 0.19 4
Pretax Profit 0.29 30 0.42 9
 Price Change
Price Change from 1988-2004
Retail Price per case 0.60%
Concentrate Price per case 3.90%
CPI 3%

•Increasing price of concentrate has put pressure on the bottlers

margins
 Conclusion
• Long Term Debts by Assets Ratio is as high as 40%.
• Channel Shift due to Big Retailers like Wal-Mart lead
to pricing pressures
• With increasing number of SKU’s ,the no of product
lines and the Labor costs of the Bottlers Increases
• Non-CSG products required costly new equipment
and major process changes
• Rising raw material costs
How has the competition between Coke and
Pepsi affected the industry profits?
QUESTION 3
100%
Beverage Consumption / Person
Tapwater/Hybrids/All Others
Distilled Spirits
90% Wine
Powdered Drinks
80% Sports Drink
Tea
Juices
70%
Coffee
Bottled Water
60% Milk
Beer
CSD
50%

40% Need Creation

30%

20%

10%

0%
1970 1975 1981 1985 1990 1994 1996 1998 2000 2002 2003 2004
Market Share
 Impact on Industry
• Overall increase in industry reach
– Strong advertising
– Diversification
• New Products
• New Markets

• Price Pressures (1998-2004)

– Concentration Price per case up by 3.9%
– CPI up by 3%
– Retail Price per case up by only 0.6% !

• Consolidation : moving towards Duopoly

– Combined 50.8% market share in 1966 to 74.8% market share in 2004
– No price war ?
 Conclusion
• Overall Industry Volume is increasing
– 3090 Mn in 1970 to 10240 Mn in 2004
• Per unit profits declined due to price war
• New products and markets
• Innovation
– Glass bottles in India : Low Cost
– Vending Machines : High Margin
• Net Profit/Sales for 2 dominant players increasing
continuously : Industry doing well
Can Coke and Pepsi sustain their profits in the wake of flattening demand
and growing popularity of non-CSD’s?

QUESTION 4
 Consumption(gl/capita) 1998 Consumption2004
60 60

50 50

40 40

30 30

20 20

10 10

0
0
CSD MILK Bottled Water Coffee Juices Tea Sports Drink
CSD MILK Bottled Water Coffee Juices Tea Sports Drink

• CSD still accounts for the largest share in total liquid consumption
• Coke and Pepsi CSD accounts for 55.4% of the market share in the Non-Alcoholic Refreshment Beverage
Industry
• Coke and Pepsi are in the business since 1890’s – High Brand Equity
• No other dominant player due to high barriers to entry
• Both figure in the “Brands Most Important to Retailers List “
• Product Differentiation
• Globalization : International Market
• International Retail Market Not consolidated as US/Europe
• Provide Coke and Pepsi better pricing power
• Emerging Markets in BRIC and Developing countries

  Population Consump Total Growth

USA 290809 837 243407133 -1.1

CHINA 1304196 21 27388116 1.2

INDIA 1065462 8 8523696 7.5

RUSSIA 143246 70 10027220 7.7

BRAZIL 178470 312 55682640 3.1

• Innovation
• Diversification
• Refrain from eroding each others market share
• Maintain duopoly industry landscape
 EPS Sales
3.5 35000

3 30000

2.5 25000

2 20000

1.5 15000

1 10000

0.5 5000

0 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Sales and EPS of Coke has increased in last decade

Similar trend for Pepsi
THANK YOU