Coke and Pepsi

In 1886 Coca-Cola was first formulated and in 1893 Pepsi-Cola was invented. It was during the time of the Great Depression when the competition between these two products truly began. Pepsi cut the price of its 12-oz bottle to 5 cents – which is what Coke was charging for their 6.5-oz bottle. During this time Pepsi competed directly with Coke and marketed to consumers that they were “twice as much for a nickel, too.” The most intense competition between the two CSD companies occurred during the years of 1975 - 1990s where Coke and Pepsi fought over the $66 billion industry. As CSD consumption rose steadily year after year, both Coke and Pepsi were achieving average annual revenue growth of 10%. The production and distribution of CSDs involved concentrate producers, bottlers, retail channels, and suppliers; concentrate producers and bottlers being the most prominent of these four participants. A concentrate producer’s most significant costs were for advertising, promotion, market research, and bottler support. The bottling process was capital-intensive and involved high-speed production lines that were interchangeable only for products of similar type and size.

The first success factor for the CSD industry started in 1893 with the idea that CSDs were “a potion for mental disorders”. Simply selling the product without attaching additional value for the customer may have been a complete failure for CSDs. Instead, it was marketed as something more than just satisfying thirst. This continued in the 1920’s when Coke initiated a “lifestyle” campaign linking the role that Coke played in a consumer’s life. In 1963, Pepsi launched their “Pepsi Generation” campaign targeting the young and “young at heart”. The ability to link a “lifestyle” to the CSD was a major success. Throughout the 1970’s the consumption of CSDs grew and a key success of both Coke and Pepsi was their ability to increase the availability of CSDs and introduce diet and flavoured varieties, which resulted in new product’s being delivered to consumers regularly; keeping them very interested in the product. Another key success factor of both Coke and Pepsi bottlers was their decision to offer direct store door delivery; route delivery salespeople managed the CSD brand in stores by securing shelf space, stacking CSD products, positioning the brand’s trademark label, and setting up end-of-aisle displays. This personal brand management was a key success to both Coke and Pepsi, and to the CSD industry as a whole, as it ensured that each brand was being properly managed at the store level. The mere rivalry and competition between Coke and Pepsi was another key success factor of the industry. This relationship resulted in broadening the horizons for CSDs. New CSD flavours were being developed in order to outsmart the competitor, and faster and cheaper bottling processes were being used in order to cut costs and provide the product at cheaper price. The extreme “Pepsi Challenge” shed a new light on the CSD industry; no longer was a cola just a “cola”. This forced consumers to “pick a side”. This notion of “Pepsi vs. Coke” still exists today as the everyday consumer still has a preference of choosing either Pepsi or Coke. This was a remarkable challenge that ignited yet another leg of the CSD lifespan.

During the years 1998 to 2004, U.S. sales volume only grew at a rate of 1% or less each year. This was in extreme contrast to the growth rates of 3% to 7% during the 1980s and early 1990s. Demand for CSDs has consistently remained flat and the market has become stagnated and saturated. Moreover, the consumer environment is moving more towards healthier products and non-CSD alternatives. There have even been recent movements of banning CSDs from schools.

Porter’s 5 forces framework (see Appendix) is used to methodologically understand the variables influencing competition and profitability in the CSD industry. The first of the forces is the competition from substitutes. Along with having substitutes within the CSD market, such as Dr. Pepper and RC Cola, the CSD is also competing with a variety of other products; such as beer, milk, water, juices, coffee, tea, and sport drinks. This makes it incredibly difficult to compete and align a strategy as there are many substitutes for CSDs that exist. The second force is the competition from entrants. Historically, Coke had issues with competitors who were merely imitating the product, and in 1916 courts barred 153 imitations of Coca-Cola. Today the costs to compete in the CSD industry would require significant capital investment for bottling production lines, advertising, and promotion; thus making the ease of entry for any competition into the CSD industry very difficult. The third force is competition from established rivals.