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Prior to 1950, Coke was about as successful a company as could be found.

By controlling the market structure and maintaining their competitive advantage, they managed to have a commanding share in a very profitable industry with relatively few and weak competitors. The result of this was a sustainable advantage that would be the envy of any manager. However, when Pepsi got its act together, they managed to show that they could take advantage of the favorable structure of the industry as well and put a check on Cokes dominance. After the cola wars commenced, much regard for industry structure was lost in the heat of battle, and they managed to compete a lot of their profits away. However, the cola industry can still serve as a template for successful management of industry structure for most of its history, as well as a case study in "hypercompetitiveness" in more recent times. The ways in which Coke influenced market structure early on all seemed to indicate an awareness of the forces governing the structure of the market even if they didnt have a neat comprehensive system like Porters five forces to work from. The cola industry has a natural bonus in having relatively common, low-cost inputs and little capital investment necessary. However, beyond that, Mother Coke gave birth to most of the arrangements that made the market forces more favorable. Porter even cited them as an example of a company that sacrificed profitability for good market structure, although for a while their policies gave them both. The idea of having bottling franchises was pioneered by both Coke and Pepsi, and subsequently adopted across the industry, showing how the major players can influence the structure of the industry effectively. The most obvious advantage of having franchised bottlers is that most of the capital-intensive aspects of production and fixed costs are shifted outside the company. Thus, the concentrate producers retain a greater degree of flexibility, and dont have to concern themselves with extraneous factors like the price of glass or aluminum. Their suppliers are all stable competitive markets without any power to drain away profit. The structure of franchised bottling agreements also minimized the leverage of the buyers and prevented the dissipation of the concentr ate producers profits. Since bottlers were forbidden to bottle competing brands, and the costs of switching to another company were high, the concentrate producer could retain a bigger share of the profits (18% gross profit, as compared to 9% for the bottler) while splitting the costs for advertising evenly (and getting the bottler to pay for 2/3 of the promotional costs). The perpetuity and territorial exclusivity added a new dimension to the power obtained by the concentrate producers. If Pepsi already had an exclusive bottler in the area, then Cokes bottler would have no choice but to deal with Coke. Of course, persistent gouging would be an unwise policy in a cooperative arrangement, and Cokes policy was always to capitalize on having a wide

distribution network, so they needed to keep their bottlers in business. However, most of the supernormal profits Coke got from differentiation were not dissipated to its bottlers. The territorial exclusivity also made sure that bottlers didnt compete against each other, which would have allowed the consumers to capture some of the value through intra-brand competition. Since both the suppliers and buyers exerted little power over concentrate producers, if they could erect stable barriers to entry and avoid competing profits away, they would have the capacity to capture supernormal profits for themselves in perpetuity. In this area, Coke took the lead with its "lifestyle" advertising, pioneered by Woodruff in the twenties and thirties, which killed two birds with one stone in both maintaining Cokes competitive advantage and creating barriers to entry that have been effective in preventing any new national competitors since Royal Crowns entrance in 1935. In an industry with very easily available supplies (and for all its vaunted secrecy, a decent lab could probably imitate Cokes formula without too much trouble; after all, cola is little more than vanilla and citrus flavor) and little capital investment, keeping out competition seems to be a formidable task. However, Coke put its first mover advantage to good use by advertising neither the quality nor taste of its product but the lifestyle associated with it. This made the very size of Coke a selling point. No company without a pre-existing network of distribution could compete with Coke on its own turf now, because they definitely didnt have a piece of the American dream trademarked. A new entrant would face other disadvantages; for example the exclusivity demanded from the bottlers might force a new entrant to take on those capital costs as well. However, if a competitor could establish demand for his product, he could entice a bottler away with a higher share of his profits. But by managing to make cola all about the image rather than taste, Coke steered the industry towards competition in an area where the first movers had a distinct sustainable advantage. The success of this strategy clearly influenced Cokes persistent march across the globe, even at the expense of short-term profits (a five-cent bottle of coke might have cost significantly more to supply to the army in the middle of nowhere). Since it had success magnifying the first-mover advantage in America, Coke realized that the same pattern could be exploited abroad. This also had the extra feature of preempting an established foreign soft drinks invasion into the US by erecting international barriers to entry. The last element of market structure that is of interest is substitutes, and both coke and Pepsi have aggressively pursued the opportunity to buy up as many potential substitutes for the soft drink industry as possible. The fact that this came relatively late in their history might indicate that the substitutability of orange juice or similar

products for soft drinks is relatively low, and thus only became paramount when the competition got really tough. The competitive advantage that Coke maintained for a long time was also a product of the policy choices made in the twenties and thirties. The wide distribution networks and Cokes leading position allowed it to capture the biggest segment of the profit garnered by lifestyle advertising. However, besides the advantage of being the top dog in a profitable industry, Coke managed to maintain its top position against most challengers by sticking to a single generic strategy. Coke chose the generic strategy of differentiation and adhered to it faithfully. They did not try to compete on price at the same time as they were selling their image (though eventually they had to respond to a significant price disparity created by Pepsis first significant move of "twice as much for a nickel"), and thus avoided getting stuck in the middle. Until Pepsi got its act together and started competing by differentiation as well, Cokes path was taking advantage of both industr y structure and competitive advantage to the fullest. The first success of Pepsi was its cost leadership, when they sold twice as much cola for the same price in the thirties. After a few years Coke matched the low price and eroded Pepsis cost leadership. Pepsi took a while to reorient themselves, and thus were teetering on the edge of bankruptcy when Alfred Steele took over in 1950 and started them on the strategy of focus differentiation that eventually translated itself into differentiation directed towards the soft-drink market as a whole. The focus differentiation that Steele pursued took on many forms. For example, by creating the 24-ounce bottle and concentrating on supermarket sale, Pepsi tried to capture the family market, which had different needs and consumption patterns than those that were the strength of Coke. The larger size could be directed less towards impulse consumption and more towards planned family meals, and the sale in supermarkets matched that emphasis, since families would be the consumers most likely to use supermarkets. Other focus differentiation that Pepsi pursued included their targeting of the youth market with a "young and young at heart" campaign as well as production of new soft-drink varieties such as Mountain Dew. However, in some ways, Pepsi was still stuck in the middle, because they sold their concentrate at a lower price to bottlers while exploring these avenues of focused differentiation. Since a simple process like concentrate production could hardly be 20% more effi cient than Cokes, Pepsi was most likely skimping on advertising and promotion, which is the key to maintaining any kind of differentiation strategy. Furthermore, Coke, despite making a point of not mentioning Pepsi directly, matched most of their moves, with new bottle sizes, marketing campaigns and

relationships with supermarkets. Thus any niche that Pepsi occupied for a short while could not be counted on as a long-term solution, since Coke would eventually address the same focus segments that Pepsi did and be at least as successful at it (and with a superior overall differentiation, Coke could expect to prevail when all other factors are equal. Finally, in 1974, Pepsi basically stumbled on the strategy that would finally put them on a truly comparable footing with Coke, at least in the US. The Pepsi Challenge wound up providing a tool for overall differentiation on the basis of taste. Since it was directed at the whole market, rather than a segment, Coke could not match that move (though they eventually tried to, with the disastrous New Coke experiment). It is hard to believe that with the success that the differentiation strategy had, no one besides Coke pursued it successfully until 1974. After all, cost leadership was constantly undermined by minor or in-store brands, and in a market built so much on image, the demand wouldnt be elastic enough to support such a strategy. Focus differentiation and pricing could only work until Coke got around to addressing the same segment. Once Pepsi became an effective competitor, at least some of the favorable market structure was compromised by Coke trying to regain the upper hand. Retail price discounting was basically competing away profits in an attempt to get a greater share. In the long run, it probably didnt be nefit either Coke or Pepsi, but they had to keep up with each other. Similarly, they also tried to expand their product lines and capture more of the substitutes for soft drinks, with mixed results. The New Coke disaster and the unprofitability of Pepsis 3 liter bottle returned some measure of restraint, but much of the consideration for the maintenance of a favorable market structure was lost in the heat of battle, as Pepsi "wanted to jump off the cliff before Coke" and vice versa. Even the bottling networks were changed, as both Coke and Pepsi made an attempt to centralize and tighten their systems of distribution and marketing. However, the need to compete effectively also brought the greatest strength of the soft drink industry, the advertising, back into the picture. The overall consumption of soft drinks increased significantly through the 1970s and 80s, as Coke even brought back its message of "drink Coke because its the most popular" to rediscover the ovine qualities of the American people. The initiation of the cola wars had some positive effects on Coke, and certainly improved the position of Pepsi. However, whatever inefficiency slack was taken up by the need to compete on all fronts has to run out sometime, and the intense growth of the soft drink market also has to reach a limit at some point, and in the long run, rivalry was the one market force that didnt allow Coke to gouge the gullible consumers in all perpetuity. There are still gullible customers across the sea, but, unfortunately for Coke, Pepsi is once again pursuing the strategy of focus

marketing evolving into overall differentiation, and there seems to be no way of stopping it. It seems that the paradigm of hypercompetition is actually useful for the more recent history of the soft drink industry, and we can notice that the search for new advantages as well as reliance on old standbys has replaced a static competitive advantage. So eventually the winners will be the consumers and advertising companies, and much of the soft drink profit will be competed away. But we can still remember the glory days when Mother Coke was the epitome of a big fish in a big profitable and secure pond as the epitome of successful management, not only of its competitive advantage, but of industry structure as a whole.
http://wso.williams.edu/~aveytsel/old/papers/econ208-1.html

The Battle of the Soda Giants: Coke vs. Pepsi


Not only in the business world, but also in many other areas of our lives we are usually surrounded by well known and long established rivalries: Apple vs. Microsoft, Federer vs. Nadal, or Britney Spears vs. good taste, to name a few. The Coke vs. Pepsi competition is one of the greatest rivalries in corporate history, so lets take a look at it from an investors perspective. Which companys a better buy, CocaCola (NYSE:KO) or PepsiCo (NYSE: PEP)?

Winning the Cola Wars

We could go over the history of this rivalry forever, and there are countless marketing moves and ads that come to mind when thinking about this epic competition. But when it comes to the cola wars, Coke won that one back in 2010 when it sold 1.6 billion cases of its regular Coke and 927 million cases of its Diet Coke, while Pepsi sold only 892 million cases total.

Coke has been strengthening its dominance in carbonated drinks over the last few years and, according to Interbrand, Coca-Cola is the most valuable brand in the world, while Pepsi follows from a considerable distance in 22nd place.

The carbonated drinks market is stagnant in developed countries, but it still presents plenty of opportunities for volume expansion in emerging ones. Per capita soda consumption tends to rise with

disposable income, so Coke has big opportunities for growth in countries like China and India where per capita consumption is well below levels observed in developed markets.

Even if there are cultural differences and consumers have different tastes, Coke knows how to adapt to its local customers, and these are gigantic markets which will offer plenty of room for expansion in the middle and long term for the company.

With a Grain of Salt

But there is much more to the comparison than sodas. Through its Frito-Lay division PepsiCo is the world's largest snack food company, controlling almost 40% of the world's salty snack market. The North American snack business is Pepsi's most profitable segment, generating 25% of the firm's total revenue in 2012 and 40% of its operating profits.

The company owns more than 22 brands generating more than $1 billion in sales, including famous names in the snacks business like Lays, Doritos and Cheetos. Just like rising soda consumption due to increasing personal income is a big plus for Coca-Cola, PepsiCos salty snacks business is benefiting from the same trend in emerging markets.

By the Numbers

When it comes to valuations, the similarities are amazing; there is almost no difference in terms of dividend yield, P/E, forward P/E or price to book value (PB) among the two companies.

Coke has delivered better financial performance, though; the company has been more efficient than Pepsi in translating sales growth into higher earnings over the last five years. Besides, thanks to its dominant position in the profitable soft drinks business, Coke has higher profit margins than its competitor.

With decades of consecutive dividend increases year after year, both Coke and Pepsi are always under consideration by dividend investors. Although current dividend yields are practically the same, Coke has been increasing its dividends more rapidly that Pepsi over the last years.

Bottom Line

Even if Pepsi has been lagging Coke in terms of earnings growth and profitability over the last years, the company is betting on products with promising long term prospects and trying to anticipate changing consumer demands. The company deserves some credit for that forward looking vision.

But Coke is still the most valuable brand in the world, and thats an invaluable asset that the company translates into superior profitability. So, for the same price of a Pepsi, Im having a Coke.

http://beta.fool.com/acardenal/2013/04/10/the-battle-of-the-soda-giants-coke-vs-pepsi/29803/
Why is the battle between Coke and Pepsi -- two ultimately similar types of sugar water -- the most important struggle in the history of capitalism? Simply put, their rivalry transcends time, distance, and culture. It has divided restaurants, presidents, and nations. It has been waged in supermarkets, stadiums, and courtrooms. Its many foot soldiers include Santa Claus, Cindy Crawford, Michael Jackson, Max Headroom, Bill Gates, and Bill Cosby. In 1886 an Atlanta chemist introduced Coca-Cola, a tasty "potion for mental and physical disorders." Pepsi-Cola followed seven years later, though it would be decades (and two bankruptcies) before Coke acknowledged the company in the way it had other competitive threats: lawsuits. Pepsi-Cola had made hay during the Depression. Like Coke, the drink cost a nickel, but it came in a 12-ounce bottle nearly twice the size of Coke's dainty, wasp-waisted one. But by the 1950s, Pepsi was still a distant No. 2. It nabbed Alfred Steele, a former Coke adman, who arrived embittered and ambitious. His motto: "Beat Coke." Coca-Cola refused to call Pepsi by name -- the drink was "the Imitator," "the Enemy," or, generously, "the Competition" -- but it began tinkering with its business (and imitating Pepsi) to stay ahead. In 1979, for the first time in the rivalry's history, Pepsi overtook Coke's sales in supermarkets. It didn't last, and by 1996, Fortune declared that the cola wars had ended. Since then Pepsi, with its increasing focus on health and snacks, has as good as surrendered. America's favorite two soft drinks? Coke and Diet Coke. Winner: Coke

http://money.cnn.com/gallery/news/companies/2013/03/21/greatest-businessrivalries.fortune/2.html

The cola wars: Pepsi launches mid-calorie Pepsi Next as it takes on Coke in battle to lure the 'healthconscious'
Pepsi is hoping to win back soft drink consumers with a compromise. Some people dislike the calories in soft drinks, but loathe the taste of their zero-calorie diet equivalents. So America's number two cola company is rolling out Pepsi Next, a cola that has about half the calories of a standard Pepsi at 60 calories per can. The cola, which is slated to hit store shelves in the U.S. by the end of next month, is Pepsi's biggest product launch in years. The drink comes as people increasingly move away from sugary drinks to water and other lower-calorie beverages because of health concerns. It is also an attempt by Pepsi to revive the cola wars against Coke and others. Pepsi Next isn't the first drink to try to hit the sweet spot between diet and standard cola. Dr Pepper Snapple rolled out its low-calorie Dr Pepper Ten, which has ten calories. The company said the drink, which has sugar unlike its diet soft drink, helped boost its fourthquarter sales. But coming up with a successful 'mid-calorie soda', which has more calories, has proved a challenge for beverage makers. In 2001, Coke rolled out C2 and Pepsi in 2004 introduced its Pepsi Edge, both of which had about half the calories of a regular soft drink. Both products also were taken off the market by 2006 because of poor sales. John Sicher, editor of Beverage Digest, said: 'The problem was that consumers either wanted regular soda or a diet drink with zero calories - not something in between.' Pepsi says its latest stab at an in-between soft drink uses a different formula to more closely imitate the taste of a regular soda. Pepsi Next is made with a mix of three artificial sweeteners and high fructose corn syrup. Melissa Tezanos, a spokesperson for Pepsi, said the company developed the cola by researching the 'taste curve' that consumers experience when drinking a regular soft drink She compared that arc to how someone might evaluate a sip of wine, from the moment the liquid hits the tongue to the after-taste it leaves. Ms Tezanos said: 'We wanted to develop a taste curve that gives the full flavor of regular Pepsi.' Pepsi Next also follows the company's lower-calorie variations of its other drinks. SODA CALORIE COUNTER A standard can of soft drink contains the following calories: Pepsi Next - 60 Pepsi - 150 Coca-Cola - 140 Diet Pepsi - 0

Diet Coke - 0 Sprite 96 Gatorade, a unit of Pepsi, has G2, which at 20 calories has a little less than half the calories of the original version. And the company's Tropicana unit introduced Trop50, which is half of the 110 calories in a regular glass of orange juice. But orange juice and sports drinks have nutritional benefits that a drink maker can market. A mid-calorie soft drink is a tougher sell because it provides only empty calories. So health-conscious drinkers usually opt for a diet soft drink or quit altogether. Sales in the $74billon soft drink industry have been fizzling out, with volume falling steadily since 2005, according to Beverage Digest, which tracks the industry. Meanwhile, healthier drinks are growing more popular, with bottled water accounting for 11 per cent of all beverages consumed in 2010, up from 2 per cent in 2000. Consumption of sports drink rose to 2.3 per cent, from 1.2 per cent. Diet soft drinks also rose to 29.9 per cent of the carbonated drink market in 2010, up from 24.7 per cent a decade earlier. To keep up with changing tastes, Coke and Pepsi have introduced newer versions of their diet drinks - Coke Zero and Pepsi Max - that promise a taste that's more like their regular sodas. Pepsi hopes Pepsi Next will help it gain back the market share it has lost in recent years. The company's namesake drink had its share in the carbonated soft drink market fall to 9.5 per cent in 2010, from 13.6 per cent a decade earlier, while Diet Pepsi's share remained steady at 5.3 per cent. Coke is still the top selling brand, with 17 per cent market share. Diet Coke follows with 9.9 per cent. Pepsi, based in Purchase, New York, said earlier this month that it plans to increase marketing for its brands by $500million to $600million this year. A centerpiece of that will be the company's first global ad campaign this summer, a peak time for the soda market.
http://www.dailymail.co.uk/news/article-2105791/Pepsi-launches-mid-calorie-Pepsi-Next-takesCoke-battle-lure-health-conscious.html

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