Cola Wars Continue Coke and Pepsi in 2006

Cola Wars Continue: Coke and Pepsi in 2006 Presented by: Tigers Team Spring 2008

Overview n History n Historical Industry Profitability n Concentrate vs. Bottler Profitability n Competition between Coke and Pepsi n Sustaining Profits

History of Pepsi n n n Pepsi was created in 1893 in North Carolina by Pharmacist Caleb Bradham. By 1910 Pepsi had built a network of 270 bottlers. Pepsi struggled and declared bankruptcy twice During Great Depression grew in popularity due to price decrease to a nickel. In 1938, Coke sued Pepsi-Cola brand for infringement on Coca-Cola’s trademark.

History of Coca-Cola was formulated in 1886 by pharmacist John Pemperton who sold the product at drug stores as “potion for mental and physical disorders. ” n. In 1891, Asa Candler acquired the formula, established a sales force and began brand advertising of Coca-Cola. n. In 1919, went public under control of Robert Woodruff expanded and developed in national and international markets. n. Successful during WWII with the high CSD consumption from the U. S soldiers. n

Industry Profitability: Porter’s Five Forces n Rivalry n Substitutes n Coke n Alliances n Pepsi n Acquisitions n Cadbury n Product Innovation

Porter’s Five Forces (Cont. ) n Barriers to Entry n Power of Suppliers n Exclusive Territories n Sugar n Substantial Investment n Packaging n Current Market Presence

Porter’s Five Forces (Cont. ) n Power of Buyers n Super Markets n Vending n Convenience and Gas n Fast Food n Mass Merchandisers § n Fountain Profitability of the CSD Industry

Concentrate Business vs. Bottling Business Concentrate Producers n n n Blend raw material ingredients Packaged Mixture in plastic canisters Shipped to bottlers Diet CSDs n Added artificial sweeteners

Concentrate Business vs. Bottling Business Bottlers n n Purchased Concentrate Added carbonated water and high fructose corn syrup Bottled CSD product Delivered to customers accounts Diet CSDs n Added sugar or high-fructose corn syrup

Concentrate Business vs. Bottling Business n Concentrate Producer n n Little Capital Investment Cost of $25 million - $50 million One plant to serve US Significant costadvertising, promotion, market research and bottler support n Bottlers n n n Capital Intensive High-speed production lines Bottling costs $4 million to $10 million Capacity of $40 million warehouse cost $75 million Coke and Pepsi each require 100 plants Pressure from Coke/Pepsi

Bottler Consolidation §Bottler plants decreased in the US § 2000 plants to 300 from 1970 -2004 §Coke’s re franchising bottling operations §Buying Poor managed bottlers §Infusing with capital §Selling to large bottling plants • In 1985, Coke purchased two of the largest bottling companies §Vertical integration

Affects on Industry’s Profits n n n Coke was the first concentrate producer to build a nationwide franchise bottling network, that Pepsi and Cadbury Schweppes followed suit. Franchise agreements with both Coke and Pepsi allowed bottlers to handle the non-cola brands of other concentrate producers. Bottlers could not carry directly competing brands.

Affects on Industry’s Profits (Cont. ) n n Throughout the 1980 s, the growth of Coke and Pepsi put a squeeze on smaller concentrate producers Shelf space for small brands declined and were shuffled from one own to another.

Affects on Industry’s Profits (Cont. ) n n In a five year span, Dr Pepper was sold several times, Canada Dry twice, Sunkist once, Shasta one, and A&W once. Phillip Morris acquired Seven-UP in 1978 for a big premium, but racked up huge losses in the early 1980 s, and then left the CSD business in 1985.

Affects on Industry’s Profits (Cont. ) n n In 1990 s, through a series of strategic acquisitions, Cadbury Schweppes became third-largest concentrate product. Coke has a world market share of 51. 4%, Pepsi has 21. 8% and Cadbury Schweppes has 6%

Sustaining Profits n n Shift to non-carbonated beverages (keep up with demand of health conscious society) Continue on current path and see where it leads

U. S. Liquid Consumption Trends