The Cola Wars have been waged for decades, with Coca Cola and Pepsi battling it out for supremacy. The two companies have taken different approaches to their business model, with Coca Cola selling concentrate to bottlers who then package and sell the product to consumers, while Pepsi sells its products directly to retailers.
There are pros and cons to both approaches. Coca Cola’s bottling strategy means that it has less control over how its products are distributed and marketed, but it also results in lower costs. Pepsi’s direct sales approach gives the company more control, but it also incurs higher costs.
Which approach is best? There is no easy answer. Each company has had success using its own strategy, and there is no clear winner in the Cola Wars. Ultimately, it is up to each company to decide which approach is best for its own business.
Capital investment. Concentrate production business is less capital intensive than bottling. It requires less funds to be invested in machinery, labor and modernization. “A typical concentrate manufacturing plant cost about $25 million to $50 million to build, and one plant could serve the entire United States” (Yoffie, 2007).
A bottling plant, on the other hand, cost around $100 million. Cola concentrate producers also benefit from economies of scale and can “spread the cost of developing new products over a large number of servings” (Yoffie, 2007). This advantage is not available to bottlers.
The high level of capital investment in bottling limits the number of companies that can participate in the business and provides an entry barrier for potential competitors. In addition, it takes longer for new entrants to break even due to the need to recoup such a large investment. Furthermore, because concentrate production is less capital intensive, companies are able to shift manufacturing operations to low-cost locations. For example, while Coca-Cola plants used to be located in the United States, the company has now shifted production to Mexico and China where labor costs are lower.
Coca-Cola and PepsiCo have different strategic priorities. Cola concentrate producers, such as Coca-Cola, focus on marketing and global expansion while bottlers, such as PepsiCo, focus on cost efficiency and localized production. As a result, the two companies have different competitive priorities and face different risks.
Coca-Cola’s business is more dependent on global economic conditions since a large portion of its revenues come from overseas markets. In addition, the company is more exposed to currency fluctuations since it generates a significant portion of its revenues in foreign currencies. On the other hand, PepsiCo’s business is more dependent on the state of the US economy since a majority of its revenues come from the domestic market. In addition, the company is more exposed to changes in commodity prices since a significant portion of its cost of goods sold consists of raw materials.
Differentiation. The Coca-Cola brand is more valuable and differentiated than the PepsiCo brand. This gives Coca-Cola some pricing power with customers and distributors. As a result, Coca-Cola’s gross margins are higher than PepsiCo’s. For example, in 2006, Coca-Cola’s gross margin was 60.4% while PepsiCo’s was 53.7%.
Coca-Cola also has a more diversified product portfolio than PepsiCo. In addition to soda, Coca-Cola offers water, sports drinks, and juices. This gives the company more pricing power since customers are less likely to switch to another brand if they are satisfied with Coca-Cola’s other products. On the other hand, PepsiCo’s product portfolio is focused on soda and snacks. This makes the company more vulnerable to changes in consumer preferences.
The Coca-Cola brand is also more recognizable and valuable than the PepsiCo brand. In 2006, Coca-Cola was ranked as the world’s most valuable brand while PepsiCo did not even make it into the top 10. As a result, Coca-Cola can charge a premium for its products and has more negotiating power with distributors.
The number of significant expenditures is little. The most important ones are marketing, market research, and product development. However, concentrate producers hired a large number of people to work with bottlers and their suppliers to guarantee quality control and productivity, as well as timely supply of raw materials (e.g., cans) and low prices (Yoffie, 2007).
In contrast, bottlers’ costs were more variable because they depended on the particular plant and processes used. The three main cost areas for bottlers were Direct Materials, which represented the raw materials (e.g. PET bottles, sweeteners, canisters of concentrate), Production or Manufacturing (including packaging and shipping), and Marketing & Distribution (Yoffie, 2007). For both types of firms, energy costs had been rising in importance in recent years.
The franchising system has many benefits for concentrate producers, including:
– It provides them with stable cash flows as they get paid before the bottlers sell the final product to customers;
– It builds an effective long-term relationship between the concentrate producer and bottler as it is beneficial for both to cooperate closely;
– Franchising allows concentrate producers to maintain control over their products’ quality as they can specify the standards that bottlers must meet;
– It also helps them to control marketing and advertising activities as well as new product development as bottlers need to get the permission from concentrate producers to introduce any changes.
The franchising system, however, has some drawbacks for bottlers:
– They have to make a very large initial investment as they need to buy equipment and build factories;
– They also have to bear all the risks associated with running a business, including the risk of failure;
– Bottlers have less control over their businesses as they have to follow the rules and regulations set by concentrate producers.
In 2006, Coke and Pepsi were still facing intense competition in the cola market. Both companies were trying to find new ways to grow their businesses and increase their market share. One of the options that they were considering was moving into the bottled water market.
Coke and Pepsi had different strategies for moving into the bottled water market. Coke decided to focus on acquiring existing bottled water companies, while Pepsi decided to start its own bottled water business from scratch.
The advantages of Coke’s strategy were that it allowed the company to quickly gain a foothold in the bottled water market and benefit from the existing distribution channels of the companies that it acquired. The disadvantages of Coke’s strategy were that it was expensive and that it did not give Coke complete control over its new business.
Pepsi’s strategy had the advantage of being less expensive than Coke’s strategy, but it carried the risk of failing if Pepsi was not able to build a successful business from scratch.
In the end, both Coke and Pepsi were successful in the bottled water market, but Pepsi’s strategy proved to be more successful than Coke’s strategy.
What do you think about these companies’ strategies? Do you think that Coke or Pepsi made the right decision? Why or why not?
I think that both companies made the right decision in moving into the bottled water market. I think that Coke’s strategy was more successful than Pepsi’s strategy because it allowed Coke to quickly gain a foothold in the market and benefit from the existing distribution channels of the companies that it acquired. However, I think that Pepsi’s strategy was less expensive and carried less risk, so I think that it was also a good decision for the company.
