Cola Wars

Cola Wars

Coke and Pepsi have had their war for a long time with the dispute heating up in 1975 when the Pepsi Company introduced the Pepsi Challenge with a revelation that Pepsi brands taste better compared to the Coke brand. The Pepsi Challenge led to the Coca-Cola inventing the formula again that became the company’s major disaster, which haunts it up to these days. The companies have fought the war through the prices, changes in the taste of their products as well as advertising. Likewise, the war resulted in their moving from a single carbonated drink to several types of sodas like diet and orange ones. For decades, the companies continue to be leading players in the carbonated soft drink industry and diversify their activity through changes in the original products to suit the needs of the customers. This paper will examine how the soft drink company has been profitable, compare financial activities between Concentrate business and the bottling business, analyze impact of competition between Coke and Pepsi on the profit of the industry. In addition, the ways how the companies can maintain their profitability at the time of reducing demand and rising popularity of non-CSDs, such as juices, tea-based, sports energy drinks and bottled water, are to be discussed.

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Why the Soft Drink Industry is So Profitable?

High Demand

The soft drink industry is profitable due to the high demanded among the consumers internationally and, as a result, there is the continued thriving of Coca-Cola, and Pepsi. For example, CSD is highly consumed in the USA followed by Mexico, Puerto Rico, and Argentina. Furthermore, the demand is expanding to the other countries such as China and India, thus enabling the companies to make much profit (Kim & Yoffie, 2011).

 Good Strategies

The producers and industry, in general, have been able to make the profit because the companies implement effective strategic decisions. They have well-developed and structured marketing campaigns for their bottlers. The producers are in a good position to create their marketing programs, implement the market research, and produce their own brands on the basis of the research that they conduct. This research helps to guarantee good and appropriate products for the market.

Another strategy employed is the delegation of different duties to the workers. The companies have increased the workforce through investing heavily in their employees. These workers helped the companies by improving the sales, setting the standard as well as improving its operation. Additionally, the initiative taken by the producers to negotiate directly with suppliers assists to ensure that there are better delivery and reduced cost. Moreover, they also reduced the costs through leaving some of the processes to the bottlers, thus increasing the profit margin (Kim &Yoffie, 2011).

Substitutes

In the early days, the soft drinks companies used to focus on producing cola brands only. Nevertheless, other beverages that include bottled water and teas have become more prevalent in the market. As a result, Coke and Pepsi have extended their offerings through acquiring alliances and innovating in their internal products. For example, Coke is in partnership with Nestea and at the same time, it has acquired Minute Maid while Pepsi is making Orange Slice. However, increased number of brands had earlier threatened their profitability through increased capital and special management skills. The bottlers were able to overcome these challenges through amalgamation to achieve economies of scale. In the meantime, the substitutes became a less threat, and the companies are able to make much profit from them now.

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Economics Comparison Between Concentrate and Bottling Businesses

The bottling business purchases the concentrate and put it in Coca-Cola and Pepsi bottles. The bottled CSDs for Coca-Cola and Pepsi are packed in metal cans, plastic bottles and glass bottles. The bottling business requires considerable capital since it entails huge overhead, labor, and the cost of production. For example, to produce a single product line of Coca-Cola or Pepsi, it is necessary to have between $4 and $10 million. In addition, a large amount of money is needed to allocate to a plant and handling the domestic distribution of CSDs. Another reason that makes bottling become capital intensive is that the bottled CSD requires many concentrates to improve the taste and satisfy the expected needs of the consumers. However, the bottling industry obtains about 40% of their capital investment in gross profits (Kim & Yoffie, 2011). Moreover, the Coca-Cola and Pepsi have been able to control the costs related to the bottling part of the CSDs distribution through the acquisition of the bottling companies and making bottles in their house with an aim of reducing the variable costs and accumulating their profits. The companies have also changed the sizes as well as the types of CSDs packages to the target market to enhance the demand and control the profit.

The concentrate producers, on the other hand, do not require many investments in terms of labor, machinery, and overheads. They produce the concentrate from the raw materials that are available within the locality, which enables them to evade the increasing costs related to imported raw materials. Moreover, the Concentrate producers do not need much equipment due to the ability of one machine to serve many people. In addition, estimates have shown that a single concentrate machine is in a position to produce sufficient concentrate to cover a large area of the country (Kim &Yoffie, 2011). Therefore, the difference in the profit margin between the bottler’s industry and the concentrate producers is experienced because the former has more responsibilities, tasks, as well as financial commitments as compared to the latter.

Impact of Competition between Coke and Pepsi to the Industry Profits

Pepsi and Coke have had a competition for a long time, which had an effect on the profits of the industry. This rivalry has affected the market due to the pull and the push effect, which, in turn, has influenced the profits of the companies. Correspondingly, as they fought for the market share, the two evolved into dominant and innovative companies, leaving little or no room for the rest of the competitors throughout the operation, which led to the decline in their profitability. For example, Pepsi has dominated the retail stores by acquiring places such as Kentucky fried chicken and Taco Bell while Coke swayed Burger King and Wendy’s to join it. Furthermore, Coke has traditionally controlled power in the fountain sales with commanding lead in the market share followed by Pepsi, which resulted in the increase in profit margin (Kim &Yoffie, 2011). Therefore, whereas Coke and Pepsi persisted with their operation because of their increased profit, other bottlers and CSD concentric companies were forced to exit the industry. When the competition intensified, they were forced to lower the prices of the products that led to decrease in their profits.

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The Ways to Sustain Profits Under the Change in Demand

Internationalization

Both companies should concentrate more on overseas markets such as Africa, Asia, and parts of Europe, where the consumption of CDS is still low compared to the USA. These areas can provide a market for the Coke and Pepsi products, particularly for Pepsi, which sells most of its brands to the American consumers.

Technology

Technology can help Coke and Pepsi Company sustain their profit as well. According to Kim and Yoffie (2011), Coke discovered a new freestyle machine to be applied in the production of dozens different beverages. Consequently, these companies have strong financial positions to enable them to invest in sophisticated technology, which can, in turn, improve their productivity as well as increase the profit.

Innovations

Coke and Pepsi plan to expand their market to different countries such as China and India. Notably, their entry in these countries requires them to innovate and diversify the product line with specific local and unusual ingredients or flavors to meet the needs of the target local citizens (Kim & Yoffie, 2011).

Change in Strategies

The companies should embrace new strategies under the conditions of the market shifts. For instance, since many customers are more aware of the products nowadays, the companies need to analyze and evaluate their discounts propositions as well as the incurred advertising and marketing costs. In addition, the companies need to introduce non-competitive products that will offer new choices to consumers and strengthen the brand.

Conclusion

In conclusion, Pepsi and Cola have been engaged in the war over their market share for more than a decade. Their competition shows a positive relationship in which one company innovates in new CSDs and Non-CSDs while another is stirred to become such in order to improve its sales, brand, and the profits. Through analyzing their production, sales, and market share, it became evident for both companies that competition has enabled them to dominate the market and benefit from the increase in profit margin. In the meantime, their smaller counterparts have significant declines in profit since their products have been ousted from the market. To sustain their profits due to the rising demand or Non-CSD beverages, these companies need to be innovative, diversify their products as well as improve their technology and strategies.

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