“Cola Wars Continue: Coke and Pepsi in 2010”
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Modern mass culture and the globalization process are impossible to imagine without the soft drinks, such as lemonade, “Cola” or “Pepsi”. In average American drinks 180 liters (four times greater than in the 50s) of the carbonated water per year, Russian - 50 liters, Chinese person - 20 liters. In the U.S. carbonated soft drinks account 73% of the general non-alcoholic production. Only in the U.S. the drinks are produced by several hundred companies, employing more than 200 thousand people. According the consulting firm American Economics Group, nonalcoholic industry provides employment in the United States for more than 3 million people, and its market reach not less than $ 278 billion per year.
Today the soft drinks create the huge economic industry that everyday gains much profit from selling the soft drinks products. There are lots of companies that earn money from selling the soft drinks: Bionad (Germany), Sprite (the U.S.), Byrativo (Russia), 7UP (the U.S.), however the most popular still are Coca Cola (the U.S.) and Pepsi (the U.S.). The products have been created by the companies “The Coca-Cola Company” and “PepsiCo Incorporated” that are the leading ones in the world soft drinks trade.
Nowadays “The Coca Cola Company” has the third place in the world’s capitalization. Its part in the New York Stock Exchange is $ 147mlrd that is 3.3 times higher than has the company “General Motors”. At the same time the annual value of turnover of the company takes only the 190th place among the world's largest companies. The main principle in the company is to hire a minimum number of employees and have a maximum limit of investment. From the time of its foundation the company has sold so much water that, if all the “Coca-Cola”, which was produced during the last 100 years, pour into the bottles, put them in a line and wrap it around the planet orbit, it will overshadow the Earth 4,334 times.
“PepsiCo Incorporate” is the main competitor for “The Coca Cola Company”. However now the positions of the company can’t change the situation in the marked that is connected to the positions of “Coca Cola”. According to the International Association of Interbrand “Coca-Cola” is the most expensive brand on the planet and is estimated at 66, 667 million dollars. Pepsi today is estimated at 13.249 million dollars (that is 5.5 times less than that “Coca-Cola”) and takes the 26 in the list, being behind the “Oracle”, “Gillette”, “Cisco” and “H & M”.
The background of the soft drink industry
Natural sparkling water has been known since ancient times and used for medicinal purposes (Hippocrates devoted a whole chapter to the water of his work and told patients not only to drink it, but to bathe in it). In the XVIII century mineral water sources began to be bottled and distributed throughout the world.
First one who has created the sparkling water was the English chemist Joseph Priestley. In 1767 he mad an experiment with the gas released during the fermentation vats in the brewery. Later, Swede Tobern Bergman in 1770 has designed a device that allowed to fill water with the carbonate bubbles with the help of the pressure from the pump. He called this system saturator.
However, the first one who began the industrial production of the carbonated water was Jacob Schweppe. He has improved the soda fountain and created an industrial installation for the production of carbonated water in 1783. At the beginning of the XIX century, in order to reduce the cost of production, Schweppe used the usual baking soda for aerating and carbonated water became known as “soda”.
“Coca-Cola” was coined in Atlanta (Georgia, USA) on May 8, 1886.by the pharmacist and a former U.S. Army officer Confederation - John Stith Pemberton. However, the name for the new drink was invented by Pemberton accountant - Frank Robinson. The main ingredients of “Coca-Cola” were as follows: three parts of coca leaves to one part of the cola nut tropical tree. The created drink was patented as a drug from any nervous disorder and began to be sold in the largest urban pharmacy Jacob in Atlanta. First time the drink was bought at average 9 people per day. The proceeds from sales during the first year were only $ 50.Thus, in the first year of the drink was unprofitable. Gradually the popularity of Coke has increased. In 1888, Pemberton has sold the rights to produce the drink. In 1892, Asa Griggs Candler, the businessman who had bought the rights to the “Coca Cola”, founded the company “The Coca-Cola Company”, which is engaged in the production of “Coca-Cola” today.
“Pepsi” was created in 1890 years in New Bern, North Carolina by the pharmacist Caleb Bredhemom and was called “Brad’s drink”. I August 28, 1898 the drink was renamed into “Pepsi-Cola”. Brand “Pepsi-Cola” was registered on June 16, 1903. The original drink was consisted from: sugar, water, caramel (burnt sugar), lime juice, phosphoric acid, ethanol, lemon oil, orange oil, cinnamon, oil of nutmeg and coriander oil. In 1923, because of the increase in sugar prices after the First World War, the company “PepsiCo” went bankruptcy. The same situation has happened eight years after. However, during the depression of the 30s in the U.S. “PepsiCo” organized a successful attack on the market position of “Coca-Cola”. “Pepsi-Cola” began selling the bottle of 12 ounces for 5 cents. A bottle of “Coca-Cola” in volume 6 ounces just cost 5 cents. During the Second World War, “Pepsi-Cola” went around “Royal Crown” and “Dr. Pepper” and became a drink number 2 after the “Coca-Cola”. In the early 50s, “Coca-Cola” was 5 times ahead “Pepsi-Cola”. In 1960, the “Coca Cola” drink 2.5 times more than the “Pepsi Cola” and in 1985 5 times more.
To sum up, the history of the soft drinks take their roots in the past. It may be on of the reason of their profitability.
The comparison analysis of the bottling business and concentrate business
In recent years the big rate of innovations in the soft drink industry has created the competition and rivalry among the companies. According to the new statistics even when lots of flavors of soft drink have appeared, cola is still the leader. The term “soft drinks” include both: concentrate and bottler products. Even being the part of the big profitable industry the products earn different profit. However, the concentrate industry is more profitable that bottling. The conclusion can be taken from the Five Forces that is essential in the comparison the bottling and concentrate industry.
First, it is Barriers to Entry. The starting investments should be bigger in founding the bottling plant. From this, the profit would be earned later than while managing the concentrative plant. The main technique of the concentrate products is mixing the elements that are used to make the drink carbonated. These products have minimal reinvestment and limited capital. To have the concentrate plant one should spend $25-50 million. What is more the plant can make the products for the whole country. The bottling company quires a complicated manufacturing technique. There should be few lines and it is impossible to make two types of product in the one line. Each line cost nearly $10 million. The big plant should buy not less than 4 lines. In the 90s the price of such plant was $75 million.
Both “Pepsi” and “Coca Cola” have already the established relationship with the present bottling companies, so called “Bottling Network”. According to them the two leading companies forbid to establish and sell the products that would be similar to the existing ones. What is more, for the new bottling product it would be difficult to find the company which agrees to sell it.
“Coca Cola” and “Pepsi” has already spent much money on their advertisement company. In particular, it was $ 2.6 billion in the 2000 year. Thus it would be very difficult to compete.
Second, it is Competitive Rivalry. “Among national concentrate producers, Coca-Cola and Pepsi-Cola, a soft drink unit of PepsiCo, claimed a combined 76% of the U.S. CSD market in sales volume in 2000”. There is the strong competition between companies market share. However, bottler industry has much less added value. The major part of it is in the brand products. “Coca Cola” and “Pepsi” are known brands all over the world that brings the major success.
Third, it is Substitutes. From the history cola was the synonym to any other soft drink, because there were not such a great variety of them. However, during the time many drinks-substitutes appeared. Among theme were beer, coffee, juice and others. They have caused the huge damage in the bottling industry profit. However, bottles have dealt with the situation. From the CP’s perspective the bottlers were “buyers” at the same time when the concentrate producers were “suppliers”.
Fourth, it is the Power of Suppliers. “Pepsi” and “Coca Cola” drinks mainly consist of water and sugar. What is more, the sustainable relationships with the suppliers can help to stimulate the coat of these products. However, the bottling industry has more suppliers and does not have such an influence on the suppliers. That is why the increase of the cost on the product will decrease the profit of the company. Now the two leading companies keep the bottling industry in a very good position because of the negotiation processes, nevertheless bottles should use their resources very smart.
Fifth, it is Power of Buyers. “The soft drink industry sold to consumers through food stores (35%), convenience stores (9%), fountain outlets (23%), vending machines (14%) and other outlets (20%)”. “Pepsi” and “Coca Cola” have implemented the special “door to door” service. The bottling industry was discriminated by the owner of the stores that have created their own price on the products, which was not profitable. However, the power of buyers is not the major one in the whole system; this helped for the bottlers to keep the profitability.
To make the long story short, the number of bottlers is higher than the concentrate producer’s. This stimulates the rivalry and decreases the margins in the bottling industry. Mostly, the concentrate producer’s create the brand equality; the distributional cost in the concentrate industry is 17% at the same time when in the bottling industry is 65%. The capital cost for the plant is very big for the bottling company when it is minimal for the concentrate company.
“Cola” and “Pepsi” competition
Throughout the century, “Pepsi” was in the shadow of its more successful competitor - the company “Coca-Cola “. The marketing war of these brands still exists. The end of this confrontation can put only one event - the merger of the corporations. However, most likely this will not happen because the companies have different view to most companies of its corporate initiatives. The rivalry between the companies resulted into the changes of their profitability. It should be underlined, that companies have too similar product as the result, the buyers need to have some other stimuli to buy it, than taste. That is why the companies provided lots of campaigns in order or receive more profit from the product.
Until the early 1930s “Pepsi” was not significant competition for “Coca-Cola”. The first successful attack on the market position of “Coca-Cola” was when “Pepsi-Cola” began to sell the bottle of 12 ounces for 5 cents, when a bottle of “Coca-Cola” in volume 6 ounces just cost 5 cents. This resulted to the increase of the “Pepsi” profit and decrease of the “Coca Cola” for some period of time. In response “Coca-Cola” sued the company for infringement of a trademark. Long and scandalous trial ended with the settlement agreement.
In 1950 the changing market forces of production of soft drinks forced “Pepsi” to rise up the cost, and it become the same with the “Coca Cola” price policy. This was the step back for “Pepsi” in competition with “Coca Cola”. The main aim that the company had was to get more customers that “Coca Cola” had, in order to receive the customer loyalty and than to receive more profit. Nevertheless this strategy didn’t work.
Now “Pepsi” is far after “Coca Cola”. However, both companies still use the advertisement campaigns and spend a lot of money on it in order to get more customers.
The future profitability of the companies in the wake of flattening demand
The tastes of the customers are changing very fast. If few years ago the most popular drink was cola, today it is not something new. That is why the companies are concerned a lot about their future profitability. Even though now customers prefer more natural drinks such as juice, non carbonated water and tea, “Coca Cola” and “Pepsi” will be profitable always. The reasons are different.
- The industries keep their technologies updated. They evaluate the tastes of the market on monthly basis. Thus, the Diet Coke and Light Coke have appeared;
- “Pepsi” and “Coca Cola” can be diverse in establishing non–carbonated drinks to regulate the situation with the flattening demand of the carbonated drinks. The result will be lots of possibilities to develop;
- The industries become the brands that have many loyal customers thought year;
- The globalization process, providing the ladder to people to more up, opens a new opportunities to the companies;
- The companies have very big influence not only in the market value, but in the advertisement industry.
To conclude, the companies are going only to develop and rise up their profit in the future.
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