Cola Wars

Marketing de precios: Melanie van Eck - Naïm Mual - Sanne Terhorst

Introduction

This report will provide the reader with a more detailed insight into the main problems, trends and
the role of price in the so-called Cola Wars in which they fought over the $74 billion carbonated soft
drink (CSD) in the United States. This situation, which is seen as a ‘carefully waged competitive
struggle’ lasted from 1975-1990 and the consumption of both Pepsi and Coke, and their average
annual growth increased. Furthermore, it is said by Coke that nothing has contributed as much to the
present-day success of Coca-Cola than Pepsi. However, there are some new challenges, which
includes how the brand can ensure growth and profitability and how to deal with competitors.

History and description

Coca-Cola was invented in 1886 by John Pemberton. The formula for Coca-Cola syrup, known as
“Merchandise 7X,” is a well-protected secret that the company kept under guard in an Atlanta bank
arch. In its early years, imitations of Coke plagued the company, which aggressively in court which
caused trademark issues as one of the main problems of Coca-Cola. Robert Woodruff began in 1923
as leader of the company. Woodruff accomplished to develop Coke’s international business. In 1893
Pepsi-Cola was developed by Caleb Bradham. Like Coke, Pepsi adopted a franchise bottling system,
and in 1910 it had built a network of 270 bottlers. Pepsi declared bankruptcy in 1923 and also in
1932. However, business began to pick up during the Great Depression. In 1938, Coke filed suit
against Pepsi, claiming that the brand of Pepsi-Cola was a violation on the Coca-Cola trademark.
From on 1970, consumption of the CSD products grew by a 3% over the next 30 years, which was
because of the increasing consumption, which made the product more affordable.

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. These Franchised
bottlers could decide whether to participate in test marketing efforts, local advertising campaigns
and promotions, and new package introductions and had the final say in decisions about retail
pricing. In 1971, the Federal Trade Commission initiated action against the major concentrate
makers, to prevent intrabrand competition.

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As the first "anchor bottler" of Coke, CCE consolidated small territories into larger regions,
renegotiated contracts with suppliers and retailers, combined superfluous distribution and
purchasing arrangements, and reduced its workforce by 20 %. CCE was Coke's biggest bottler in 2009.
In the late 1980s, for $591 million, Pepsi acquired MEI Bottling, and for a significant amount of
money, several others. Pepsi shifted course after operating the bottlers for a decade and adopted the
anchor bottler model of Coke. Bottler consolidation has made smaller concentrate producers
increasingly dependent for the distribution of their products on the Pepsi and Coke bottling
networks.

As U.S. demand for CSDs softened, Coke and Pepsi also looked abroad for new growth. The US as
their largest market, followed by Mexico, Puerto Rico and Argentina. Coke flourished, and also relied
upon, international markets far more than Pepsi. Through steady expansion, the Coca-Cola name had
become synonymous with American culture. By the early 2000s, Pepsi chose to focus on emerging
markets that were still up for grabs like Asia, Middle East, and Africa.

Main Problems

The main problems are basically declining CSD sales, declining cola sales, and the rapid emergence of
non-carbonated drinks in the cola wars. All spending billions of dollars to bring bottling operations
under Coke and Pepsi’s direct control again. Further in the text the reader can briefly read the main
problems described.

Around 1950 Pepsi battled aggressively in the United States, and doubled its U.S. share between
1950 and 1970 which was a problem for Coke. In 1974, Pepsi launched the “Pepsi Challenge” in
Dallas, Texas. Coke was the leading brand in that city, and Pepsi ran a distant third behind the brand
Dr Pepper. The Pepsi Challenge was basically a blind taste test conducted by Pepsi as the company
was trying to demonstrate that consumers truly preferred Pepsi to Coke which was no good news for
Coke. Therefore, Coke countered with rebates, retail price cuts, and a series of advertisements that
questioned the tests’ validity. Pepsi is constantly imitating Coke’s moves such as Coke changed from
using sugar to using high-fructose corn syrup, a lower-priced alternative. Pepsi emulated that move
three years later. Moreover, Coke also intensified its marketing effort, more than doubling its
advertising spending between 1981 and 1984. In response, Pepsi doubled its advertising
expenditures over the same period. Starting in the late 1990s, the soft drink industry encountered
new challenges that suggested a possible long-term shift in the marketplace. Obesity and other
health issues were linked to soft drinks and this was a really bad turn for both Coke and Pepsi.
Schools banned soda consumption in their canteens, and several states pushes for a soda tax. Both

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companies definitely had to respond to this crisis. Coke’s case introduced a Freestyle soda machine in
2009 which could create dozens of different kinds of custom beverages. They also placed a greater
emphasis on promoting its brands, and upped spending on sponsorships and global marketing.
Meanwhile, Pepsi redesigned its logo, and focused on promoting the company’s overall portfolio.

In April 1985, The company Coke, revealed that it had changed the 99-year-old Coca-Cola recipe. This
was a radical break with tradition. Goizueta cited a sharp depreciation in the value of the Coca-Cola
trademark. “The product and the brand,” he said, “had a declining share in a shrinking segment of
the market.” Therefore, the company brought the original formula three months later back under the
name Coca-Cola Classic, while retaining the new formula as its flagship brand under the name New
Coke. Despite some success with diet drinks, Coke and Pepsi realized that growth would involve non
carbs. By 2009, Pepsi had 43% of the U.S. non-carbs market share compared to Coke’s 32%.
However, price-sensitive consumers sought cheaper alternatives. Environmentalists also became
more vocal in their criticisms against the use of plastic bottles. Coke saw its market share in this
category slip to 15% in 2009 (compared to 22% in 2004) while Pepsi’s fell to 11% (compared to 14%).

The growing popularity of alternative beverages brewed complications for CSD makers’ traditional
production and distribution practices. Concentrate companies became more directly involved in the
manufacturing of several non-CSDs, ranging from Gatorade to Lipton Iced Tea .

Trends

Pepsi entered the fast-food restaurant business by acquiring Pizza Hut (1978), Taco Bell (1986), and
Kentucky Fried Chicken (1986), Coca-Cola persuaded competing chains such as Wendy’s and Burger
King to switch to Coke. Coke retained deals with Burger King and McDonald’s. In 2004, Coke won the
Subway account away from Pepsi, while Pepsi grabbed the Quiznos account from Coke. Where Coke
had long retained control of national fountain accounts.

During 1982, Diet Coke was the very first extension of the “Coke” brand name. Many managers of
Coke, considered the "Mother Coke" brand, holy, which is why they were not a fan of the move.
However, Diet Coke was a huge success. It was admired as the “most successful consumer product
launch of the Eighties,” it was not only seen as the most popular diet soft drink in the United States,
but also as the nation’s third-largest-selling CSD.

In the late 1990s, people and health organisations started to link obesity and other health issues to
the consumption of sodas. Schools banned soda consumption in their canteens and some states
even implied a soda tax. In fact Coke’s 2009 annual report identified obesity and health concerns as

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the number one risk factor to its business. One of the responses was ofcourse introducing beverages
that are less bad for the consumer’s health, this offered another way to grow for Coke and Pepsi.
They introduced diet sodas such as Coca-Cola Zero, at the same time Pepsi and Coke used alternative
sweeteners for its brands, such as Stevia.

The role of price

The original Coca-Cola franchise agreement (1899), was a fixed-price contract that did not provide
options for renegotiation, even if ingredient costs changed. The following contract (1987) did not
give complete pricing control to the brand, but used a formula that sets a maximum price and
adjusted prices according to changes in sweetener pricing. Different from Coke’s agreement, Pepsi’s
agreement gave the bottler rights to distribute Pepsi’s products but required it to purchase raw
materials from Pepsi at the prices, terms and conditions, determined by Pepsi.

Popularity of non-carbs continued to grow in the late 1990s, bottlers were frustrated that they were
not fully participating in the new growth businesses. Energy and sports drinks promised better
margins than CSDs because they commanded premium prices and were usually chosen for
immediate, single-serve consumption. All CSD companies faced the challenge of achieving pricing
power in the take-home channels. In particular, the rapid growth of the mass-merchandisers, led by
WalMart, and various club stores.

Conclusion

Declining CSD sales, declining cola sales, and the rapid emergence of non-carbonated drinks
appeared to be changing the game in the cola wars. By spending billions of dollars to bring bottling
operations under Coke and Pepsi’s direct control again, observers couldn’t help but wonder: was this
a fundamental shift in the cola wars or was this just one more round in a 100 year rivalry? We believe
this is just one more in a round of 100 year of rivalry. To be fair, Coca-Cola will most likely remain the
most liked one in any case, because it has such a strong brand image. If branding was not a thing
then they would be more likely to be on the same page as the taste is not that different.
Nevertheless, whatever one does the other one will most likely follow or will do something which
has a much effect as the other one. We are convinced this war will last another 100 years and they
will remain evolving their product. For example, Lipton which is part of Pepsi has been selling a lot of
sparkling iced teas in the Netherlands which is very famous over there. Last year, Coca-Cola started
to compete with them and introduced FuzeTea, which basically tastes the same, but has a few more
flavours. As a consequence, many bars/pubs/clubs that used to sell Lipton and are selling Coca-Cola

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as well had to substitute their Lipton Iced teas with Coke’s Fuzetea. Most likely Pepsi will introduce
more flavours again, and the fight will continue like this endlessly.