201: STRATEGIC MANAGEMENT

ASSIGNMENT
COKE vs. PEPSI








Coke Vs. Pepsi
History of Coca-Cola (Coke): Coca-Cola was formulated by John S.Pemberton, originally
as a cocawine called Pembertons French Wine Coca, and originally sold as a patent
medicine for five cents a glass at soda fountains, which were popular in America due to a
contemporary view that soda water was good for your health. Coca-Cola is the trademarked
name, registered in 1893, for a popular soft drink sold in stores, restaurants and vending
machines around the world.
History of Pepsi: Caleb Bradham, a New Bern, North Carolina pharmacist, renamed "Brad's
Drink," a carbonated soft drink he had created to serve his drugstore's fountain customers.
The new name, Pepsi-Cola, was first used on August 28, 13 years after Coca-Cola. In 1902
Bradham applied for a trademark to the U.S. Patent Office, issued stock and began selling
Pepsi syrup. By 1923, Pepsi-Cola Company was declared bankrupt and its assets were sold to
a North Carolina concern, Craven Holding Corporation, for $30,000. Roy C. Megargel, a
Wall Street broker, bought the Pepsi trademark, business and goodwill from Craven Holding
Corporation for $35,000, forming the Pepsi-Cola Corporation and in 1932 the trademark was
registered in Argentina.
The beginning of the Cola war: 1975 heralded the Pepsi Challenge, a landmark
marketing strategy, which convinced millions of consumers that the taste of Pepsi was
superior to Coke. Simultaneously, Pepsi Light, with a distinctive lemon taste, was introduced
as an alternative to traditional diet colas. In 1983 Coke launched aspartame/saccharin blend
Diet Coke. In response in 1989 Pepsi-Cola introduced an exciting new flavour, Wild Cherry
Pepsi. Thus Diet Pepsi's 'The Other Challenge' campaign was based around a 54-46% lead
over Diet Coke in independently researched taste tests in Australia. It was only in 1996 that
Pepsi unveiled a revolutionary 'blue' look worldwide 'to transform the image and attitude' of
one of the world's best-known brands. 'Pepsi Blue represents a quantum leap into the future
and redefines how the Cola Wars will be fought and won in the 21st Century.'
Although the goal of both companies is exactly the same, the two companies rely on
somewhat different marketing strategies. Pepsi has always taken the lead in developing new
products, but Coke soon learned their lesson and started to do the same. Coke hired
marketing executives with good track records. Coke also implemented cross training of
managers so it would be more difficult for cliques to form within the company.
On the other hand, Pepsi has always taken more risks, acted rapidly, and was always
developing new advertising ideas. Both companies have also relied on finding new markets,
especially in foreign countries. In the foreign markets, Coke has been more successful than
Pepsi. For example, in Eastern Europe, Pepsi has relied on a barter system that proved to fail.
However, in certain countries that allow direct comparison, Pepsi has beat Coke. In foreign
markets, both companies have followed the marketing concept by offering products that meet
consumer needs in order to gain market share. For instance, in certain countries, consumers
wanted a soft drink that was low in sugar, yet did not have a diet taste or image. Pepsi
responded by developing Pepsi Max. These companies in trying to capture market share
have relied on the development of new products. In some cases the products have been
successful. However, at other times the new products have failed. For Coke, changing their
original formula and introducing it as New Coke was a major failure.
The new formula hurt Coke as consumers requested Classic Cokes return. Pepsi has also
had its share of failures. Some of their failures included: Pepsi Light, Pepsi Free, Pepsi AM,
and Crystal Pepsi. One solution to increasing market share is to carefully follow consumer
wants in each country. The next step is to take fast action to develop a product that meets the
requirements for that particular region. Both companies cannot just sell one product; if they
do they will not succeed. They have to always be creating and updating their marketing plans
and products. The companies must be willing to accommodate their target markets.
Gaining market share occurs when a company stays one-step ahead of the competition by
knowing what the consumer wants.
Lucrative Markets and the Strategies adopted by the Cola giants: Chinese Market:
The Chinese soft drink market is one of the fastest growing and both the cola makers have
tailored their strategies to make the most of this boom. Coca-Colas long time strategy has
been to make its product inexpensive, widely available and tasty. As far as taste is concerned,
the company had to develop various drinks tailored to Chinese palates. During the China
International Beverage Festival held in September, Coca-Cola invited Chinese folk artists to
make paper-cuts and mold clay dolls, so as to better combine traditional Chinese art with a
foreign brand. Pepsi also developed its market strategy according to the unique tastes of
Chinese customers. They spent huge amounts of money to invite famous singers, stars and
soccer players to promote its products. The company called this its soccer & music
promotional strategy. The Chinese market presents unique problems. For example, 2,800
local soft-drink bottlers, many of whom are state-owned, control nearly 75% of the Chinese
market. Those bottlers located in remote areas have virtual monopolies. The battle for China
will take place in the interior regions. These areas are unpenetrated as most of the foreign
soft-drink producers have set up in the booming coastal cities. China's high transportation and
distribution costs mean that plants must be located close to their markets. Otherwise, in a
country of China's size, Coca-Cola and Pepsi risk pricing their products as luxury items. In
China, it is easier and politically safer to expand through joint ventures with local bottlers. It
is expected that, in China, the company that wins the cola war will win based on the locations
of their bottling plants and the quality of the partners they choose.
Australian Market: Pepsi has scored a marketing coup in the battle of the lemon in
Australia by getting its new Pepsi Twist product in consumers hands ahead of Coca-Colas
planned launch of its own lemon-flavoured cola product. When Coke announced plans to
have its Diet Coke with Lemon product on Australian supermarket shelves it served as a blow
to Pepsi, whose plans to launch into the Australian market before Coke had been hampered
by production hurdles. But in an aggressive strategy deliberately aimed at pre-empting
Cokes entry, PepsiCo Australia launched a major coming soon public relations campaign
and sampling promotion to raise awareness of its product ahead of its roll-out in stores,
supermarkets and in the route trade.
Coke and Pepsi in Russia: In 1972, Pepsi signed an agreement with the Soviet Union,
which made it the first Western product to be sold to consumers in Russia. This gave Pepsi
the first-mover advantage. Presently, Pepsi has 23 plants in the former Soviet Union and is
the leader in the soft-drink industry in Russia. Pepsi outsells Coca-Cola by 6 to 1 and is seen
as a local brand. Also, Pepsi must counter trade its concentrate with Russia's Stolichnaya
vodka since rubles are not tradable on the world market. However, Pepsi has also had some
problems. There has not been an increase in brand loyalty for Pepsi since its advertising blitz
in Russia, even though it has produced commercials tailored to the Russian market and has
sponsored television concerts. On the positive side, Pepsi may be leading Coca-Cola due to
the big difference in price between the two colas. Coca-Cola, on the other hand, only moved
into Russia 2 years ago and is manufactured locally in Moscow and St. Petersburg under a
license. Despite investing $85 million in these two bottling plants, they do not perceive Coca-
Cola as a premium brand in the Russian market. Moreover, they see it as a "foreign" brand in
Russia.
Coke and Pepsi in Romania: Romania is the second largest central European market after
Poland, and this makes it a hot battleground for Coca-Cola and Pepsi. When Pepsi established
a bottling plant in Romania in 1965, it became the first U.S. product produced and sold in the
region. Pepsi began producing locally during the communist period and has recently decided
to reorganize and retrain its local staff. Pepsi entered into a joint venture with a local firm,
Flora and Quadrant, for its Bucharest plant, and has 5 other factories in Romania. Quadrant
leases Pepsi the equipment and handles Pepsi's distribution. In addition, Pepsi bought 500
Romanian trucks, which are also used for distribution in other countries. Moreover, Pepsi
produces its bottles locally through an investment in the glass industry. While the price of
Pepsi and Coca-Cola are the same, some consumers drink Pepsi because Pepsi sent Michael
Jackson to Romania for a concert. Another reason for drinking Pepsi is that it is slightly
sweeter than Coca-Cola and is more suited for the sweet-toothed Romanians. Lastly, some
drink Pepsi because, in the past, only top officials were allowed to drink it, but now everyone
can. Coca-Cola only began producing locally in November 1991, but it is outselling all of its
competitors. In 1992, Coca-Cola saw an increase in Romania of sales by 99.2% and outsold
Pepsi by 6 to 5. While Pepsi preferred to buy its equipment from Romania, Coca-
Cola preferred to bring equipment into Romania. Also, Coca-Cola brought 2 bottlers to
Romania. One is the Leventis Group, which is privately owned. Coca-Cola has invested
almost $25 million into 2 factories. These factories are double the size of the factory Pepsi
has in Bucharest. Moreover, Coca-Cola has a partnership with a local company, Ci-Co, in
Bucharest and Brasov. Ci-Co has planned an aggressive publicity campaign and has
sponsored local sporting and cultural events. Lastly, Romanians drink Coke because it is a
powerful western symbol, which was once forbidden.
Coke and Pepsi in The Czech Republic: The key to success in the Czech Republic is for
both Coca-Cola and Pepsi to increase the annual consumption of soft drinks. Per capita
consumption of beer, the national drink in the Czech Republic, exceeds that of soft drinks by
3 to 1(165 litres of beer per capita of beer versus 50 litres of soft-drinks). Both companies are
trying to increase their market share because distribution for both products is no longer as
limited as it was in 1989. Coca-Cola and Pepsi face stiff competition from domestic
producers, whose products are lower-priced. Because of this, domestic producers have a
market share of about 60%. Coca-Cola and Pepsi each have a market share between 10%-
25%. Another problem in the Czech Republic is that many people think that the same
company produces Coca-Cola and Pepsi. Recently, Pepsi opened an office in Prague. Coca-
Cola, on the other hand, has been trying to convince local shop owners to stock and circulate
its product. The main apprehension may be that the price of Coke is twice the price of locally
produced colas and a little higher than Pepsi. Coca- Cola has arrangements with 4 domestic
bottling companies and acquired a new plant in 1992 in which it has invested almost $20
million. This may be one reason why Coca-Cola is closing in on Pepsi's lead in the Czech
Republic.
Coke and Pepsi in Hungary: Traditionally, Pepsi held the lead in Hungary with a strategy
of putting the infrastructure in place, upgrading it, and then marketing to the consumer. Pepsi
plans to invest $115 million, which includes acquiring FAU, an Eastern European bottler.
Because of this, Pepsi will have greater control over distribution and quality. In May of 1993,
Pepsi introduced Pepsi Light and had outdoor and television advertising blitzes. Coca Cola,
on the other hand, introduced Coke Light in the beginning of 1993, but did not mention its
product name during the first few weeks of promotional advertising. Coca-Cola's strategy
was to advertise internationally for Central Europe. Hungarians saw the 'Always Coca-Cola'
commercials, along with the rest of the world, in April 1993. In 1992, Coca-Cola led Pepsi.
In addition, Coca-Cola participates in counter trade agreements with Hungary. Coca-Cola
trades its concentrate for glass bottles, which are exported and then sold to bottlers.
Coke and Pepsi in Poland: Poland, with a population of 38 million people, is the biggest
consumer market in central and Eastern Europe. Coca-Cola is closing in on Pepsi's lead in
this country with 1992 sales of 19.5 million cases versus Pepsi's sales of 26.5 million cases.
The main problems in this area are the centralized economy, the lack of modern production
facilities, a non-convertible local currency, and poor distribution. However, since the zloty is
now convertible, Coca-Cola realizes the growth potential in Poland. After Fiat, Coca-Cola is
now the second biggest investor in Poland.
Coca-Cola has developed an investment plan, which includes direct investment and joint
ventures/investments with European bottling partners. Its investments may exceed $250
million, and it has completed the infrastructure building. Coca-Cola has divided Poland into 8
regions with strategic sites in each of these areas. Moreover, it has organized a distribution
network to make sure its products are widely available. This distribution network, which
Coca-Cola has spent a lot of money organizing, is extremely important to challenge Pepsi's
market share and to maintain a high level of customer service. Also, Coca-Cola, like Pepsi,
signed counter trade agreements with Poland. Both trade their concentrate for Polish beer. All
of this has helped Coca-Cola to close in on Pepsi's lead in Poland.
Coke and Pepsi in Mexico: The Mexican government recently freed the Mexican soft drink
market from nearly 40 years of price controls in return for a commitment from bottling
companies to invest nearly $4.5 billion and create nearly 55,000 jobs over the next 7 years.
Naturally, Mexico has become another battleground in the international cola wars. In Mexico,
Coca-Cola and Pepsi command 50% and 21% of the market respectively. The cola war is
especially hot here because the per capita consumption of Coca-Cola and Pepsi exceeds that
of the United States. The face off in Mexico is between Gemex, the largest Pepsi bottler
outside the United States, and Femsa, the beer and soft drink company that owns the largest
Coca-Cola franchise in the world. Femsa, however, may be at a disadvantage. Despite being
part of the conglomerate Grupo Vista, Femsa lacks financial punch because it plays only a
small part in the conglomerate's overall interests. The challenge in Mexico is to win market
share through distribution efficiency. With this in mind, each company is undertaking
strategic efforts designed to bolster their shares of the Mexican market. Pepsi is moving in on
the Coke-dominated Yucatan peninsula while Femsa, the Coca-Cola franchisee, is planning
to invest $600 million more for 3 new Coca-Cola plants next door to Gemex's Mexico City
facilities. The parent companies have joined the battles as well. Coca-Cola has made a $3
billion long-term commitment to the Mexican market, and Pepsi has countered with a $750
million investment of its own.
Coke and Pepsi in Saudi Arabia: In Saudi Arabia, Pepsi is the market leader and has been
for nearly a generation. Part of this is due to the absence of its arch rival, Coca-Cola. For
nearly 25 years, Coke has been exiled from the desert kingdom. Coca-Cola's presence in
Israel meant that it was subject to an Arab boycott. Because of this, Pepsi has an 80% share
of the $1 billion Saudi soft-drink market. Saudi Arabia is Pepsi's third largest foreign market,
after Mexico and Canada. In 1993, almost 7% of Pepsi-Cola International's sales came from
Saudi Arabia alone. The environment in Saudi Arabia makes the country very conducive to
soft-drink sales: alcohol is banned, the climate is hot and dry, the population is growing at
3.5% a year, and the Saudis' oil-based wealth "make it the most valuable market in the
Middle East". Coca-Cola, long known as "red Pepsi", has finally started to fight back. The
battle for Saudi Arabia actually began 6 years ago, when the Arab boycott collapsed and
Coca-Cola began to make inroads into the Gulf, Egypt, Lebanon, and Jordan. The start of the
Gulf War, however, temporarily stunted Coca-Cola's growth in the region. Pepsi's 5 Saudi
factories worked 24 hours a day to keep the troops refreshed. The most significant blow to
Coca-Cola's return to the desert, however, came at the end of the war, when General Norman
Schwarzkopf was shown signing the cease-fire with a can of diet Pepsi in his hand. Coca-
Cola aims to control 35% of the Saudi market by the year 2000. Coca-Cola, which plans to
pour over $100 million into the Saudi market, is focusing on marketing to get there. Recently,
it shipped some 20,000 red coolers into Saudi Arabia over the last 9 months. Also, Coca-Cola
put $1 million into sponsoring the Saudi World Cup soccer team. This alone has doubled
Coca-Cola's market share to almost 15%. America's Reynolds Company is among the
investors looking to cash in on Coca-Cola's return to Saudi Arabia. The company is among
the investors in a new factory, which, by 1996, will be producing 1.2 billion Coca-Cola cans
per year. This equates to nearly 100 cans for every Saudi in the country. Pepsi, trying to fight
off the Coca-Cola onslaught, has responded with deep discounting.
Coke and Pepsi in India: Coca-Cola controlled the Indian market until 1977, when the
Janata Party beat the Congress Party of then Prime Minister Indira Gandhi. To punish Coca-
Cola's principal bottler, a Congress Party stalwart and long-time Gandhi supporter, the Janata
government demanded that Coca-Cola transfer its syrup formula to an Indian subsidiary.
Coca-Cola balked and withdrew from the country. India, now left without both Coca-Cola
and Pepsi, became a protected market. In the meantime, India's two largest soft-drink
producers have gotten rich and lazy while controlling 80% of the Indian market. These
domestic producers have little incentive to expand their plants or develop the country's
potentially enormous market. Some analysts reason that the Indian market may be more
lucrative than the Chinese market. India has 850 million potential customers, 150 million of
whom comprise the middle class, with disposable income to spend on cars, VCRs, and
computers. The Indian middle class is growing at 10% per year. To obtain the license for
India, Pepsi had to export $5 of locally made products for every $1 of materials it imported,
and it had to agree to help the Indian government to initiate a second agricultural revolution.
Pepsi has also had to take on Indian partners. In the end, all parties involved seem to come
out ahead: Pepsi gains access to a potentially enormous market; Indian bottlers will get to
serve a market that is expanding rapidly because of competition; and the Indian consumer
benefits from the competition from abroad and will pay lower prices. Even before the first
bottle of Pepsi hit the shelves, local soft drink manufacturers increased the size of their
bottles by 25% without raising costs.