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Cola Wars Continue

The soft drink industry has historically been profitable for a few key reasons: 1) Soft drinks were originally marketed as health tonics and became popular during wartime distribution 2) Coca-Cola and Pepsi emerged in the late 19th century and effectively marketed their products through advertising 3) Soft drinks are tasty, sweet, addictive, and fill a lifestyle/brand image that drives ongoing demand. The concentrate business is more profitable than bottling as it requires less capital expenditure and determines pricing. However, bottling faces higher costs for production, distribution, and competing with other bottlers. Competition between Coke and Pepsi drove extensive marketing spend on advertising and research to understand shifting consumer preferences,

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529 views4 pages

Cola Wars Continue

The soft drink industry has historically been profitable for a few key reasons: 1) Soft drinks were originally marketed as health tonics and became popular during wartime distribution 2) Coca-Cola and Pepsi emerged in the late 19th century and effectively marketed their products through advertising 3) Soft drinks are tasty, sweet, addictive, and fill a lifestyle/brand image that drives ongoing demand. The concentrate business is more profitable than bottling as it requires less capital expenditure and determines pricing. However, bottling faces higher costs for production, distribution, and competing with other bottlers. Competition between Coke and Pepsi drove extensive marketing spend on advertising and research to understand shifting consumer preferences,

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CASE STUDY: COLA WARS CONTINUE 1. Why, historically, has the soft drink industry been so profitable?

Both Coca-Cola and Pepsi appeared in the end of the 19th century. The Civil War

was already far in past and the market was ready to accept new products to make peoples peaceful life more vivid and happy. The era of industrialization began, the standards of living were growing and people started to pay more attention to health problems. Soft drinks were originally presented as a medicine, able to cure mental and physical disorders. For many people it looked like an unprecedented opportunity to combine tasty with healthy at a relatively low price. During the Second World War cola was positioned as an antidepressant for soldiers and was actively distributed to the overseas forefronts. This, in fact, contributed greatly to the growing popularity of soft drinks in Europe in the post-war period. Soft drinks are extremely tasty and sweet. They are in great demand with both grown-ups and children. They are even considered to be causing a kind of addiction among people who drink them on a regular basis. Probably, advertising contributed greatly to the growing popularity of soft drinks: today for many young people particular soft drinks are closely connected with a certain lifestyle. They are conveniently packaged, fashionable and quenching the thirst. No wonder the demand for this product has always been extremely great. 2. Compare the economics of the concentrate business to that of the bottling business: Why is the profitability so different? Though both businesses can be considered as two business operations in marketing a single product, they are very different. Concentrate production business is less capital intensive. The number of significant costs is not so big as in the bottling

CASE STUDY: COLA WARS CONTINUE business. Fewer raw materials are required; bottling companies have to pay to cooperate according to the franchise agreements. Also concentrate producing companies usually determine the profitability of both businesses by setting the prices for the concentrate. Bottling business is extremely capital intensive. After the bottling lines are built, they need constant modernization. Also the transportation and distribution costs are very

significant. Dependency on concentrate producers combined with higher risks makes this business less attractive. At the same time the competition here is much more severe. Though the concentrate producing companies usually take responsibility for advertising and marketing research, they are always more profitable than the bottling businesses working with them. 3. How has the competition between Coke and Pepsi affected the industrys profits? Competition is always good for the customers. It forces the companies to take care of their products in order to protect their market share. Severe competition forced both cola companies to handle ongoing market researches, thus providing the soft drink producers with relevant information about the shifting consumer trends. Much money was spent on advertising and promotion. It helped to establish an association between different soft drinks and peoples lifestyles. All these factors helped to make the soft drinks market a growing segment with various products, tailored to satisfy every particular consumers taste. Strong competition also contributed to lower prices and higher quality of the products. Therefore, the industrys profits were constantly growing. 4. Can Coke and Pepsi sustain their profits in the wake of flattening demand and the growing popularity of non-CSDs?

CASE STUDY: COLA WARS CONTINUE Seeing the global trend towards the growing consumption of non-CSDs, both

companies have already done correct marketing steps and started to produce drinks in this category. Updating the tastes of the existing drinks, ongoing promotion and earning positive publicity also contribute to the financial success of the companies. At the same time both companies still have to fight the health issue problem. Now that it became popular worldwide to blame the carbonated drinks for being harmful for peoples health, both produces have either to make their products less harmful or attempt to refute this opinion. The first variant seems to be more reasonable but can be very costly or even impossible to implement. But trying to deny that the soft drinks are harmful will also hardly lead to a positive result. That is why only good diversification and ongoing promotion will help the companies to remain profitable. Existing products will hardly allow them to earn as much as them managed to do before.

CASE STUDY: COLA WARS CONTINUE

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