COKE WARS

Coke Wars

Coke Wars

Executive Summary

The term "Cola Wars" refers to the fierce competition over the past century between cola manufacturers Coca-Cola and Pepsi. Dr. John Pemberton created Coca-Cola in 1886, and Caleb Bradham created Pepsi in 1898. Coca-Cola (or Coke) became instantly popular, and the company was the leading soda pop manufacturer throughout the twentieth century. Pepsi survived two early bankruptcies only to achieve wide success during the Great Depression by offering twice as much soda for a reduced price. The growth of these two companies provides insight into the rapid development of American capitalism over the past one hundred years.

As the environment changes, companies are forced to change as well. Often, the change is challenging. PepsiCo, for example, saw its sales drop from $31 billion in 1999 to $25 billion in 2002. Pepsi's leaders needed to transform the company to meet the new industry realities. As Indra Nooyi, Pepsi's President and CEO said, “In a perfect world, I'd be able to tell you we executed this restructuring flawlessly. Naturally, that's not the case. The process was neither smooth nor seamless. Many times it felt like baptism by fire.”

Key Problems

Soft drinks, by definition, came into being when people explicitly sought liquid refreshment without the stimulus of alcohol. Coca-Cola, “The Real Thing” by which all other soft drinks are measured, claimed to be “The Great National Temperance Beverage” when it first found its market in turn-of-the-century American soda fountains. However, the genealogy of such familiar commercial soft drinks extends back to the “small beers,” fruit juice cordials, and sparkling spa waters long consumed in premodern Europe. Although temperance sentiments facilitated popular acceptance of modern soft drinks, the genesis of today's nonalcoholic beverage industry came when the Enlightenment's quest to better Nature's handiwork was complemented with the marketing tricks of nineteenth-century patent medicine entrepreneurs.

For generations, the soft drink industry has been one of the most profitable industries. Experts estimate that gross margins in soft drink concentrate are approximately 83 percent and net margins about 35 percent. Coke had long been the dominant player while Pepsi fought hard to win market share. The “Cola Wars” between the two giants defined the industry, as we'll see in more detail below. But as the two companies battled intently with each other, the battleground around them was changing.

Analysis and Evaluation

During the Cola Wars, Pepsi had also entered the restaurant business—buying Taco Bell, Pizza Hut, and KFC—to block Coke from further gains in the fountain market. Coke dominated the fountain market with a strategic partnership with McDonalds, which accounted for 75-100 million gallons of Coke sold each year in the U.S. alone. Pepsi bought the three chains to ensure that those restaurants sold only Pepsi products.

Although buying the restaurants seemed a good strategic move, it brought Pepsi into an unfamiliar industry, and the venture started sapping Pepsi's profits.

The core carbonated soft drinks business started changing, too. Both Coke and Pepsi face challenges as consumers become more health conscious and start to substitute juice and water for ...