COLA WARS - EXTENDED ANALYSIS OF CASE

Cola Wars - Extended analysis of case



Cola Wars - Extended analysis of case

Review of the strategic issues presented in the case

For a company to succeed in the global soft drink industry, it needs to achieve critical mass and develop a distribution system that is strategically aligned with its brands. Coke has already met these goals in 90% of the world's soft drink markets, while Pepsi has attained them primarily in the United States. Cadbury Schweppes' performance is expected to continue to suffer because it is still not aligned with its U.S. bottler network. For Coca-Cola, this means continuing to reinvest its cash flow from developed markets (51% of volume) into emerging markets (43% volume) and new markets (6% volume). For PepsiCo, this means focusing its international soft drink business on the emerging markets of China, India and Russia, the fountain channel opportunity in the U.S., and Olestra fat free snacks in the U.S. For Cadbury Schweppes, one could argue that management has been concentrating on taking the strong cash flows from U.S (Waldemer, 2008).

The Coca-Cola business model of separating concentrate operations from the bottling business is the only model that can win in the long run in the global soft drink industry. A group of approximately 12 geographically diverse anchor bottlers will help accelerate Coke's global domination of the soft drink industry, by controlling over 60% of the company's worldwide volume over the next five years, up from 30% today. PepsiCo, in contrast, still owns bottling operations representing 37% of its worldwide volume (Polk, 2009). The company's recent decision to create a separate management unit for its domestic bottling operations should allow a more-focused management team to respond to Coke's increased aggressiveness, and could be the first step of an eventual spinoff. Losses in Pepsi's bottling operations in subscale and emerging markets will contribute to most of the expected $35 million loss in the international beverage operations in 1997.

The company has made a sea change recently, realizing it can't compete directly with Coke everywhere: It will aim at becoming a profitable number-two by concentrating on a few select emerging markets. This effort can only be successful if Pepsi reduces its exposure to the bottling business in its subscale and emerging markets, and finds bottling partners that are well-capitalized with sufficient industry expertise (Fuhrman, 2009). The company also faces pressures on its domestic profit engine, as Coca-Cola increases marketing support to its U.S. bottlers. Pepsi's U.S. bottling operations represent 50% of domestic beverage profits and are exposed to this pricing onslaught. Offsetting some of the price impact should be Pepsi's reallocation of capital spending in the U.S. market, earmarked to shifting volume into the high-margin cold channel.

PepsiCo, post its restaurant spinoff, will average 15% EPS growth over the next five years (versus 11% the last five years), with half the increased growth from share buybacks, and half from the swing in international beverage profits offsetting slower growth in domestic beverages and snacks (Landi, ...