For many years, the term “cola wars” has been used to describethe hard-fought battle for market share that has been waged byCoca-Cola and Pepsi. Coke has managed to stay on top, and in 2001boasted 43.7% of the US soft drink market but consumers’ tastesevolved, and sales of carbonated sodas slowed. Juices, bottledwater, sports drinks, coffee beverages, and vitamin-enriched drinksare now being marketed, both by Pepsi and by Coke. Pepsi has beenmore proactive at introducing new types of noncarbonated beveragesto a population that is increasingly health conscious and moreindividualistic. In fact, Pepsi is the top seller of noncarbonatedbeverages in the U.S. As their product mixes are expanding, Coke inparticular is struggling to determine the best way to market avariety of disparate brands instead of just its powerhousesodas.
Fizzling soda sales
After growing at a rate of 2% to 3% each year during the 1990s,domestic soda sales declined in 1999 and 2000. They reboundedslightly in 2001, with a small increase of 0.6%. However, theaverage U.S. consumer drank less soda in 2001, estimated at 55.4gallons, as opposed to 55.7 gallons in 2000 and 55.9 gallons in1999. These trends have had a profound impact on the top two softdrink producers.
During the 1980s and most of the 1990s, Coca-Cola’s performance wasexcellent. Except for the embarrassing failure of “New Coke,” areformulation of its flagship cola’s flavor in 1985, the company’sstrategy was on target. During that period, Coca-Cola had annualearnings increases that averaged at least 15% and its stock rose adazzling 3500%. But by 2001, the company experienced its thirdconsecutive year of flat or declining market share in the US. Inaddition, earnings were declining, and Coca-Cola was facing seriousthreats on several fronts, not the least of which was from itsperennial challenger, Pepsi.
After losing market share to Coca-Cola in the 1990s, Pepsi, beganto make small gains on Coke’s share of the domestic cola market,and in 2001 claimed 32% of the $61.7 billion industry. The companybegan aggressively fighting with Coke for every vending machine,restaurant contract, and supermarket shelf that came available.Boosting PepsiCo’s (the parent company of Pepsi-Cola) overallhealth is its fast-growing snack foods division, Frito-LayInternational, which comprises more than 60% of the company’ssales.
Perhaps anticipating the slowdown in soda sales, Pepsi asserted itsdesire to become a “total beverage company” in the early 1990s andbegan rapidly expanding its product mix to include bottled water,juices, and much more. This plan has paid off as an agingpopulation of consumers have become increasingly concerned aboutthe health risks associated with caffeine, sugar, and artificialsweeteners. At the same time, recognizing that 12- to 24-year-oldsdrink the most soda, Pepsi revitalized its cola products withsplashy ad campaigns.
Experimenting with New Flavors of Management at Coke
Maintaining a focused, coherent strategy has been difficult forCoca-Cola since the company lost its long-time and highly regardedCEO in 1997 when Roberto Goizueta died of cancer. He was replacedby Doug Ivester, a rigid and analytical executive who alienatedCoke’s largest bottlers and whose European expansion
efforts ran into government regulatory hurdles. As a result, Coke’searnings declined despite very aggressive
growth targets, and the company’s advertisements and promotionalstrategies lost momentum.
Ivester was replaced by Douglas Daft in December 1999, and inJanuary of 2000, it fell to Daft to
announce that Coke would lay off 6,000 employees, about 20% of itswork force. He also decided to
emphasize decentralized decision making to give local managers moreauthority over marketing strategy.
“Think local, act local” was the phrase coined by Daft to describeCoke’s new strategy. “No one drinks
globally. Local people get thirsty and go to their retailer and buya locally make Coke.”
Daft engaged in joint ventures with Nestle for ready-to-drink teasand coffees, and with Walt Disney
for Disney-branded children’s drinks. The new joint ventures andthe focus on local decision making were
major departures for the company that has long been known forbrilliant global marketing strategies that
resulted in Coke being the most recognized brand in theworld.
Daft also inherited unrealistic growth expectations. Stockholdersand analyst had come to expect 15%
to 20% annual growth in earnings, and 7% to 8% annual increases inrevenues. “For us to achieve the growth
rate that people are expecting, we have to become morediversified,” stated one of Coke’s marketing
executives in February of 2000. “We have to move beyond Coke andthe carbs (other carbonated beverages).”
Juicing up their Product Mixes
Although soft drink sales rose a very modest 0.6% in 2001, the toptwo brands experienced declines.
Coca-Cola Classic managed to hold onto the top spot, but its marketshare declined slightly, as did Pepsi-
Cola’s. And both products experienced diminished salesvolumes.
At the same time, the noncarbonated beverages market grew 60%faster than soft drinks in 2001, and
Pepsi sold more than any other company. In fact, Pepsi ownsTropicana, the #1 orange juice brand; Lipton,
the #1 iced tea brand; Gatorade, the #1 sports drink brand; andAquafina, the #1 bottled water brand. It began
pouring resources into these and other noncarbonated beverages wellbefore Coke, and its efforts have paid
off.
For instance, Pepsi acquired Tropicana in 1998 to compete withCoke’s Minute Maid brand. Supported
by Pepsi’s marketing, Tropicana captured 39% of the chilled orangejuice market in 2001, and ranked #3 in
sales among all supermarket beverages, trailing only Pepsi-Cola andCoca-Cola Classic. Coca-Cola
responded by introducing a not-from-concentrate orange juice calledSimply Orange that it claims tastes even
fresher than Tropicana. It hopes the new brand will steal away someloyal Tropicana drinkers without
cannibalizing any of Minute Maid’s 21% market share.
Perhaps the hardest-fought recent battle waged between Coke andPepsi has been for the acquisition
of Quaker Oats, owner of the Gatorade brand. In 2000, Coke’s boardrefused to approve a $16 billion offer
for Quaker. That cleared the way for Pepsi to buy the company for$13.8 billion in 2001, giving it a
commanding 78% share of the sports drink market. By comparison,Coke’s Powerade has only 15%. Soon
after Pepsi acquired Gatorade, Coke decided to overhaul its line ofPowerade drinks. It began by repositioning
the brand to appeal to people besides just the traditional athletestargeted by Gatorade, and developed ads
geared toward those participating in extreme sports such asrollerblading. It also announced plans to add new
Powerade products, such as a breakfast drink and beverages withherbal supplements and energy
enhancements. Some analyst worry that the brand will be dilutedwith all these new additions. Others feel
Pepsi lead is too large to overcome. One analyst commented that,“There’s a lot of brand equity in Gatorade.
As the distant number two, Coke shouldn’t over invest.”
Prior to its acquisition of Quaker, Pepsi also managed tooutmaneuver Coke in its bid for South Beach
Beverages and the SoBe brand in 2000. at the time of sale, SoBe’sline included more than 30 different drinks,
with more on the way. In 2001, Coke responded by supplementing its“new age” Fruitopia line of juice drinks
with the purchases of Mad River Traders and Odwalla, the makers ofpremium juice drinks, teas, and gourmet
sodas. Although both purchases were relatively small ($7 millionand $ 181 million, respectively) they gave
Coke the means to compete with Pepsi in this rapidly growing marketthat has gained wide appeal with
younger consumers.
Coke purchased another small company called P. J. Bean in 2001. itsPlanet Java bottled coffee drinks
and roasted coffee were meant to take on Pepsi’s Frappuccinoproducts. Again, the company was very small
(with only 100,000 cases sold in 2000), but like Odwalla and MadRiver, Coke planned to rapidly increase
sales by utilizing its massive distribution system.
Although most of their focus has been on expanding their domestic,noncarbonated beverage offerings
in the U.S., Coke and Pepsi have recently introduced some new sodasas well. Pepsi, trying to develop a
lemon-lime brand to compete with Coke’s Sprite and CadburySchweppes’ 7UP, launched Sierra Mist in 2000.
Its previous lemon-lemon products, Teem, Slice, and Storm were allunsuccessful, but Sierra Mist has proven
to be popular with younger consumers. Pepsi also unveiledlemon-flavoured Pepsi Twist and cherry-flavoured
Mountain Dew Code Red, and Coke countered with Diet Coke withLemon.
On the international front, both companies have a large stable ofbrands that have been developed or
acquired in order to appeal to local cultures and tastes. Forinstance, Coke markets Thums Up in India and
Inca Cola in Peru. In Japan, Coke offers Marocha Green Tea, and inBrazil it has developed a carbonated
soda that incorporates a locally popular flavor from guaranaberriesthat are found in the Amazon. But Coke
is facing challenges in many foreign markets as well. Decliningeconomies in Brazil, Japan, and Russia
adversely affected Coke’s sales. And in Mexico, the #2 market forCoke outside the U.S., Coke has been
charged with illegal signing exclusivity agreements with itsretailers, charges similar to those that have been
brought against Coke in Europe.
Perhaps the most unexpected new product to be introduced by thesecompanies has come from Coke.
Many hip Londoners are now sporting Coca-Cola Ware. The newclothing line, which features trendy
sportswear, was a hit in stylish London boutiques, and has been abig seller with Coke’s coveted 13- to 29-
year-old audience. Coke hopes to introduce it to the rest of Europeand Eurasia by 2002, and eventually to
the U.S. market.
Noncarbonated Beverage Offerings
in the United States
Type of Product Coca-Cola PepsiCo
Bottled water Dasani Aquafina
Sports drink Powerade Gatorade
Orange and Simply Orange Tropicana,
fruit juice Juice, Minute Dole
Maid, Hi-C, 5-Alive
Coffee drinks Planet Java Frappucino
Tea Nestea and Nescafe Lipton
Mad River SoBe
Juice drinks Fruitopia Mad SoBe
River, Odwalla Fruitworks
Trying to Hit the Sport with Various Ad Strateges
Despite having more than 230 brands in 200 countries, Coca-Colasoda still accounts for 60% of the
company’s global sales. Long recognized as “the world’s most famousbrand,” Coca-Cola has had a string of
advertising hits using taglines such as “Coke is it,” “AlwaysCoca-Cola” and “The Real Thing.” And anyone
old enough to recall the days of bell-bottom pants, yellow smileyfaces, and peace signs will surely remember
the landmark television ad that showed kids from around the worldswaying while singing, “I’d like to teach
the world to sing…I’d like to buy the world a Coke.” Thesecampaigns contributed to Coke’s recongnition
throughout the world, but as Coca-Cola continued to diversify itsproduct offerings, it became more difficult
to advertise on a global basis. One analyst sums up this conundrumby saying, “Without the Coke name,
they’re just another brand on the shelf.”
For this reason, Daft announced his “Think local, act local”strategy in 2000, and empowered local
marketing managers to develop their own ideas for products and howto market them. Unfortunately, this led
to some ads that were not considered to be appropriate by Coke’sexecutives, and some of them even turned
off consumers. In 2001, Daft announced that the corporate marketingteam in Atlanta had developed the them,
“Life Tastes Good,” and that local managers were free to use thisconcept and further develop it to fit local
cultures and sensibilities.
This theme was yanked after it proved to be only marginallysuccessful. In addition, many local
managers were frustrated by the lack of direction from corporateheadquarters, and some were turning out ads
that were not considered to be in keeping with Coke’s wholesomeimage. For example, one Italian ad featured
nude bathers. As a result, some analysts feared Coke was losing itswell-established identity.
Coke also banked on a tie-in with the successful film, Harry Potterand the Sorcerer’s Stone to spur
sales, but Coke’s placement was so minor in the ads that Coke’smarketing vice president questioned the
investment. In March 2002, Coke switched gears once more andabandoned the “Think local, act local”
concept. According to a marketing executive at Coca-Cola, “It waspretty obvious we had lost our way”. For
the second time Coke began looking for a universal tag to spursales of its flagship cola products.
While Coke searched for its next big tagline, Pepsi proclaimed,“The Joy of Cola”. Long a proponent
of celebrity-based ads, Pepsi hit the jackpot in 2001 with upbeatspots featuring pop-culture princess Britney
Spears singing about her favourite soft drink. That same year Pepsilaunched www.pepsistuff.com, an Internet
site that took Pepsi’s loyalty program online. PepsiStuff was aprogram that allowed consumers to exchange
proof of purchases for items such as branded clothing, video games,and DVDs, but it required that Pepsi print
100 million 10-page catalogs. By going online, the need for thecatalogs was eliminated, and Pepsi gained
valuable data about more than 3.5 million consumers by requiringthem to provide name, e-mail address, zip
code, and date of birth. In addition to this new database, Pepsibenefited from a 5% spike in sales during the
promotion.
Only time will tell whether Pepsi will be successful in its bid totake over Coke’s top spot in the famous
clash of the colas. But that duel may ultimate prove to be just onebattle in a much larger war.
Questions
1. Do a SWOT Analysis (state only two strengths, weaknesses,opportunities and threats) of both Coca
Cola Company and Pepsi Company. 40 marks
2. Describe one major factor in the macro-environment which willsignificantly affect the future of both
Coca-Cola and PepsiCo and advice the companies on the strategy topursue.