Cola Wars: Coca-Cola vs. PepsiCo A CASE STUDY

BAHCESEHIR UNIVERSITY THEORY OF MARKETING

Cola Wars: Coca-Cola vs. PepsiCo A CASE STUDY İPEK EGMEN 23.01.2014

THIS HOMEWORK WILL ANSWER THE CASE OF “COLA WARS: COCA-COLA VS PEPSICO. THE QUESTION WHAT WILL YOU DO ON P. 81 AND HANDS ON EXERCISES ON P.85

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HOMEWORK 3: MARKETING THEORY

INDEX WHAT WILL YOU DO?...................................................................................................................... 3 I.

INTRODUCTION ................................................................................................................. 3

II. TABLE 5.4 IS EXPLAINED ................................................................................................ 3 III.

WHAT WOULD I REALLY DO? ................................................................................... 4

HANDS-ON EXERCISES I. ................................................................................................................ 7 HANDS-ON EXERCISES II ................................................................................................................ 8 HANDS-ON EXERCISES III ............................................................................................................ 10 REFERENCES .................................................................................................................................... 11 TABLES AND FIGURES TABLE 5.4 COMPRASION OF COKE AND PEPSI REVENUE AND NET INCOME, 1999-2006........................................................................................................................................ 3 FIGURE 1.1 MODELS OF ENTRY INTO FOREIGN MARKET ......................................... 8

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WHAT WILL YOU DO? LOOKING AT TABLE 5.4, W HICH SHOW S PEPSI W INNING THE W AR W ITH COCACOLA, AT LEAST IN MARKET DOMINANCE, W HAT W OULD YOU DO TO GET THE COMPANY IN THE GROW T H MODE, W ITH THE GOAL OF EVENTUALLY SURPASSING PEPSI IN BOTH REVENUE AND NET INCO ME?

TABLE 5.4 COMPRASION OF COKE AND PEPSI REVENUE AND NET INCOME, 1999-

2006

I.

INTRODUCTION

This case study follows the more than 100-year “Cola War” between Coke and Pepsi. If I were CEO of Coca-Cola, and who know maybe I will be one day, I would play by the rules, but be ferocious 1 to get the company in the growth mode, with the goal of eventually surpassing Pepsi in both revenue and net income. II.

TABLE 5.4 IS EXPLAINED

In the table 5.4 readers can see that Coca-Cola is being outgunned by Pepsi in these most recent eight years. Eventually, this was not always the case. As one see in 1999, revenues were about the same, with a slight edge to Pepsi. But in net income, Coke had a nice edge, which continued until 2006. It is interesting to speculate what happened.

1

. "Play by the rules. But be ferocious. “Quoted from Philip H. Knight Founder of Nike.

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We know that the most profitable carbonated soft drink market had been slowly declining in recent years, partly due to health concerns. Worldwide obesity has nearly doubled since 1980. In 2008, more than 1.4 billion adults, 20 and older, were overweight. Of these over 200 million men and nearly 300 million women were obese. To make it more clear in numbers, 35% of adults aged 20 and over were overweight in 2008, and 11% were obese. 65% of the world's population lives in countries where overweight and obesity kills more people than underweight. More than 40 million children under the age of five were overweight in 2011.2 It is not only affecting the soft drink markets but other carbonated and sugary products as well. And this is where most of Coke’s business has always been. It was slow to diversify beyond this, whereas Pepsi had far more vigorously done so, even beyond noncarb drinks into the snack market with its Frito-Lay division.3 III.

WHAT WOULD I REALLY DO?

Once I was been chosen and assigned for position of the CEO in Coca-Cola Company, I would look for a new marketing management strategy. I would look for both keys to effective marketing both internally and globally. Here are some of my strategic ideas for Coca-Cola: 1. I might add a product line extension In the given time of comparison of coke and pepsi revenue and net income, the most part of the problem facing Coke was an industry problem, but with its heavy emphasis on carbonated soft drinks it became worse for Coke than for Pepsi. Consumers, more concerned with health and obesity, were seeking new kinds of beverages such as gourmet coffees, New Age teas, sports drinks, and waters. Carbonated beverages were no longer a growth sector of the market. One consultant said, “The carbonated soft-drink model is 30 years old and out of date.”4 So I would produce more in variety of the healthier life scope product line to increase my profit such yoghurts and ayrans.5 2. I might try to improve the Coca-Cola company and brand I would do some managerial change as well to improve my companies for an international war. I would make a international cultured company which would help the global company to be better in their local places. I would also make careful investment in

2

World Health Organization, Fact Sheet On Obesity And Overweight, Accessed On 23.01.2014, URL: 3 Hartley, Robert F.(2009), Marketing mistakes and successes/Robert F. Hartley. —11th ed.,, p. 81 4 Hartley, Robert F.(2009), Marketing mistakes and successes/Robert F. Hartley. —11th ed.,, p. 73 5 Pepsi Penetrates New Markets with Health Foods, Forbes Web Edition, Accessed on 23.01.2014, URL:

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bottlers and increased financial resources to plow into marketing, form company’s future to continue to gain greater control of the global soft-drink industry. 6 Today, management science is now aware of the importance of the buyer-seller interaction, as a dyadic relationship. A transaction, negotiation, or relationship can often be helped by certain characteristics of the buyer and seller in the particular encounter. Researchers suggest that salespeople tend to be more successful if they have characteristics similar to their customers in age, size, and other demographic, social, and ethnic variables.7 Brand image usually is a more powerful sales stimulant. Advertisers consistently have been more successful in cultivating a desirable image or personality for their brands or the types of people who use them, than by such vague statements

as “better tasting.”

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3. I might target a different geography According to case study, early in 1994, PepsiCo began an ambitious assault on the softdrink market in Brazil.9 PepsiCo spent heavily on marketing and cold-drink equipment for its choice customers. As a result shut out of small retail outlets, those most profitable for bottlers. In return I could not use my Latin American background as I do not have one to influence the Argentine president to reduce an onerous 24 percent tax on cola to 4 percent. 10 But I would try to grow good relations with governments of the markets I am entering to improve my companies place on the foreign countries market. I would go and visit commerce attachés to understand the market place and economic politics of the country. This would move strengthened my company’s position against Pepsi. 4. I may try and improve the taste of the cola After seeing the results of “Pepsi Challenge,” in which comparative taste tests with consumers showed a clear preference for Pepsi which is the campaign led to a rapid increase in Pepsi’s market share, from 6 to 14 percent of total U.S. soft-drink sales, I would do the same as what Donald Keough did to settle for being president in the first place for Coca-Cola. I would change the taste of the Coca Cola. As Donald did in the new era of change and broke the sacredness of the commitment to the original Coke formula became tenuous and the

Hartley, Robert F.(2009), Marketing Mistakes And Successes/Robert F. Hartley. —11th Ed.,, P. 81 Hartley, Robert F.(2009), Marketing Mistakes And Successes/Robert F. Hartley. —11th Ed.,, P. 79 8 Hartley, Robert F.(2009), Marketing Mistakes And Successes/Robert F. Hartley. —11th Ed.,, P. 82 9 Hartley, Robert F.(2009), Marketing Mistakes And Successes/Robert F. Hartley. —11th Ed.,, P. 66 10 Hartley, Robert F.(2009), Marketing Mistakes And Successes/Robert F. Hartley. —11th Ed.,, P. 67 6 7

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ground was laid for the first flavor change in ninety-nine years. 11 I would also add and research some more flavors to go with the Coca-Cola coke. 5. I might try and add an additional feature, such as a different sized bottle I would discount and launch new products and packages; I would both increase my research on the environmental friendly packaging and make smaller sized bottles.12 I would put some budget on research and development department to find a second secret formula which would be a surprise that would definitely increase my market share and my global share.

Hartley, Robert F.(2009), Marketing mistakes and successes/Robert F. Hartley. —11th ed.,, p. 65 Enjoy Coke on the Go, Coca-Cola Company Web Page, Accessed on 23.01.2014, URL: < http://www.cocacola.co.uk/about-us/new-375-ml-coke.html> 11 12

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HANDS-ON EXERCISES 1. ASSUME THAT YOU ARE ROBERT GOIZUETA AND THAT YOU ARE FACING INCREASED PRESSURE IN EARLY JULY 1985 TO ABANDON THE NEW COKE AND BRING BACK THE OLD FORMULA. HOWEVER, YOUR LATEST MARKETING RESEARCH SUGGESTS THAT ONLY A SMALL GROUP OF AGITATORS ARE MAKING ALL THE FUSS. EVALUATE YOUR OPTIONS AND SUPPORT YOUR RECOMMENDATIONS TO THE BOARD. (DO NOT BE SWAYED BY WHAT ACTUALLY HAPPENED—MAYBE THE PROTESTS COULD HAVE BEEN CONTAINED.) The Flawed Marketing research is the major design of the marketing research involved taste tests by representative consumers. After all, the decision was whether to go with a different flavored Coke, so what could be more logical than to conduct taste tests to determine acceptability of the new flavor, not only versus the old Coke but also versus Pepsi? The results were strongly positive for the new formula, even among Pepsi drinkers. This was a clear “go” signal. With benefit of hindsight, however, some deficiencies in the research design merited concern. Research participants were not told that by picking one cola, they would lose the other. This proved to be a significant distortion: Any addition to the product line would naturally be far more acceptable than completely eliminating the traditional product would be. While three to four new tastes were tested with almost 200,000 people, only 30,000 to 40,000 of these testers tried the specific formula for the new Coke. Research was geared more to the idea of a new, sweeter cola than that used in the final formula. In general, a sweeter flavor tends to be preferred in blind taste tests. 13 If I were Robert Gouizeta and I was facing increased pressure for the changing the symbolic taste of Coke, I should have been foreseen this type of resistance. Perhaps I would ask to the marketing researching department to map this aggression to determine and those who are favor the change. Admittedly, symbolic value and emotional involvement, any researcher is dealing with vague attitudes. So I would ship my old flavored products the places that is against to the taste change. And I would ship the new flavored one to the place where it is both accepted. I would make a relevant percentage of the both products so they could easily try the other one.

13

Hartley, Robert F.(2009), Marketing mistakes and successes/Robert F. Hartley. —11th ed.,, p. 78

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HANDS-ON EXERCISES 2. AS A MARKET ANALYST FOR PEPSICO, YOU HAVE BEEN ASKED TO PRESENT RECOMMENDATIONS TO CEO ROGER ENRICO AND THE EXECUTIVE BOARD, FOR THE INVASION OF BRAZIL’S SOFT-DRINK MARKET. THE MAJOR BOTTLER, BAESA, IS ALREADY IN PLACE AND WAITING FOR PEPSI’S FINAL PLANS AND OBJECTIVES. YOU ARE TO DESIGN A PLANNING BLUEPRINT FOR THE “INVASION,” COMPLETE WITH AN ESTIMATED TIMETABLE.

FIGURE 1.1 MODELS OF ENTRY INTO FOREIGN MARKETS

Source: Adapted From Li And Cavusgil (1995)

Companies go abroad for various reasons – they may need a larger customer base, want to achieve economies of scale or reduce dependence on one market. 14 Brazil’s hot weather and a growing teen population positioned Brazil to become one of the world’s fastest growing soft-drink markets, along with China, India, and Southeast Asia.15 Brazilian consumers averaged only 264 eight ounce servings of soft drinks a year, far below the U.S. average of about 800. 16 As a market analyst for PepsiCo I would first put some time and budget on a research of country’s culture, laws or consumer preferences. When

Philip Kotler, 2001, A Framework for Marketing Management: Marketing Management in the Global Economy, Ch. 18, 10th Edt., p.347-p.351 15 Hartley, Robert F.(2009), Marketing mistakes and successes/Robert F. Hartley. —11th ed.,, p. 66 16 Ibid. 14

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seeking to enter the global market, a company must define its marketing objectives and policies. 17 Three times before over the previous 25 years, Pepsi had attempted to enter the Brazilian market with splashy promotional campaigns and different bottlers. Each of these efforts proved disappointing, and Pepsi had quickly dropped them and retreated from the field. In 1994 it planned a much more aggressive and enduring push. 18 So as a market analyst for my possible strategies may be first indirect export then licensing after I would put some effort with the local market to make up joint ventures, and I would make plants for employment and more direct investment. Then my company must also decide how much to adapt their marketing strategies to local conditions. On the one hand I would first introduce the product without any change, and put an effort for communications – changing market communications for Brazil market, I would escalate the price due to the need to cover the added cost of transportation, tariffs, etc., I would choose the cheapest and the most secure way to ship and transport my products. On the other hand I would consider my country’s origin effect and how to use positive perceptions of the brand or the products when communicating with Brazillian consumers.19

Philip Kotler, 2001, A Framework for Marketing Management: Marketing Management in the Global Economy, Ch. 18, 10th Edt., p.347-p.351 18 Hartley, Robert F.(2009), Marketing mistakes and successes/Robert F. Hartley. —11th ed.,, p. 67 19 Philip Kotler, 2001, A Framework for Marketing Management: Marketing Management in the Global Economy, Ch. 18, 10th Edt., p.347-p.351 17

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HANDS-ON EXERCISES 3. YOU ARE A STAFF ASSISTANT TO INVESTER. IT IS 1998, AND HE HAS JUST ASSUMED THE TOP EXECUTIVE JOB WITH COCA-COLA. ONE OF HIS FIRST MAJOR DECISIONS CONCERNS RAISING SOFT-DRINK PRICES OVER 7 PERCENT TO IMPROVE OPERATING MARGINS AND MAKE UP FOR DIMINISHED REVENUES IN A DEPRESSED EUROPEAN MARKET. HE WANTS YOU TO PROVIDE PRO AND CON INFORMATION ON THIS IMPORTANT DECISION. PROS Raising soft-drink prices over 7 percent to improve operating margins and make up for diminished revenues in a depressed European market would definitely damp sales of Coke, but still it would increase bottlers’ profits. 20 More clearly raising the price would be advantageous for economies of scale in production and distribution, lowering marketing costs, power and scope, consistency in brand image, ability to leverage good ideas quickly and efficiently, and uniformity of marketing practices.

CONS Disadvantages would be that it ignores differences in consumer needs, wants and usage pattern of products, ignores differences in consumer response to marketing programs and activities, ignores differences in brand and product development and the competitive environment, ignores differences in the legal environment, ignores differences in marketing institutions, and ignores differences in administrative procedures.

21

Adding to the

dissatisfaction with the higher prices, many consumers were critical of the taste, either too fl at or with an aftertaste.22 In reality, some bottlers also refused to carry the company’s new noncarbonated niche offerings, Mad River teas and Planet Java coffee, and these flopped and the company phased them out in 2003.23

Hartley, Robert F.(2009), Marketing mistakes and successes/Robert F. Hartley. —11th ed.,, p. 67 Philip Kotler, 2001, A Framework for Marketing Management: Marketing Management in the Global Economy, Ch. 18, 10th Edt., p.347-p.351 22 Hartley, Robert F.(2009), Marketing Mistakes And Successes/Robert F. Hartley. —11th Ed., P. 67 23 Ibid. 20 21

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REFERENCES 1.

"Play by the rules. But be ferocious. “Quoted from Philip H. Knight Founder of Nike.

2.

World Health Organization, Fact Sheet On Obesity And Overweight, Accessed On 23.01.2014, URL:

3.

Hartley, Robert F.(2009), Marketing mistakes and successes/Robert F. Hartley. —11th ed.,, p. 81

4.

Hartley, Robert F.(2009), Marketing mistakes and successes/Robert F. Hartley. —11th ed.,, p. 73

5.

Pepsi Penetrates New Markets with Health Foods, Forbes Web Edition, Accessed on 23.01.2014, URL:

6.

Hartley, Robert F.(2009), Marketing Mistakes And Successes/Robert F. Hartley. —11th Ed.,, P. 81

7.

Hartley, Robert F.(2009), Marketing Mistakes And Successes/Robert F. Hartley. —11th Ed.,, P. 79

8.

Hartley, Robert F.(2009), Marketing Mistakes And Successes/Robert F. Hartley. —11th Ed.,, P. 82

9.

Hartley, Robert F.(2009), Marketing Mistakes And Successes/Robert F. Hartley. —11th Ed.,, P. 66

10. Hartley, Robert F.(2009), Marketing Mistakes And Successes/Robert F. Hartley. —11th Ed.,, P. 67 11. Hartley, Robert F.(2009), Marketing mistakes and successes/Robert F. Hartley. —11th ed.,, p. 65 12. Enjoy Coke on the Go, Coca-Cola Company Web Page, Accessed on 23.01.2014, URL: < http://www.coca-cola.co.uk/about-us/new-375-ml-coke.html> 13. Hartley, Robert F.(2009), Marketing mistakes and successes/Robert F. Hartley. —11th ed.,, p. 78 14. Philip Kotler, 2001, A Framework for Marketing Management: Marketing Management in the Global Economy, Ch. 18, 10th Edt., p.347-p.351 15. Hartley, Robert F.(2009), Marketing mistakes and successes/Robert F. Hartley. —11th ed.,, p. 66 16. Ibid. 17. Philip Kotler, 2001, A Framework for Marketing Management: Marketing Management in the Global Economy, Ch. 18, 10th Edt., p.347-p.351 18. Hartley, Robert F.(2009), Marketing mistakes and successes/Robert F. Hartley. —11th ed.,, p. 67 19. Philip Kotler, 2001, A Framework for Marketing Management: Marketing Management in the Global Economy, Ch. 18, 10th Edt., p.347-p.351 20. Hartley, Robert F.(2009), Marketing mistakes and successes/Robert F. Hartley. —11th ed.,, p. 67 21. Philip Kotler, 2001, A Framework for Marketing Management: Marketing Management in the Global Economy, Ch. 18, 10th Edt., p.347-p.351 22. Hartley, Robert F.(2009), Marketing Mistakes And Successes/Robert F. Hartley. —11th Ed., P. 67 23. Ibid.

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