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Coke vs. Pepsi

In this report, we will analyze the strategic direction of beverage giants Coca Cola Company (Coke) and Pepsi Co. (Pepsi), as influenced by the external environment. Utilizing Michael Porter’s Five Forces Model for industry analysis, we will specifically review the impact of supplier power, buyer power, threat of substitutes, rivalry, and barriers to entry for each company, comparing and contrasting the general influences of these factors. Finally, we will identify the threats and opportunities facing these companies and offer strategic recommendations for each company’s future positioning. Analysis of Coke

Coke, by its own admission, is a troubled company. Having long encountered significant annual growth spurts exceeding 18%, the company’s yearly growth has languished to a mere 4% (Etrade. com. ) over the past half decade. One reason for the downward trend is merely superficial, a result of the creative accounting process initiated by Coke’s former CEO, Roberto Goizueta. Under Goizueta’s leadership, various Coke assets were spun off in Enronesque fashion, causing the company’s reported earnings to be artificially inflated and hiking stock prices by 3500% over a 16-year period (Foust, December 20, 2004.)

However, with the advent of stricter reporting requirements and the arrival of a new CEO following Goizueta’s death, Coke’s

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financial reports became far more accurate and far less impressive. Beyond the superficial reasons is a problem that cuts to the core of Coke’s bottom line woes: its Board of Directors. Grounded firmly in the concept of Coke as a soda company exclusively, the Board has repeatedly vetoed efforts to diversify the product line into the areas of non-carbonated beverages and snacks. This includes a decision in 2000 not to acquire Quaker Oats Co. (Foust, December 3, 2001.)

In addition to overcoming these internal challenges, Coke must address the following external forces.

Supplier Power. Bottlers are rebelling against Coke’s price hikes by imposing price increases of their own, which can dampen sales and, thus, decrease the amount of concentrate they are required to purchase from Coke. (Foust, December 20, 2004. )

Buyer Power. Regardless of taste preferences, cola is basically cola. Coke drinkers can switch to Pepsi or a lesser known brand at any time unless Coke’s prices remain competitive.

Threat of Substitutes.

The non-carbonated beverage market is growing exponentially as North Americans begin to catch up with Asia in health consciousness. Coke’s lack of product diversification presents a hindrance to its ability to compete in this area.

Rivalry. Coke’s most notable rival is Pepsi – the second largest cola producer in the world. As Pepsi fights to gain predominance in the Cola market, it already surpasses Coke in product diversification, which was boosted significantly by its acquisition of Quaker Oats Co. – including its Gatorade line of soft drinks – after Coke backed out of a similar deal.

Barriers to Entry. In this area, Coke remains king. While smaller brands constantly enter and leave the beverage market, it would take years for any single brand to acquire even a 15% share of Coke’s key turf – the cola market. (Finance. yahoo. com. ) Analysis of Pepsi Pepsi is in a prime position. As number two in the cola market, they have the luxury of experimenting with thousands of new products each year without the fear of losing supremacy or abandoning an allegiance to a single formula for success.

With regard to its share of the cola market, Pepsi’s growth has remained steady at more than 5% per year (Etrade. com. ), and the company’s affiliation of Mountain Dew with the extreme sports industry has set it apart as a leader in non-cola carbonated beverage sales. (Finance. yahoo. com. ) In addition, Pepsi’s non-carbonated beverage sales have escalated since partnering with Starbucks in the distribution of bottled coffees and taking over the Gatorade brand with its acquisition of Quaker Oats Co.

Beyond beverages, Pepsi has cornered 60% of the U.S. chip market with its Frito-Lay branded snacks (Brady, June 14, 2004. ), and has succeeded in convincing grocers to stock soft drinks and snacks next to one another to enhance its cross-promotional efforts and to boost the sales of each. For the past decade, Pepsi has slowly but aggressively chipped away at Coke’s hold on fast food chains and vending machine locations, determined to move closer to the number one position. (Light, May 3, 1999; Pepsi. com. ) In doing so, it has become strategically leaner and keener in its response to external forces, as described below.

Supplier Power. Pepsi has demonstrated an uncanny knack for forecasting trends and initiating successful partnerships for impending consumer demand. While suppliers can pose a risk, Pepsi has cultivated relationships that have proven to be mutually beneficial.

Buyer Power. As mentioned above, Pepsi caters to demand. In addition, the company works hard to create demand for its cola through its national Pepsi Challenge campaign, and for its snacks through shelf positioning.

Threat of Substitutes.

Rather than fall prey to other brands over substitute products such as juices, waters and coffees, Pepsi aggressively markets and distributes its own substitutes through in-house production, acquisition, and partnerships.

Rivalry. Coke is Pepsi’s main competitor and boasts a 2:1 share of the food chain market for beverage sales.

However, the scope of Pepsi’s product diversification makes the company the leading brand in combined beverages and snacks. In addition, Pepsi has succeeded in acquiring companies that would otherwise have been rivals. Barriers to Entry.

As with Coke, Pepsi is a force with which to reckon. Although products are not proprietary, it would require remarkable uniqueness and foresight to compete with the power of the Pepsi, Frit-Lay, and Quaker Oats brands.

Comparison of Coke and Pepsi While Coke and Pepsi have different operating strategies and marketing objectives, the companies nevertheless face two similar challenges:

The growing popularity of non-carbonated beverages. Americans are moving from soda to non-carbonated substitutes such as juices, energy drinks, bottled teas, bottled coffees, and various versions of vitamin- and herb-enhanced waters.

Each of these represents an alternative to soda, and each has greater appeal in upscale markets. To meet changing demands, both Coke and Pepsi must diversify their products to include such substitutes. The growing state of health consciousness. Beyond the desire for less fizz, Americans are on a new kind of non-carb kick: the campaign for fewer simple carbohydrates, specifically in the form of refined white sugar. Coke’s and Pepsi’s flagship products are loaded with such sugars. Although diet alternatives are available, they are made with sugar substitutes, the health benefits of which have been called into question.

Coke and Pepsi must produce products that cater to consumers’ desire for a healthier lifestyle. Opportunities and Threats The following table presents several opportunities and threats faced by Coke and Pepsi. For the sake of brevity, we will focus primarily on the points of comparison referenced above and will succinctly address miscellaneous factors of influence. In closing, I would offer the following recommendations. For Coke, I suggest enhanced diversification into non-carbonated beverages and snacks other than chips. Product additions should include standard, healthy, and organic versions.

Minnick should be permitted to utilize her vast knowledge and experience in the non-carb segment to move Coke forward, and Board members who hold back progress should be replaced at the earliest possible opportunity. For Pepsi, while I applaud the company’s scope of diversification, I suggest more focused research and development efforts with emphasis on healthy and organic snacks. The Quaker Oats granola line provides a solid start in this direction. I also recommend stronger promotion of existing natural beverages to counter Coke’s impending competition in that area.

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