Competition between Coca Cola and Pepsi Companies

free essayPepsi and Coca-Cola have been in active state of confrontation for more than a hundred years. Although the drinks, in general, are similar in such aspects as having been invented by pharmacists at almost the same time, originally used for medicinal purposes, having a similar form of product presentation and close marketing position, none of them wants to be worse than the other. The companies are involved in a complicated production structure that includes bottlers, sellers, concentrate producers, and distributors; they are deeply impacted by soft drink industry (Yoffie & Kim, 2010). However, the world and its demands are changing, so Pepsi and Coca Cola need to face new challenges.

Soft Drink Industry and Its Profitability

Soft drinks market is traditionally divided into three major segments: juices and juice drinks, mineral and drinking water, and carbonated drinks. Considering the vast volume of global soft drinks market, including its carbonated segment, general consumption of soft drinks has passed an impressive threshold of 600 billion liters (Yoffie & Kim, 2010).

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The reasons for soft drink industry’s profitability are numerous. First, it is convenient, for consumers pay high attention to convenience of beverage consumption. The role of packaging in marketing of soft drinks is growing. Second, fashion is driving profitability, as it is strongly linked to frequency of consumption and popularity of a brand. Fashionable product takes full advantage of social networking in today’s network marketing era. Additionally, there is a global increase in consumption of luxury goods, which, in its turn, stimulates growth of luxury consumption of drinks. Surprisingly, demand for many premium drinks’ brands has remained stable in many markets even despite crisis years and fall of total consumption. The next reason is functionality, as consumers want to have the “magic” drinks, drinks which make them stronger, healthier, and smarter. Soft drinks now have such slogans as “energy”, “beverages for sports”, “to improve brain,” and others, which are appealing and bring profits. Furthermore, there is a trend of clean and environmentally friendly products. Climate and environment in the 21st century are getting worse. Air pollution is one of the leading factors contributing to mortality rates. The population of the world is concerned about these changes, but every single individual does not want to refuse a car, use of water, or electricity. Instead, consumers vote by their purchases of those products and beverages which, in their opinion, are more environmentally friendly and good for health. Finally, the last reason is tradition. There are numerous examples of a product tried being moved from one part of the world to another and introduced into a new country without any changes. However, each country has its own ideas about taste, fashion, premium quality, and convenience. Local traditions of consumption have always been drivers of demand in each country. However, with reference to the two abovementioned drinks, namely, Pepsi and Coca Cola, they have become drivers of tradition, and a tradition itself, all over the world.
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Economics of Concentrate Business Versus that of Bottling Business

Concentrate producers and bottles are both involved in soft drink production; however, profitability of their businesses is very different. This is mostly caused by use of different resources. For example, concentrate business focuses on raw materials and depends on crops, shipping conditions, and prices of sweeteners. Production of concentrates does not require high investment in equipment or labor force. The companies’ main objectives is to find a bottling partner and advertise themselves. Bottling, in its turn, has a different business pattern. First, production process involves mixing a concentrate with carbonated water and adding sweeteners if they have not been added to a concentrate before. Second, production lines for bottling are very expensive and require very intensive operation. Bottling involves expenses for logistics, packaging, and design, which is crucial for successful further sales. Both Pepsi and Coca Cola have their own bottling networks and periodically support them financially. Bottlers working with Coke or Pepsi sign special franchise contracts that give them certain flexibility, such as production of other drinks than Coke or Pepsi.

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How Competition Between Coke and Pepsi Affected the Industry

In 1886 a pharmacist from Atlanta John Pemberton invented a drink recipe based on coca leaves, which later became well-known to all as Coca Cola (Yoffie & Kim, 2010). After 12 years, a pharmacist from New Bern Caleb Bredhem also came up with an invigorating drink called Brad’s Drink, which eventually became Pepsi (Yoffie & Kim, 2010). In those years, the two drinks existed in parallel, and none of their creators guessed about existence of a rival. If Coca Cola has traditionally been the favorite drink of families, Pepsi directed all its efforts at attracting attention of young people.

Thus, Coca Cola controls 42.7% of the US market and receives 74% of the revenue from international market (Yoffie & Kim, 2010). At the same time, Pepsi controls only 30.8% of domestic market, and its revenue from international sales does not exceed 48% (Yoffie & Kim, 2010). In 2009, the brand Coca Cola was valued at $70 billion, which is five times larger than the value of Pepsi brand (Yoffie & Kim, 2010).

Competition between these two brands has shaped the soft drinks market in the whole world. First, Pepsi and Cola were competitors in retail channels: Cola preferred fountain drinks, and Pepsi focused on retail outlets. Second, both companies led powerful advertisement campaigns. Moreover, both were involved in fast food industry, thus dividing it into two camps (Pepsi supporters – KFC, Taco Bell and Coke supporters: McDonald’s or Burger King). Lastly, their competition has changed the image of the brand forever (Yoffie & Kim, 2010). A bright example of this was “Pepsi Challenge”. In this experiment, visitors of a store were asked to try two cups of a drink without any marking and choose their favorite one. One cup contained Coca Cola, and the other had Pepsi. It was revealed that the majority gave preference to Pepsi. Then, it was decided to investigate the brain’s response to these two drinks, and the results were that Pepsi caused 5 times more excitement in pleasure centers of the human brain than Coca-Cola (Yoffie & Kim, 2010). However, Pepsi’s competitor was not defeated. Pepsi did not become a monopolist in the world of soft drinks. The reason why Coca Cola remains ahead is because of its powerful brand. When visitors knew what exactly they were drinking, they made a choice for Coca Cola, and the experiment recorded absolutely different brain activity. When a person is drinking Coca Cola, his or her brain activates areas responsible for self-identification. In this example, the brand recognition wins over senses. The brand has formed an opinion of people, their emotional response, associative links, which appeared stronger than their taste buds.

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Future of Coke and Pepsi on the Market

Statistics shows that popularity of carbonated soft drinks is declining in the United States in the last years. This poses major challenges to both CSD giants – Coke and Pepsi. However, the companies can sustain their profits at the time of falling demand by continuing competition but in slightly different vectors. While CSD consumption rates are decreasing, demand for non-carbonated soft drinks is rising. Popularity of non-carbonated soft drinks is growing because people are currently involved in healthier lifestyle, while carbonated soft drinks are believed to contribute to obesity. Pepsi has made attempts and has been more active in introducing non-carbonated soft drinks. Coca Cola has also tried to refer to healthier lifestyle by changing its CSD composition, and, as a result, Coca Cola Zero (zero calories) was successful on the market (Yoffie & Kim, 2010). Both companies may introduce “healthy” sweeteners to their drinks, launch lines of tea-based drinks that improve wellbeing, introduce juices with “trendy” components, such as chia seeds, etc. Energy drinks and sports drinks should be in focus of the companies’ attention, as nowadays their popularity positively correlates with trends of sport lifestyle.

Additionally, in recent years, the result of competition between the major companies in the global soft drinks market leads to emergence of a wide variety of mergers and acquisitions. That may also be a solution to changes on the market. An example of successful acquisition was Vitaminwater by Coca Cola (Yoffie & Kim, 2010). This allows expanding production lines and satisfying more customers. Globalization has also dictated its own rules: a successful company must be presented abroad, outreach for more customers, but it may also mean different demands. This process involves tax issues, monopolization in other countries, restrictions; however, at the same time, it allows both Pepsi and Coca Cola to grow and stimulates their innovativeness.

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To summarize, Pepsi and Cola wars have a long history. Their competition is active now and it is present in many spheres. Success of Pepsi and Coca Cola companies depends on trends in soft drinks industry. It also involves concentrate producers and bottlers. Despite strong competition, they both positively affect the industry of carbonated soft drinks. However, consumption of CSD is decreasing, which marks the beginning of changes in Cola and Pepsi.

The companies need to make many amendments to survive. These ways include production of non-carbonated soft drinks (sport drinks, juices, teas, etc.), changing control over bottler lines, internationalization of production, successful advertising campaigns, shifting the companies’ strategies to healthy lifestyle. All these are believed to help Coca Cola and Pepsi in being new-age companies that satisfy consumers’ demands and preserve sustainability of the trend.