Executive Summary For more than a hundred years Coke and Pepsi had enjoyed an age of peace. However, as the consumer’s concern of health is increasing, they are facing the profitability decrease of the CSD industry. They sometimes had hard time and tried various tactics to survive. To maintain profit and stable growth rate, they have to find innovative win-win strategy. Analysis The role of concentrate producer is blending raw materials, packaging the mixture, and delivering it to the bottler. The concentrate producing process needs relatively little capital investment; the building cost of a general plant which is able to cover the whole U. S. domestic area is around $50 to $100 million. On the other hand, the bottling process is capital intensive and the process needs fast production line which is hard to interchange between products of different types and size. This being the case the operating margin gap between those two producers is pretty big (see Exhibit 1). There are two reasons why Coke and Pepsi bought their bottlers. First of all, they wanted to play more direct role with their stakeholders. They had been cooperating with their bottlers by spending huge amount of money in marketing and promotion event.
Moreover, they helped their bottlers to negotiate contracts with suppliers and retailers in better conditions. By bottler acquisitions, they could enact directly with the suppliers of bottlers so that they can increase management efficiency and decrease operating cost. Secondly, they could negotiate with their bottlers more easily by acquiring petty bottlers and selling them in better condition to the big bottlers, which makes bottling market to be managed by big bottling company. If bottling companies go broken continuously, it takes enormous cash to invest in the capital-intensive bottling business for Coke and Pepsi.
At the same time, Coke and Pepsi gave their bottlers exclusivity so that they can control their products management effectively by making the bottlers dependent on them. During Coke has focused its business onto the global area, Pepsi has tried to expend its market share in domestic region. It has been successful so far, but in the situation that consumers’ health concern is increasing and they are more consuming non-carbonated drinks such as water, or tea, etc. , Pepsi has to differentiate its product line by M&A or strategic alliance with other food or beverage companies and expand its product selling network to international market.
Recommendation If Pepsi aggressively tries to take away Coke’s global market shares, Coke will respond to this more brutally not to lose its profit margins. Neither Pepsi nor Coke wants to experience the Cola war in the next coming decade in the other business in the other region. Therefore, as a relatively smaller competitor, Pepsi needs a kind of win-win strategy which is more sustainable and not forcing Coke to retaliate. If they ally strategically to build new business, they can compete in positive way, not hurting their own profit.