The Industrial Economy

Discuss different strategies which Coca-Cola and Pepsi adopted against each other and their behaviour towards local soft drink producers in Germany, Italy, Japan, France and the UK.

Discuss how successful they have been in each case and highlight whether failures were due to a wrong strategy or to local conditions.

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ESSAY 2: Discuss different strategies which Coca-Cola and Pepsi adopted against each other and their behaviour towards local soft drink producers in Germany, Italy, Japan, France and the UK. Discuss how successful they have been in each case and highlight whether failures were due to a wrong strategy or to local conditions.

Introduction:

Coca-Cola has had the largest proportion of the soft-drink market since its foundation in 1886, currently being 47%. Pepsi has the next largest share of 23%. These two companies are the biggest competitors in their market, and fight fiercely for consumers. However the companies do not to use price as a method of competing, but instead resort to a method of product differentiation.

In this essay I will look into the theory behind product differentiation, the companies’ competitive strategies as well as the results of a survey we carried out on consumer tastes.

Theoretical Analysis

With Coca-Cola and Pepsi being almost identical products, the market they operate in can be considered to be oligopolistic. This means that there are only a small number of large firms that dominate the market. Why is this the case? Well as Coca-Cola and Pepsi both spend vast amounts on advertising, there are certain barriers to entry for new firms. For example Pepsi spent a whopping $1.9bil. on advertising in 1996. Including the fact that both companies have well established links with other companies such as Coca-Cola’s ties with McDonalds and Disney, and Pepsi’s with KFC, Pizza Hut and Taco Bell (AKA Tricon). This makes it difficult for new soft-drink brands to spread effectively beyond its supermarket sales (which are the least profitable anyway, compared to vending machine and fountain sales).

One of the characteristics of the cola market is availability of substitutes and complements. The former normally leads to a high price elasticity of demand, where small fluctuations in price causes huge changes in demand, i.e. lower prices encourages greater sales. However with Coca-Cola selling its drinks at the highest price (compared to all its competitors) but retaining the greatest market share none the less, it must mean that price elasticity of demand is very low. The reason for the lack of price competition between Coca-Cola and Pepsi is due to that it would be neither companies’ interest, as it would lead to a decrease in their profits and no change in the market share percentages.

The main method of competition has therefore been through product differentiation. This is what, in theory, reduces price elasticity allowing for higher prices to be charged. In effect this works in the manner of the competing firms attempting make their similar products appear as if there is a significant difference between them. The consumer is thus ‘conned’ into believing that the product is worth this added value. The effectiveness of the product differentiation can be measured by the gap in the cost of creating it and the price premium that is added to the product’s value.

There are two types of product differentiation, horizontal and vertical. Vertical differentiation is when two similar products are sold at the same price, and one is always chosen. Like between a Mercedes SLK and a Ford Mondeo. This type of differentiation appears between Coca-Cola/Pepsi and their supermarket brand competitors. Horizontal differentiation occurs when the choice between the products is not quite as clear, and choices are made from differences in taste instead of quality.

Another important factor in differentiation is the sustainability of it. It is important that the differentiation created is sustainable, as otherwise money spent on it is wasted. Coca-Cola and Pepsi have achieved this through branding. This creates a sense of identity in the product that consumers recognise and become loyal to. New competitors have difficulty in intruding on the well-established market shares possessed by branded products like Coca-Cola and Pepsi. To be more specific Coca-Cola and Pepsi brand their products with an image of certain lifestyles, quality, having fun and being ultimately refreshing.

Competitive Strategies

Well how have these theories translated into the actual markets in which Coca-Cola and Pepsi operate? The idea of image signalling through branding is a lot more valuable to boost street sales, but has little effect on supermarket sales. This caused Coca-Cola to have lower supermarket sales than preferred. Coca-Cola reacted to this by cutting its supermarket prices. The perceived quality that branded products have, can also be used to increase sales. Although in actual fact cola products are almost identical tastewise, a perceived difference in it can be achieved. An example of this is Coca-Cola’s emphasis of its secret formula and its heavy investment in cooling machines. This helps to create a differentiation between its own and other soft-drink products, and boosting sales in all areas.

Packaging is also very important, as it relates directly to the product. The logo and colours (and in Coca-Cola’s case, also the bottle itself) used should be easily be associated with the product whether it be on shelves or in machines. Pepsi made a massive 500 million dollar investment, called the ‘Blue Project’, aimed at changing the packaging.

The success of this was not immediately visible, but can also be viewed as a long term investment, increasing total sales by a margin that would pay it back over a period of time. On the other hand, Coca-Cola’s famous bottle has made a perfect example of the importance of packaging. It was able to increase its sales by 30% in America, by simply changing from a straight bottle to the famous contour bottle design. Research & Development has also showed its importance in the soft-drink market, as local tastes were shown to differ or change. R&D has allowed soft-drink firms to maximise their sales in the areas in which consistent and effective surveys/analyses are conducted.

Improving the distribution system is also a sustainable form of product differentiation, as availability is extremely important in the soft-drink market due to impulse purchases. Coca-Cola and Pepsi have both created effective and flexible distribution systems to facilitate their markets, taking advantage of economies of scale and scope. Coca-Cola is known to make alliances (or even buys) with local bottlers all over the world. Pepsi does this to a lesser extent, but has also bought the Tricon restaurant chain (Taco Bell, Pizza Hut and KFC) to increase its fountain sales.

World Strategies

So how does Coca-Cola and Pepsi behave in different world markets? I will now look at their strategies in the UK, Italy, France, Germany and Japan.

As the table above shows, Coca-Cola is clearly the leader in all five countries, notice however that the 2nd best consumer choices do not include Pepsi but are instead other Coca-Cola owned brands. This has been one of Coca-Cola’s main strategies in dominating local markets. In 1997 they reintroduced Fanta in the UK market and also offered McDonald’s one-time gifts of 200-600 gallons of free soft drink syrup if they guaranteed only to serve Coca-Cola’s drinks. In France Coca-Cola acquired Orangina which is a popular fruit drink, to ensure its domination of the market, in addition to advertising through football and the World Cup which boosted sales in 1997 by 18%, compared to the previous year.

In Germany Coca-Cola’s two bottling partners (Coca-Cola Rhein-Ruhr and Coca-Cola Erfrischungsgetrante AG) merged, creating an increase in sales there. In Italy Coca-Cola rewarded wholesalers with end of year bonuses and loyalty agreements, if they guaranteed that they only sold Coca-Cola soft drinks, which is a good example of a barrier of entry for new firms. Finally in Japan, Coca-Cola has one of its most profitable markets, controlling about 90% (basically a monopoly). There Coca-Cola has introduced many new products, achieved a saturation of locations for its vending machines, the latter also being their main source of profits in Japan. Coke has also been wise to compromise with the varying tastes in Japan, making failure less likely and elbowing out the competition.

Pepsi’s global strategy lies mainly in acquiring companies that either are competition or complementary with their beverages, such as the purchase of the Tricon restaurants. In France, however, Pepsi did introduce its line of fruit based beverages (called “The Radical Fruit Company”) in 1995. This made it more competitive with other soft drink producers. Using the idea of selling through complementary goods, Pepsi also owns the Frito-Lay crisps company. These are consumed internationally at a high level.

As an example, in the UK 65% of all crisps consumed, are Frito-Lay products. Pepsi has also been very active in introducing new products to satisfy more people’s tastes. The list includes Pepsi Free and Diet Pepsi Free in 1982, Slice and Diet Slice in 1984 and Pepsi Max in 1994. Finally Pepsi has also established a number of joint ventures such as with J. Lipton Co. (that sells tea or tea-based products) and with the second largest Japanese beverage company, Suntory Ltd. As the UK market includes strong competition from tea, as refreshment, Pepsi has decided gain a part of this market. In Japan this is also true for lactose based beverages, which gives Pepsi a head start with selling products the company is not familiar with.

The Taste Test

In this final part of the essay I will show the results of a taste test we organised to test the truth of the differences in taste between different colas. We tested 50 people, first by asking them what their favourite cola was and then placing four unlabelled plastic cups in front of them. We used Virgin, Tesco, Coca-Cola, and Pepsi for this test. Each person would taste each cup and by only knowing which brands were present, they had to name the brand in each cup. The results are what follows.

Fig. 1

Fig. 2

Well Fig. 1 and 2 almost speak for themselves. Tastes were distributed as we thought, majority to Coca-Cola and Pepsi an obvious second. But people could not find their favourite brands AT ALL!! Virgin seemed to be the most popular but I got the feeling it was more random than anything. People did seem to try hard though…

Fig. 3

Fig. 4

Fig. 4 shows the proportion of people that guessed the brands all wrong and 1, 2 or all right. Statistically the ‘all right’ should be the smallest, the ‘1 right’ the largest and the two others equally large. Some of this does hold true. ‘2 right’ and ‘all wrong’ are almost equally large, and ‘all right’ is the smallest of them all. However the ‘1 right’ is a lot smaller than it should be then and the other three are therefore much larger. I feel that there is some definite randomness in this, but it is not completely validated. You can definitely not say that the majority got 2 or more right, but the proportion is a great deal larger than had it been completely random. Finally Fig. 4 shows how only 20% managed to find their favourite brand of cola, quite pathetic when you consider that many said they had drunk the same brand for years, and even didn’t like other brands!!!

Conclusion

Coca-Cola and Pepsi are two very large multinationals that instead of resorting to vigorous price competition have decided to compete through product differentiation, mainly through advertising. In another survey we conducted people were asked about slogan awareness and product associations. Although Pepsi’s slogan was much less known than Coca-Cola’s but both were very strongly associated with their advertisements and image. A large majority also admitted to readily substitute one brand for the other if their favourite was not available. Both firms have managed to create an ‘illusion’ that their products are very different, as well as preventing any form of strong competition by new firms. However in detail the two companies’ strategies are slightly different.

Pepsi goes to great lengths to fully acquire firms that complement their beverages (Frito-Lay, Tricon), while Coca-Cola relies a lot on its famous name and well-established market. However they also share certain competitive strategies. Both have purchased important local competitors in certain countries (i.e. Orangina) and have gone into joint ventures with well-established local companies. They also go to great lengths to ensure optimal conditions for sale and distribution in each and every country (such as vending machines in Japan, and using local bottlers). The outcome is quite remarkable, as two almost identical products have managed to create loyal consumer bases, by portraying their products as being different.

Bibliography

Coca-Cola Annual Report

Kay, John : Foundations of Corporate Success

Pepsi Annual Report

Porter, M. : Competitive Advantage: creating and sustaining superior performance

Tendergrast, M. : For God, Country and Coca-Cola

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