Cola Wars Continue: Coke and Pepsi in 2010
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R E V : M A Y 2 6 , XXXXXXXXXX
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Professor David B. Yoffie and Research Associate Michael Slind prepared the original version of this case, “Cola Wars Continue: Coke and Pepsi
in 2006,” HBS No XXXXXXXXXXThis version was prepared by Professor David B. Yoffie and Research Associate Renee Kim. This case was developed
from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements,
sources of primary data, or illustrations of effective or ineffective management.
Copyright © 2010, 2011 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call XXXXXXXXXX-
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D A V I D B . Y O F F I E
R E N E E K I M
Cola Wars Continue: Coke and Pepsi in 2010
For more than a century, Coke and Pepsi vied for “throat share” of the world’s beverage market.
The most intense battles in the so-called cola wars were fought over the $74 billion ca
onated soft
drink (CSD) industry in the United States.1 In a “carefully waged competitive struggle” that lasted
from 1975 through the mid-1990s, both Coke and Pepsi achieved average annual revenue growth of
around 10%, as both U.S. and worldwide CSD consumption rose steadily year after year.2 According
to Roger Enrico, former CEO of Pepsi:
The warfare must be perceived as a continuing battle without blood. Without Coke, Pepsi
would have a tough time being an original and lively competitor. The more successful they are,
the sharper we have to be. If the Coca-Cola company didn’t exist, we’d pray for someone to
invent them. And on the other side of the fence, I’m sure the folks at Coke would say that
nothing contributes as much to the present-day success of the Coca-Cola company than . . .
Pepsi.3
That relationship began to fray in the early 2000s, however, as U.S. per-capita CSD consumption
started to decline. By 2009, the average American drank 46 gallons of CSDs per year, the lowest CSD
consumption level since XXXXXXXXXXAt the same time, the two companies experienced their own distinct
ups and downs; Coke suffered several operational setbacks while Pepsi charted a new, aggressive
course in alternative beverages and snack acquisitions.
As the cola wars continued into the 21st century, Coke and Pepsi faced new challenges: Could
they boost flagging domestic CSD sales? How could they compete in the growing non-CSD category
that demanded different bottling, pricing, and
and strategies? What had to be done to ensure
sustainable growth and profitability?
Economics of the U.S. CSD Industry
Americans consumed 23 gallons of CSDs annually in 1970, and consumption grew by an average
of 3% per year over the next three decades (see Exhibit 1). Fueling this growth were the increasing
availability of CSDs and the introduction of diet and flavored varieties. Declining real (inflation-
adjusted) prices that made CSDs more affordable played a significant role as well.5 There were many
For the exclusive use of A. KOFFI, 2021.
This document is authorized for use only by AVOURA MARIE KOFFI in BPS 2021 Spring#2 taught by Xuanye Li, Rutgers University - Newark from Jan 2021 to May 2021.
XXXXXXXXXXCola Wars Continue: Coke and Pepsi in 2010
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alternatives to CSDs, including beer, milk, coffee, bottled water, juices, tea, powdered drinks, wine,
sports drinks, distilled spirits, and tap water. Yet Americans drank more soda than any other
everage. Within the CSD category, the cola segment maintained its dominance, although its market
share dropped from 71% in 1990 to 55% in XXXXXXXXXXNon-cola CSDs included lemon/lime, citrus,
pepper-type, orange, root beer, and other flavors. CSDs consisted of a flavor base (called
“concentrate”), a sweetener, and ca
onated water. The production and distribution of CSDs
involved four major participants: concentrate producers, bottlers, retail channels, and suppliers.7
Concentrate Producers
The concentrate producer blended raw material ingredients, packaged the mixture in plastic
canisters, and shipped those containers to the bottler. To make concentrate for diet CSDs, concentrate
makers often added artificial sweetener; with regular CSDs, bottlers added sugar or high-fructose
corn syrup themselves. The concentrate manufacturing process involved relatively little capital
investment in machinery, overhead, or labor. A typical concentrate manufacturing plant, which could
cover a geographic area as large as the United States, cost between $50 million to $100 million to
uild.8
A concentrate producer’s most significant costs were for advertising, promotion, market research,
and bottler support. Using innovative and sophisticated campaigns, they invested heavily in their
trademarks over time. While concentrate producers implemented and financed marketing programs
jointly with bottlers, they usually took the lead in developing those programs, particularly when it
came to product development, market research, and advertising. They also took charge of negotiating
“customer development agreements” (CDAs) with nationwide retailers such as Wal-Mart. Under a
CDA, Coke or Pepsi offered funds for marketing and other purposes in exchange for shelf space.
With smaller regional accounts, bottlers assumed a key role in developing such relationships, and
paid an agreed-upon percentage—typically 50% or more—of promotional and advertising costs.
Concentrate producers employed a large staff of people who worked with bottlers by supporting
sales efforts, setting standards, and suggesting operational improvements. They also negotiated
directly with their bottlers’ major suppliers (especially sweetener and packaging makers) to achieve
eliable supply, fast delivery, and low prices.9
Once a fragmented business that featured hundreds of local manufacturers, the U.S. soft drink
industry had changed dramatically over time. Among national concentrate producers, Coke and
Pepsi claimed a combined 72% of the U.S. CSD market’s sales volume in 2009, followed by Dr Pepper
Snapple Group (DPS) and Cott Corporation (see Exhibits 2, 3a and 3b). In addition, there were
private-label manufacturers and several dozen other national and regional producers.
Bottlers
Bottlers purchased concentrate, added ca
onated water and high-fructose corn syrup, bottled or
canned the resulting CSD product, and delivered it to customer accounts. Coke and Pepsi bottlers
offered “direct store door” (DSD) delivery, an a
angement whereby route delivery salespeople
managed the CSD
and in stores by securing shelf space, stacking CSD products, positioning the
and’s trademarked label, and setting up point-of-purchase or end-of-aisle displays. (Smaller
national
ands, such as Shasta and Faygo, distributed through food store warehouses.) Cooperative
merchandising agreements, in which retailers agreed to specific promotional activity and discount
levels in exchange for a payment from a bottler, were another key ingredient of soft drink sales.
The bottling process was capital-intensive and involved high-speed production lines that were
interchangeable only for products of similar type and packages of similar size. Bottling and canning
For the exclusive use of A. KOFFI, 2021.
This document is authorized for use only by AVOURA MARIE KOFFI in BPS 2021 Spring#2 taught by Xuanye Li, Rutgers University - Newark from Jan 2021 to May 2021.
Cola Wars Continue: Coke and Pepsi in XXXXXXXXXX
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lines cost from $4 million to $10 million each, depending on volume and package type. But the cost of
a large plant with multiple lines and automated warehousing could reach hundreds of millions of
dollars. In 2010, DPS completed construction of a production facility in California with a capacity of
40 million cases at an estimated cost of $120 million.10 While a handful of such plants could
theoretically provide enough capacity to serve the entire United States, Coke and Pepsi each had
around 100 plants for nationwide distribution.11 For bottlers, their main costs components were
concentrate and syrup. Other significant expenses included packaging, labor, and overhead.12
Bottlers also invested capital in trucks and distribution networks. For CSDs, bottlers’ gross profits
outinely exceeded 40% but operating margins were usually around 8%, about a third of concentrate
producers’ operating margins (see Exhibit 4).
The number of U.S. soft drink bottlers had fallen steadily, from more than 2,000 in 1970 to fewer
than 300 in XXXXXXXXXXCoke was the first concentrate producer to build a nationwide franchised bottling
network, and Pepsi and DPS followed suit. The typical franchised bottler owned a manufacturing
and sales operation in an exclusive geographic te
itory, with rights granted in perpetuity by the
franchiser. In the case of Coke, te
itorial rights did not extend to national fountain accounts, which
the company handled directly. The original Coca-Cola franchise agreement, written in 1899, was a
fixed-price contract that did not provide for renegotiation, even if ingredient costs changed. After
considerable negotiation, often accompanied by bitter legal disputes, Coca-Cola amended the
contract in 1921, 1978, and 1987. By 2009, 92% of Coke’s U.S. concentrate sales for bottled and canned
everages was covered by its 1987 Master Bottler Contract, which granted Coke the right to
determine concentrate price and other terms of sale.14 Under this contract, Coke had no legal
obligation to assist bottlers with advertising or marketing. Nonetheless, to ensure quality and to
match Pepsi, Coke made huge investments to support its bottling network. In 2009, for example,
Coke contributed $540 million in marketing support payments to its top bottler.15
The 1987 contract did not give complete pricing control to Coke, but rather used a formula that
established a maximum price and adjusted prices quarterly according to changes in sweetener
pricing. This contract differed from Pepsi’s Master Bottling Agreement with its top bottler. That
agreement granted the bottler perpetual rights to distribute Pepsi’s CSD products but required it to
purchase raw materials from Pepsi at prices, and on terms and conditions, determined by Pepsi.
Pepsi negotiated concentrate prices with its bottling association, and normally based price increases
on the consumer price index (CPI). Over the last two decades,