Coca-Cola Case Analysis Discussion Questions 

1. Why, historically, has the soft drink industry been so profitable?

2. Compare the economics of the concentrate business to that of the bottling business . Why is the profitability so different?

3. How has the competition between Coke and Pepsi affected the industry’s profits?

4. How can Coke and Pepsi sustain their profits in the wake of flattening demand and the growing popularity of non-CSDs?

This assignment should be 1-2 pages in length and will be graded as per the guidelines outlined in the syllabus.

9 – 7 1 1 – 4 6 2

R E V : M A Y 2 6 , 2 0 1 1

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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. 706-447. This 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 1-800-545-
7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be
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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 20

10

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 carbonated 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 1989.4 At 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 brand 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

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711-462 Cola 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
beverage. Within the CSD category, the cola segment maintained its dominance, although its market
share dropped from 71% in 1990 to 55% in 2009.6 Non-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 carbonated 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
build.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
reliable 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 carbonated 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 arrangement whereby route delivery salespeople
managed the CSD brand in stores by securing shelf space, stacking CSD products, positioning the
brand’s trademarked label, and setting up point-of-purchase or end-of-aisle displays. (Smaller
national brands, 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

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Cola Wars Continue: Coke and Pepsi in 2010 711-462

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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
routinely 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 2009.13 Coke 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 territory, with rights granted in perpetuity by the
franchiser. In the case of Coke, territorial 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
beverages 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, however, concentrate makers regularly
raised concentrate prices, often by more than the increase in inflation (see Exhibit 5).

Franchise agreements with both Coke and Pepsi allowed bottlers to handle the non-cola brands of
other concentrate producers. Bottlers could choose whether to market new beverages introduced by a
concentrate producer. However, concentrate producers worked hard to “encourage” bottlers to carry
their product offerings. Bottlers could not carry directly competing brands, however. For example, a
Coke bottler could not sell Royal Crown Cola, yet it could distribute 7UP if it did not carry Sprite.
Franchised bottlers could decide whether to participate in test marketing efforts, local advertising
campaigns and promotions, and new package introductions (although they could only use packages
authorized by their franchiser). Bottlers also had the final say in decisions about retail pricing.

In 1971, the Federal Trade Commission initiated action against eight major concentrate makers,
charging that the granting of exclusive territories to bottlers prevented intrabrand competition (that
is, two or more bottlers competing in the same area with the same beverage). The concentrate makers
argued that interbrand competition was strong enough to warrant continuation of the existing
territorial agreements. In 1980, after years of litigation, Congress enacted the Soft Drink Interbrand
Competition Act, which preserved the right of concentrate makers to grant exclusive territories.

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711-462 Cola Wars Continue: Coke and Pepsi in 2010

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Retail Channels

In 2009, the distribution of CSDs in the United States took place through supermarkets (29.1%),
fountain outlets (23.1%), vending machines (12.5%), mass merchandisers (16.7%), convenience stores
and gas stations (10.8%), and other outlets (7.8%). Small grocery stores and drug chains made up
most of the latter category.16 Costs and profitability in each channel varied by delivery method and
frequency, drop size, advertising, and marketing (see Exhibit 6).

CSDs accounted for $12 billion, or 4% of total store sales in the U.S., and were also a big traffic
draw for supermarkets.17 Bottlers fought for shelf space to ensure visibility for their products, and
they looked for new ways to drive impulse purchases, such as placing coolers at checkout counters.
An ever-expanding array of products and packages created intense competition for shelf space.

The mass merchandiser category included discount retailers, such as Wal-Mart and Target. These
companies formed an increasingly important channel. Although they sold Coke and Pepsi products,
they (along with some drug chains) could also have their own private-label CSD, or sell a generic
label such as President’s Choice. Private-label CSDs were usually delivered to a retailer’s warehouse,
while branded CSDs were delivered directly to stores. With the warehouse delivery method, the
retailer was responsible for storage, transportation, merchandising, and stocking the shelves, thereby
incurring additional costs.

Historically, Pepsi had focused on sales through retail outlets, while Coke commanded the lead in
fountain sales. (The term “fountain,” which originally referred to drug store soda fountains, covered
restaurants, cafeterias, and any other outlet that served soft drinks by the glass using fountain-type
dispensers.) Competition for national fountain accounts was intense, especially in the 1990s. In 1999,
for example, Burger King franchises were believed to pay about $6.20 per gallon for Coke syrup, but
they received a substantial rebate on each gallon; one large Midwestern franchise owner said that his
annual rebate ran $1.45 per gallon, or about 23%.18 Local fountain accounts, which bottlers handled in
most cases, were considerably more profitable than national accounts. To support the fountain
channel, Coke and Pepsi invested in the development of service dispensers and other equipment, and
provided fountain customers with point-of-sale advertising and other in-store promotional material.

After Pepsi entered the fast-food restaurant business by acquiring Pizza Hut (1978), Taco Bell
(1986), and Kentucky Fried Chicken (1986), Coca-Cola persuaded competing chains such as Wendy’s
and Burger King to switch to Coke. In 1997, PepsiCo spun off its restaurant business under the name
Tricon, but fountain “pouring rights” remained split along largely pre-Tricon lines.19 In 2009, Pepsi
supplied all Taco Bell and KFC restaurants and the great majority of Pizza Hut restaurants, and Coke
retained deals with Burger King and McDonald’s (the largest national account in terms of sales).
Competition remained vigorous: In 2004, Coke won the Subway account away from Pepsi, while
Pepsi grabbed the Quiznos account from Coke. (Subway was the largest account as measured by
number of outlets.) In April 2009, DPS secured rights for Dr Pepper at all U.S. McDonald’s
restaurants.20 Yet Coke continued to lead the channel with a 69% share of national pouring rights,
against Pepsi’s 20% and DPS’ 11%.

21

Coke and DPS had long retained control of national fountain accounts, negotiating pouring-rights
contracts that in some cases (as with big restaurant chains) covered the entire United States or even
the world. Local bottlers or the franchisors’ fountain divisions serviced these accounts. (In such cases,
bottlers received a fee for delivering syrup and maintaining machines.) Historically, PepsiCo had
ceded fountain rights to local Pepsi bottlers. But in the late 1990s, Pepsi began a successful campaign
to gain from its bottlers the right to sell fountain syrup via restaurant commissary companies.

22

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Cola Wars Continue: Coke and Pepsi in 2010 711-462

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In the vending channel, bottlers took charge of buying, installing, and servicing machines, and for
negotiating contracts with property owners, who typically received a sales commission in exchange
for accommodating those machines. But concentrate makers offered bottlers financial incentives to
encourage investment in machines, and also played a large role in the development of vending
technology. Coke and Pepsi were by far the largest suppliers of CSDs to this channel.

Suppliers to Concentrate Producers and Bottlers

Concentrate producers required few inputs: the concentrate for most regular colas consisted of
caramel coloring, phosphoric or citric acid, natural flavors, and caffeine.23 Bottlers purchased two
major inputs: packaging (including cans, plastic bottles, and glass bottles), and sweeteners (including
high-fructose corn syrup and sugar, as well as artificial sweeteners such as aspartame). The majority
of U.S. CSDs were packaged in metal cans (56%), with plastic bottles (42%) and glass bottles (2%)
accounting for the remainder.24 Cans were an attractive packaging material because they were easily
handled and displayed, weighed little, and were durable and recyclable. Plastic packaging,
introduced in 1978, allowed for larger and more varied bottle sizes. Single-serve 20-oz PET bottles,
introduced in 1993, steadily gained popularity; in 2009, they represented 35% of CSD volume (and
52% of CSD revenues) in convenience stores.25

The concentrate producers’ strategy toward can manufacturers was typical of their supplier
relationships. Coke and Pepsi negotiated on behalf of their bottling networks, and were among the
metal can industry’s largest customers. In the 1960s and 1970s, both companies took control of a
portion of their own can production, but by 1990 they had largely exited that business. Thereafter,
they sought instead to establish stable long-term relationships with suppliers. In 2009, major can
producers included Ball, Rexam (through its American National Can subsidiary), and Crown Cork &
Seal.26 Metal cans were essentially a commodity, and often two or three can manufacturers competed
for a single contract.

The Evolution of the U.S. Soft Drink Industry27

Early History

Coca-Cola was formulated in 1886 by John Pemberton, a pharmacist in Atlanta, Georgia, who sold
it at drug store soda fountains as a “potion for mental and physical disorders.” In 1891, Asa Candler
acquired the formula, established a sales force, and began brand advertising of Coca-Cola. The
formula for Coca-Cola syrup, known as “Merchandise 7X,” remained a well-protected secret that the
company kept under guard in an Atlanta bank vault. Candler granted Coca-Cola’s first bottling
franchise in 1899 for a nominal one dollar, believing that the future of the drink rested with soda
fountains. The company’s bottling network grew quickly, however, reaching 370 franchisees by 1910.

In its early years, imitations and counterfeit versions of Coke plagued the company, which
aggressively fought trademark infringements in court. In 1916 alone, courts barred 153 imitations of
Coca-Cola, including the brands Coca-Kola, Koca-Nola, and Cold-Cola. Coke introduced and
patented a 6.5-oz bottle whose unique “skirt” design subsequently became an American icon.

Candler sold the company to a group of investors in 1919, and it went public that year. Four years
later, Robert Woodruff began his long tenure as leader of the company. Woodruff pushed franchise
bottlers to place the beverage “in arm’s reach of desire,” by any and all means. During the 1920s and
1930s, Coke pioneered open-top coolers for use in grocery stores and other channels, developed

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711-462 Cola Wars Continue: Coke and Pepsi in 2010

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automatic fountain dispensers, and introduced vending machines. Woodruff also initiated “lifestyle”
advertising for Coca-Cola, emphasizing the role that Coke played in a consumer’s life.

Woodruff developed Coke’s international business as well. During World War II, at the request of
General Eisenhower, Woodruff promised that “every man in uniform gets a bottle of Coca-Cola for
five cents wherever he is and whatever it costs the company.” Beginning in 1942, Coke won
exemptions from wartime sugar rationing for production of beverages that it sold to the military or to
retailers that served soldiers. Coca-Cola bottling plants followed the movement of American troops,
and during the war the U.S. government set up 64 such plants overseas—a development that
contributed to Coke’s dominant postwar market shares in most European and Asian countries.

Pepsi-Cola was invented in 1893 in New Bern, North Carolina, by pharmacist Caleb Bradham.
Like Coke, Pepsi adopted a franchise bottling system, and by 1910 it had built a network of 270
bottlers. Pepsi struggled, however; it declared bankruptcy in 1923 and again in 1932. But business
began to pick up when, during the Great Depression, Pepsi lowered the price of its 12-oz bottle to a
nickel—the same price that Coke charged for a 6.5-oz bottle. In the years that followed, Pepsi built a
marketing strategy around the theme of its famous radio jingle: “Twice as much for a nickel, too.”

In 1938, Coke filed suit against Pepsi, claiming that the Pepsi-Cola brand was an infringement on
the Coca-Cola trademark. A 1941 court ruling in Pepsi’s favor ended a series of suits and countersuits
between the two companies. During this period, as Pepsi sought to expand its bottling network, it
had to rely on small local bottlers that competed with wealthy, established Coke franchisees.28 Still,
the company began to gain market share, surpassing Royal Crown and Dr Pepper in the 1940s to
become the second-largest-selling CSD brand. In 1950, Coke’s share of the U.S. market was 47% and
Pepsi’s was 10%; hundreds of regional CSD companies, which offered a wide assortment of flavors,
made up the rest of the market.29

The Cola Wars Begin

In 1950, Alfred Steele, a former Coke marketing executive, became CEO of Pepsi. Steele made
“Beat Coke” his motto and encouraged bottlers to focus on take-home sales through supermarkets.
To target family consumption, for example, the company introduced a 26-oz bottle. Pepsi’s growth
began to follow the postwar growth in the number of supermarkets and convenience stores in the
United States: There were about 10,000 supermarkets in 1945; 15,000 in 1955; and 32,000 in 1962, at
the peak of this growth curve.

Under the leadership of CEO Donald Kendall, Pepsi in 1963 launched its “Pepsi Generation”
marketing campaign, which targeted the young and “young at heart.” The campaign helped Pepsi
narrow Coke’s lead to a 2-to-1 margin. At the same time, Pepsi worked with its bottlers to modernize
plants and to improve store delivery services. By 1970, Pepsi bottlers were generally larger than their
Coke counterparts. Coke’s network remained fragmented, with more than 800 independent
franchised bottlers (most of which served U.S. cities of 50,000 or less).30 Throughout this period, Pepsi
sold concentrate to its bottlers at a price that was about 20% lower than what Coke charged. In the
early 1970s, Pepsi increased its concentrate prices to equal those of Coke. To overcome bottler
opposition, Pepsi promised to spend this extra income on advertising and promotion.

Coke and Pepsi began to experiment with new cola and non-cola flavors, and with new packaging
options, in the 1960s. Previously, the two companies had sold only their flagship cola brands. Coke
launched Fanta (1960), Sprite (1961), and the low-calorie cola Tab (1963). Pepsi countered with Teem
(1960), Mountain Dew (1964), and Diet Pepsi (1964). Both companies introduced non-returnable glass
bottles and 12-oz metal cans in various configurations. They also diversified into non-CSD industries.

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Cola Wars Continue: Coke and Pepsi in 2010 711-462
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Coke purchased Minute Maid (fruit juice), Duncan Foods (coffee, tea, hot chocolate), and Belmont
Springs Water. In 1965, Pepsi merged with snack-food giant Frito-Lay to form PepsiCo, hoping to
achieve synergies based on similar customer targets, delivery systems, and marketing orientations.

In the late 1950s, Coca-Cola began to use advertising messages that implicitly recognized the
existence of competitors: “American’s Preferred Taste” (1955), “No Wonder Coke Refreshes Best”
(1960). In meetings with Coca-Cola bottlers, however, executives discussed only the growth of their
own brand and never referred to its closest competitor by name. During the 1960s, Coke focused
primarily on overseas markets, apparently basing its strategy on the assumption that domestic CSD
consumption was approaching a saturation point. Pepsi, meanwhile, battled Coke aggressively in the
United States, and doubled its U.S. share between 1950 and 1970.

The Pepsi Challenge

In 1974, Pepsi launched the “Pepsi Challenge” in Dallas, Texas. Coke was the dominant brand in
that city, and Pepsi ran a distant third behind Dr Pepper. In blind taste tests conducted by Pepsi’s
small local bottler, the company tried to demonstrate that consumers actually preferred Pepsi to
Coke. After its sales shot up in Dallas, Pepsi rolled out the campaign nationwide.

Coke countered with rebates, retail price cuts, and a series of advertisements that questioned the
tests’ validity. In particular, it employed retail price discounts in markets where a company-owned
Coke bottler competed against an independent Pepsi bottler. Nonetheless, the Pepsi Challenge
successfully eroded Coke’s market share. In 1979, Pepsi passed Coke in food store sales for the first
time, opening up a 1.4 share-point lead. In a sign of the times, Coca-Cola president Brian Dyson
inadvertently uttered the name Pepsi at a 1979 bottlers’ conference.

During this period, Coke renegotiated its franchise bottling contract to obtain greater flexibility in
pricing concentrate and syrups. Its bottlers approved a new contract in 1978, but only after Coke
agreed to link concentrate price changes to the CPI, to adjust the price to reflect any cost savings
associated with ingredient changes, and to supply unsweetened concentrate to bottlers that preferred
to buy their own sweetener on the open market.31 This arrangement brought Coke in line with Pepsi,
which traditionally had sold unsweetened concentrate to its bottlers. Immediately after securing
approval of the new agreement, Coke announced a significant concentrate price increase. Pepsi
followed with a 15% price increase of its own.

Cola Wars Heat Up

In 1980, Roberto Goizueta was named CEO of Coca-Cola, and Don Keough became its president.
That year, Coke switched from using sugar to using high-fructose corn syrup, a lower-priced
alternative. Pepsi emulated that move three years later. Coke also intensified its marketing effort,
more than doubling its advertising spending between 1981 and 1984. In response, Pepsi doubled its
advertising expenditures over the same period. Meanwhile, Goizueta sold off most of the non-CSD
businesses that he had inherited, including wine, coffee, tea, and industrial water treatment, while
retaining Minute Maid.

Diet Coke, introduced in 1982, was the first extension of the “Coke” brand name. Many Coke
managers, deeming the “Mother Coke” brand sacred, had opposed the move. So had company
lawyers, who worried about copyright issues. Nonetheless, Diet Coke was a huge success. Praised as
the “most successful consumer product launch of the Eighties,” it became within a few years not only
the most popular diet soft drink in the United States, but also the nation’s third-largest-selling CSD.

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711-462 Cola Wars Continue: Coke and Pepsi in 2010

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In April 1985, Coke announced that it had changed the 99-year-old Coca-Cola formula. Explaining
this radical break with tradition, Goizueta cited a sharp depreciation in the value of the Coca-Cola
trademark. “The product and the brand,” he said, “had a declining share in a shrinking segment of
the market.”32 On the day of Coke’s announcement, Pepsi declared a holiday for its employees,
claiming that the new Coke mimicked Pepsi in taste. The reformulation prompted an outcry from
Coke’s most loyal customers, and bottlers joined the clamor. Three months later, the company
brought back the original formula under the name Coca-Cola Classic, while retaining the new
formula as its flagship brand under the name New Coke. Six months later, Coke announced that it
would henceforth treat Coca-Cola Classic (the original formula) as its flagship brand.

New CSD brands proliferated in the 1980s. Coke introduced 11 new products, including Caffeine-
Free Coke (1983) and Cherry Coke (1985). Pepsi introduced 13 products, including Lemon-Lime Slice
(1984) and Caffeine-Free Pepsi-Cola (1987). The number of packaging types and sizes also increased
dramatically, and the battle for shelf space in supermarkets and other stores became fierce. By the late
1980s, Coke and Pepsi each offered more than 10 major brands and 17 or more container types.33 The
struggle for market share intensified, and retail price discounting became the norm. Consumers grew
accustomed to such discounts.

Throughout the 1980s, the growth of Coke and Pepsi put a squeeze on smaller concentrate
producers. As their shelf space declined, small brands were shuffled from one owner to another.
Over a five-year span, Dr Pepper was sold (all or in part) several times, Canada Dry twice, Sunkist
once, and A&W Brands once. Philip Morris acquired Seven-Up in 1978 for a big premium, racked up
huge losses in the early 1980s, and then left the CSD business in 1985. In the 1990s, through a series of
strategic acquisitions, Cadbury Schweppes emerged as the third-largest concentrate producer—the
main (albeit distant) competitor of the two CSD giants. It bought the Dr Pepper/Seven-Up
Companies in 1995, and continued to add such well-known brands as Orangina (2001) and Nantucket
Nectars (2002) to its portfolio. Then in 2008, Cadbury’s beverage business was spun off into an
independent company, Dr Pepper Snapple Group.

Bottler Consolidation and Spin-Off

Relations between Coke and its franchised bottlers had been strained since the contract
renegotiation of 1978. Coke struggled to persuade bottlers to cooperate in marketing and promotion
programs, to upgrade plant and equipment, and to support new product launches.34 The cola wars
had particularly weakened small, independent bottlers. Pressures to spend more on advertising,
product and packaging proliferation, widespread retail price discounting—together, these factors
resulted in higher capital requirements and lower profit margins. Many family-owned bottlers no
longer had the resources needed to remain competitive.

At a July 1980 dinner with Coke’s 15 largest domestic bottlers, Goizueta announced a plan to
refranchise bottling operations. Coke began buying up poorly managed bottlers, infusing them with
capital, and quickly reselling them to better-performing bottlers. Refranchising allowed Coke’s larger
bottlers to expand outside their traditionally exclusive geographic territories. When two of its largest
bottling companies came up for sale in 1985, Coke moved swiftly to buy them for $2.4 billion,
preempting outside bidders. Together with other recently purchased bottlers, these acquisitions
placed one-third of Coke’s volume in company-owned operations. Meanwhile, Coke began to replace
its 1978 franchise agreement with what became the 1987 Master Bottler Contract.

Coke’s bottler acquisitions had increased its long-term debt to approximately $1 billion. In 1986,
the company created an independent bottling subsidiary, Coca-Cola Enterprises (CCE), selling 51% of
its shares to the public and retaining the rest. The minority equity position enabled Coke to separate

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Cola Wars Continue: Coke and Pepsi in 2010 711-462
9

its financial statements from those of CCE. As Coke’s first “anchor bottler,” CCE consolidated small
territories into larger regions, renegotiated contracts with suppliers and retailers, merged redundant
distribution and purchasing arrangements, and cut its work force by 20%. CCE also invested in
building 50-million-case production lines that involved high levels of automation. Coke continued to
acquire independent franchised bottlers and sell them to CCE. “We became an investment banking
firm specializing in bottler deals,” said Don Keough. 35 In 1997 alone, Coke put together more than $7
billion in such deals.36 As of 2009, CCE was Coke’s largest bottler. It handled about 75% of Coke’s
North American bottle and can volume, and logged annual sales of more than $21 billion.

In the late 1980s, Pepsi acquired MEI Bottling for $591 million, Grand Metropolitan’s bottling
operations for $705 million, and General Cinema’s bottling operations for $1.8 billion. After operating
the bottlers for a decade, Pepsi shifted course and adopted Coke’s anchor bottler model. In April
1999, the Pepsi Bottling Group (PBG) went public, with Pepsi retaining a 35% equity stake in it. By
2009, PBG produced 56% of PepsiCo’s total volume, while the total number of Pepsi bottlers had
fallen from more than 400 in the mid-1980s to 106.37

Bottler consolidation made smaller concentrate producers increasingly dependent on the Pepsi
and Coke bottling networks for distribution of their products. In response, DPS in 1998 bought and
merged two large U.S. bottling companies to form its own bottler. In 2009, Coke had the most
consolidated system, with its top 10 bottlers producing 94% of domestic volume. Pepsi’s and DPS’
top 10 bottlers produced 89% and 79% of the domestic volume of their respective franchisors.38

Adapting to the Times

Starting in the late 1990s, the soft drink industry encountered new challenges that suggested a
possible long-term shift in the marketplace. Although Americans still drank more CSDs than any
other beverage, U.S. consumption began to fizzle (see Exhibit 1). That stood in contrast to annual
growth rates of 3% to 7% during the 1980s and early 1990s.39

This shift in consumption patterns evolved around the growing linkage between CSDs and health
issues such as obesity and nutrition. New federal nutrition guidelines, issued in 2005, identified
regular CSDs as the largest source of obesity-causing sugars in the American diet.40 Schools
throughout the nation banned the sale of soft drinks on their premises. Several states pushed for a
“soda tax” on sugary drinks like sodas and energy beverages. A U.S. government study suggested
that a 20% tax could cut the calorie intake from sugary drinks by up to 49 calories a day per person in
the United States.41 As of April 2010, 29 states already taxed sodas and around 12 more states were
considering the measure.42 In addition, a greater number of consumers started to perceive high-
fructose corn syrup as unnatural and unhealthy. According to one market research study, 53% of
Americans were concerned that the ingredient posed a health hazard in 2010, compared to 40% in
2004.43 In fact, Coke’s 2009 annual report identified obesity and health concerns as the number one
risk factor to its business.44

In face of dwindling CSD sales (see Exhibit 7), Coke and Pepsi tried to stem the tide by enticing
consumers with stepped-up innovation and marketing. In Coke’s case, the company revealed a new
Freestyle soda machine in 2009 which could create dozens of different kinds of custom beverages;
restaurants had to pay a 30% premium for the Freestyle compared to a regular soda fountain.45 Coke
also placed a greater emphasis on promoting its brands, such as spending $230 million in advertising
for its flagship Cola-Cola drink (see Exhibit 8). It also upped spending on sponsorships and global
marketing, including $600 million for the World Cup in 2010.46 Meanwhile, Pepsi redesigned its logo
in 2008 with a three-year rebranding plan that could cost over $1 billion to rejuvenate its image. Pepsi

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711-462 Cola Wars Continue: Coke and Pepsi in 2010
10

focused on promoting the company’s overall portfolio as a snack and beverage company, such as
through “The Power of One” concept. Market surveys on brand loyalty indicated that more
consumers preferred Coke over Pepsi as their favorite CSD brand towards 2010, a slight setback for
Pepsi after it had significantly narrowed the gap in the late 1990s.47

The Quest for Alternatives

Expanding the product mix offered another avenue for growth. Diet sodas, for example, rose to
capture 30% of the CSD market in 2009 compared to 24% a decade ago.48 Coca-Cola Zero became the
most successful new CSD product launched in the second half of the decade. The beverage, which
offered the “real Coca-Cola taste with zero calories”, experienced consecutive double-digit growth
since its introduction in 2005. It was primarily marketed to younger men around the world who
shunned the “diet” label.

At the same time, both Coke and Pepsi intensified their efforts to use alternative sweeteners. Pepsi
replaced high-fructose corn syrup with natural sugar for its brands, Pepsi Throwback and Mountain
Dew Throwback. Another possible alternative was Stevia, an herb that could be used as a natural,
zero-calorie sweetener. Coke and Pepsi both developed their own versions of a Stevia-based
sweetener, which were approved to be used as a food additive by the U.S. Food and Drug
Administration in 2008. New Stevia-based product releases followed, including Pepsi’s reduced-
calorie Trop 50 (orange juice), and Coke’s Sprite Green, with plans to expand to more CSDs as well.

Despite some success with diet drinks, Coke and Pepsi realized that growth would involve “non-
carbs”—a category that included juices and juice drinks, sports drinks, energy drinks, and tea-based
drinks—and also on bottled water (see Exhibit 9). In 2009, while CSDs accounted for 63% of U.S. non-
alcoholic refreshment beverage volume (down from 81% in 2000), the remaining volume was made
up of bottled water at 20% (up from 7%) and non-carbs at 17% (up from 13%).49

Initially, Pepsi was more aggressive than Coke in shifting to non-CSDs. Declaring itself to be a
“total beverage company,” Pepsi developed a portfolio of non-CSD products that outsold Coke’s
rival product in several key categories, such as sports drink (Gatorade) and tea-based drinks (Lipton).
Between 2004 and 2007, 77% of Pepsi’s new products released in the U.S. market were non-carbs
compared to Coke’s 56%.50 But starting in 2007, Coke aggressively expanded its non-carbs product
portfolio through acquisitions. Most notable was its $4 billion purchase of Energy Brands, maker of
the popular Vitaminwater drinks. The deal was the biggest acquisition Coke had ever made. Coke
also entered the business of supplying coffee and tea to fountain/foodservice customers. By 2009,
Pepsi had 43% of the U.S. non-carbs market share compared to Coke’s 32%.51

In the $14 billion bottled-water category, both Pepsi (with Aquafina, 1998) and Coke (with Dasani,
1999) had introduced purified-water products that had surged to become leading beverage brands.
Using their distribution prowess, they had outstripped competing brands, many of which sold spring
water. However, the economic downturn in the late 2000s dampened future prospects for what had
been the fastest growing beverage category between 2000 and 2007.52 Price-sensitive consumers
sought cheaper alternatives such as private label bottled-water or tap water, exhibiting little brand
loyalty compared to CSDs. Environmentalists also became more vocal in their criticisms against the
use of plastic bottles, known as PET, which had a recycling rate below 25%.53 Bottled water started to
generate negative operating profit margins. Coke also saw its market share in this category slip to
15% in 2009 (compared to 22% in 2004) while Pepsi’s fell to 11% (compared to 14%).54

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Cola Wars Continue: Coke and Pepsi in 2010 711-462

11

Internationalizing the Beverage Wars

As U.S. demand for CSDs softened, Coke and Pepsi also looked abroad for new growth. The
United States remained the largest market, accounting for a third of global CSD consumption,
followed by Mexico, Puerto Rico, and Argentina.55 But improved access to markets in Asia and
Eastern Europe stimulated new demand. In particular, China and India emerged as future
battlegrounds with a large, growing middle class population. Each company planned to invest about
$2 billion in China over the next few years to build up their market presence.

Coke flourished, and also relied upon, international markets far more than Pepsi. Through steady
expansion, the Coca-Cola name had become synonymous with American culture. Served in more
than 200 countries, Coke derived about 80% of its sales from international markets.56 Pepsi, on the
other hand, depended on the U.S. for roughly half of its total sales.57 Earlier efforts to go after Coke in
core international markets generated relatively little success. By the early 2000s, Pepsi chose to focus
on emerging markets that were still up for grabs. Several of its top CSD markets were in Asia, Middle
East, and Africa.

Since CSD consumption abroad was generally lower compared to the United States, Coke and
Pepsi aggressively pursued non-carbs opportunities in global markets. For instance, juice was a
popular category—its retail value in China was expected to grow 94% by 2012 compared to 30% for
CSDs.58 In Russia, Pepsi and PBC paid $1.4 billion for a 76% stake in Russia’s largest juice producer,
OAO Lebedyansky, in 2008. International operations, however, encountered several obstacles,
including antitrust regulation, foreign exchange controls, advertising restrictions, and local
competition. In one high-profile incident, the Chinese government rejected Coke’s $2.4 billion bid to
buy Huiyan Juice, a leading juice company in China. At the same time, overseas markets enabled
Coke and Pepsi to broaden the scope of innovation. To tailor to local tastes, Coke offered Sprite Tea,
which blended green tea with Sprite, while Pepsi experimented with beverages made out of Chinese
herbs. New approaches to packaging abounded as well.59 In China and India, use of small returnable
glass bottles allowed Coke to reach poor, rural consumers at a very low price point, while boosting
revenue-per-ounce.60

Evolving Structures and Strategies

Both at home and abroad, the growing popularity of alternative beverages brewed complications
for CSD makers’ traditional production and distribution practices. Concentrate companies became
more directly involved in the manufacturing of several non-CSDs, ranging from Gatorade to Lipton
Iced Tea. Such finished goods required a smaller but specialized production process that were
challenging for bottlers to make with their existing infrastructure. As the popularity of non-carbs
continued to grow, bottlers were frustrated that they were not fully participating in the new growth
businesses. Coke and Pepsi sold the finished goods to their bottlers, who distributed them alongside
their own bottled products at a percentage markup. In addition, Coke and Pepsi distributed some
non-CSDs directly to the retailers’ warehouses, bypassing bottlers.

Energy and sports drinks promised better margins than CSDs because they commanded premium
prices and were usually chosen for immediate, single-serve consumption (see Exhibit 10). In
convenience stores, energy drinks had an average case price of $34.32 compared to CSD’s $8.99.61 Yet
volume for such products, while growing fast, remained small in comparison with CSD volume. This
created issues with DSD, which worked best with high-volume, high consumer demand products.

All CSD companies faced the challenge of achieving pricing power in the take-home channels. In
particular, the rapid growth of the mass-merchandisers, led by Wal-Mart, and various club stores

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711-462 Cola Wars Continue: Coke and Pepsi in 2010
12

posed a new threat to profitability for Coke, Pepsi, and their bottlers. Consolidation in the retail
sector meant that the top ten customers represented as much as 40% of Coke’s U.S. package volume.62
In the case of Wal-Mart, it not only used its size to exert pricing pressure, it also insisted on
negotiating marketing and shelving arrangements directly with concentrate makers. This left bottlers
feeling vulnerable in their traditional practice of distributing products in their exclusive territories.

In addition, bottlers had to manage an ever-rising number of stock-keeping units (SKUs).63 For
instance, Pepsi wanted its bottlers to carry 47 different Gatorade SKUs in exchange for gaining
distribution rights to smaller but more profitable channels like convenience and dollar stores.64 Many
non-CSDs sold in relatively low volume, leading to an increased use of “split pallets.” By loading
more than one product type on a pallet (the hard, wooden bed used to organize and transport
merchandise), bottlers incurred higher distribution and sales costs. Some of Coke’s biggest bottlers
saw their cost of goods sold (including operating expenses) reach 90% of their sales, the highest level
in more than two decades.65

Not surprisingly, bottlers complained over Coke’s practice of charging a flat rate for its
concentrate in the U.S. market. Coke’s profits were tied to volume growth while bottlers’ profits were
driven by package types and where the drinks were sold.66 Then in 2003, Coke and CCE moved
toward “incidence pricing”, an approach that Coke often used with its overseas bottlers, whereby
Coke agreed to vary concentrate prices according to prices charged in different channels and for
different packages. By 2009, around 90% of Coke’s total volume was covered under incidence pricing
agreements. Annual price negotiations were also replaced with multi-year concentrate-price
agreements. With some bottlers, Coke pursued more 50-50 joint ventures. Motivating its independent
bottlers became critical, especially for Coke, as they accounted for nearly 90% of Coke’s worldwide
sales volume.67

Bottler Consolidation, Again

In 2009, Pepsi announced that it would buy two of its biggest bottlers, PBG and PepsiAmericas, in
a transaction worth $7.8 billion. The offer came just about ten years after Pepsi had spun off PBG into
an independent company. The merger would consolidate more than 80% of Pepsi’s North America
beverage operations under one roof.68 One analyst noted that the deal acknowledged the “changing
realities of the North American beverage business.”69 Then Coke, which had been a loyal defender of
the franchise bottling system, surprised the world with its decision to buy CCE’s North American
operations in February 2010. The deal brought back 90% of Coke’s North America business under its
control. In return, CCE bought Coke’s own bottling operations in Norway and Sweden, and received
the option to buy Coke’s stake in its German bottling business at a later date.

Future of the Cola Wars?

Declining CSD sales, declining cola sales, and the rapid emergence of non-carbonated drinks
appeared to be changing the game in the cola wars. By spending billions of dollars to bring bottling
operations under Coke and Pepsi’s direct control again, observers couldn’t help but wonder: was this
a fundamental shift in the cola wars or was this just one more round in a 100 year rivalry?

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This document is authorized for use only by LINTING BING in BUS 109-030 taught by Paul Kirwan, University of California – Riverside from Jan 2020 to Mar 2020.

711-462 Cola Wars Continue: Coke and Pepsi in 2010

14

Exhibit 2 U.S. Soft Drink Market Share by Unit Case Volume (%)

1970 1980 1985 1990 1995 2000 2005 2009Ea

Coca-Cola Company

Coca-Colab 28.4 25.3 21.7 20.7 20.9 20.4 17.6 17.0

Diet Coke ― ― 6.8 9.3 8.8 8.7 9.8 9.9

Sprite and Diet Sprite 1.8 3.0 4.7 4.5 5.7 7.2 6.3 6.1

Caffeine Free Coke, Diet Coke ― ― 1.7 2.9 2.6 2.2 1.8 1.4

Fantac ― ― 0.9 0.7 0.7 0.2 1.6 1.8

Barq’s and Diet Barq’s ― ― ― ― 0.2 1.2 1.1 1.1

Minute Maid brands ― ― ― 0.7 0.7 1.5 0.1 ―

Tab 1.3 3.3 1.1 0.2 0.1 ― ― ―

Others 3.2 4.3 2.6 2.8 3.3 4.2 4.9 4.6

Total 34.7 35.9 39.5 41.1 42.3 44.1 43.1 41.9

PepsiCo, Inc.

Pepsi-Cola 17.0 20.4 19.3 17.6 15.0 13.6 11.2 9.9

Mountain Dew 0.9 3.3 3.1 3.9 5.7 7.2 6.5 6.7

Diet Pepsi 1.1 3.0 3.9 6.3 5.8 5.3 6.0 5.6

Sierra Mist ― ― ― ― ― 0.1 1.4 1.3

Diet Mountain Dew ― ― ― 0.5 0.7 0.9 1.4 1.9

Caffeine Free Pepsi, and Diet Pepsi ― ― 2.5 2.3 2.0 1.7 1.4 1.0

Mug Root Beer ― ― ― 0.3 0.3 0.8 0.7 0.7

Slice and Diet Slice ― ― 1.4 1.4 1.2 0.6 0.1 0.1

Others 0.8 1.1 0.1 0.1 0.2 1.2 2.7 2.7

Total 19.8 27.8 30.3 32.4 30.9 31.4 31.4 29.9

Dr Pepper Snapple Groupd

Dr Pepper (all brands) 3.8 6.0 4.5 5.2 6.8 7.5 7.6 8.3

7UP (all brands) 7.2 6.3 5.8 3.9 3.3 2.8 1.7 1.6

A&W brands ― ― ― ― 0.9 0.9 1.0 1.1

Sunkist ― ― 1.2 0.7 0.7 0.8 1.1 1.2

Canada Dry ― ― 1.5 1.2 1.0 0.9 0.8 1.0

Schweppes ― ― 0.5 0.6 0.5 0.4 0.4 0.5

Others ― ― 1.5 0.7 1.9 1.4 2.0 2.7

Total 11.0 12.3 15.0 12.3 15.1 14.7 14.6 16.4

Cott Corporation ― ― ― ― 2.7 3.3 5.4 4.9

Royal Crown Cos. 6.0 4.7 3.1 2.6 2.0 1.1 ― ―

Other companies 28.5 19.3 12.1 11.6 7.0 5.4 5.5 6.9

Total case volume (in millions) 3,670 5,180 6,385 7,780 8,970 9,950 10,224 9,416

Source: Compiled from Beverage Digest Fact Book 2001, 2005, and 2010; The Maxwell Consumer Report, February. 3, 1994; the
Beverage Marketing Corporation, cited in Beverage World, March 1996 and March 1999.

a Expected market share. One unit case is equivalent to 192 oz.

b Between 1985 and 1995, market share includes Coca-Cola Classic. Coca-Cola drops the name “classic” in 2009.

c For the period before 1985, Fanta sales are included under “Others.”

d For the years preceding 1988, Dr Pepper and 7UP brand shares refer to the shares of the respective independent companies,
the Dr Pepper Company and the Seven-Up Company. Then, Cadbury Schweppes acquired A&W brands in 1993, Dr
Pepper/Seven-Up Cos. brands in 1995, and Royal Crown brands in 2000. In 2008, Cadbury Schweppes’ beverage brands came
under the control of the Dr Pepper Snapple Group.

For the exclusive use of L. BING, 2020.
This document is authorized for use only by LINTING BING in BUS 109-030 taught by Paul Kirwan, University of California – Riverside from Jan 2020 to Mar 2020.

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For the exclusive use of L. BING, 2020.
This document is authorized for use only by LINTING BING in BUS 109-030 taught by Paul Kirwan, University of California – Riverside from Jan 2020 to Mar 2020.

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Cola Wars Continue: Coke and Pepsi in 2010 711-462

17

Exhibit 4 Comparative Costs of a Typical U.S. Concentrate Producer and Bottler, 2009

Concentrate Producer Bottler
Dollars Percent Dollars Percent

per casea of net sales per casea of net sales

Net sales $0.98 100% $4.63 10

0%

Cost of goods sold $0.22 22% $2.67 58%

Gross profit $0.76 78% $1.97 42%

Direct marketing expense $0.21 21% $0.45 10%

Selling & delivery expense

General & admin expense

$0.00

$0.24

0%

25%

$0.85

$0.31

18%

6%

Operating income $0.30 32% $0.36 8%

Sources: Compiled from estimates provided by beverage industry source, October 2010.

a One case is equivalent to 192 oz.

Exhibit 5 U.S. CSD Industry Pricing and Statistics, 1988-2009

1988 1994 1998 2002 2006 2008 2009

Retail price per case, adjusted for inflationa $10.79 $8.48 $7.63 $7.57 $7.47 $7.66 $7.98

Change in retail priceb — -3.9% -1.7% -0.1% -0.2% 0.4% 0.7%

Total Change 1988-2008: -1.4%

Concentrate price per casec $0.79 $1.00 $1.14 $1.35 $1.50 $1.59 $1.65

Change in concentrate price — 4.0% 3.3% 4.3% 2.7% 3.0% 3.8%

Total Change 1988-2009: 3.6%

Volume (cases, in billions) 7.40 8.70 9.90 10.09 10.16 9.62 9.42

Change in volume — 2.0% 3.3% 0.3% 0.2% -2.7% -2.1%

Total Change 1988-2009: 1.2%

Consumption (gallons/capital) 40.30 50.00 54.00 52.60 51.10 47.40 46.00

Change in consumption — 2.7% 1.9% -0.4% -0.7% -3.7% -3.0%

Total Change 1988-2009: 0.6%

Consumer Price Index (2005=100) 60.57 75.91 83.48 92.11 103.22 110.23 109.88

Change in CPI — 2.9% 2.4% 2.5% 2.9% 3.3% -0.3%

Total Change 1988-2009: 2.9%

Source: Compiled from Beverage Digest Fact Book, 2001, and every edition between 2006 and 2010.

a Refers to a 192-oz. case. Prices reflect inflation using the inflation calculator tool, U.S. Bureau of Labor Statistics website,
http://data.bls.gov/cgi-bin/cpicalc.pl, accessed June 2010.

b All change figures are calculated using Compounded Annual Growth Rate (CAGR).

c For the purpose of this item only, concentrate price refers to a 288-oz. case. Concentrate price data for previous years appear
in aggregated form in Beverage Digest Fact Book 2003, p. 64. After 2004, price is based on a weighted average of concentrate
prices for the top 10 CSD brands, as released in Beverage Digest Fact Book, Appendix G, and based on the brands’ market share
for the given year. Concentrate prices were also affected by specific ingredients, such as corn and ethanol, which varied
significantly from CPI in certain years.

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711-462 Cola Wars Continue: Coke and Pepsi in 2010

18

Exhibit 6 U.S. Refreshment Beverages: Bottling Profitability per Channel, 2009

Super-
markets

Convenience
retail

Super-
centersa

Mass
retailersa

Club
storesa

Drug
stores

Fountain,
vending,
and other

Total

Share of industry volume

37% 10% 11% 2% 7% 2% 31% 100%

Index of bottling profitabilityb

Net price 1.00 2.24 1.13 1.10 0.93 1.23 2.09 NA

Variable profit 1.00 1.24 1.24 1.39 1.37 1.68 1.56 NA

Source: Compiled from estimates provided by beverage industry source, October 2010. All figures refer to the entire
refreshment beverage industry.

a “Supercenters” include Wal-Mart Supercenter stories and similar outlets. “Mass Retailers” include standard Wal-Mart stores,
Target stores, and the like. “Club Stores” include Sam’s Club, Costco, and similar membership-based retailers.

b Using supermarket information as a baseline, these figures indicate variance by channel of both by-volume pricing and by-
volume profit. The variable profit figures take into account cost of goods sold as well as delivery costs.

Exhibit 7 Non-Alcoholic Refreshment Beverage Megabrands, 2004 and 2009a

Annual Annual

2009 2009 2004 2004 Volume Change in

Cases Share Cases Share Changeb Market Shareb

Brand (Owner) Category (mil) (%) (mil) (%) 2004–09 2004–09

Coke (Coke) CSD 2,913.1 19.6% 3,272.3 23.4% -2.3% -3.5%

Pepsi (Pepsi) CSD 1,681.5 11.3% 2,098.4 15.0% -4.3% -5.5%

Mountain Dew (Pepsi) CSD 900.1 6.1% 871.1 6.2% 0.7% -0.3%

Dr Pepper (DPS) CSD 784.0 5.3% 738.3 5.3% 1.2% 0.0%

Sprite (Coke) CSD 573.0 3.9% 683.2 4.9% -3.5% -4.5%

Gatorade (Pepsi) Non-Carb 553.7 3.7% 546.0 3.9% 0.3% -1.0%

Aquafina (Pepsi) Water 325.0 2.2% 251.0 1.8% 5.3% 4.1%

Dasani (Coke) Water 289.7 1.9% 223.0 1.6% 5.4% 3.5%

Poland Spring (Nestlé Waters) Water 280.1 1.9% 217.0 1.5% 5.2% 4.8%

7UP (DPS) CSD 150.9 1.0% 186.7 1.3% -4.2% -5.1%

Minute Maid (Coke) CSD/Non-Carb 95.5 0.6% 176.4 1.3% -11.5% -14.3%

Sierra Mist (Pepsi) CSD 149.9 1.0% 166.9 1.2% -2.1% -3.6%

Lipton (Pepsi/Unilever) Non-Carb 235.3 1.6% 164.0 1.2% 7.5% 5.9%

Crystal Geyser (CG Roxanne) Water 223.7 1.5% 135.5 1.0% 10.5% 8.4%

Arrowhead (Nestlé Waters) Water 156.4 1.1% 127.0 0.9% 4.3% 4.1%

PowerAde (Coke) Non-Carb 177.6 1.2% 122.7 0.9% 7.7% 5.9%

Nestlé Pure Life (Nestlé

Waters) Water 469.4 3.2% 113.2 0.8% 32.9% 32.0%

Barq’s (Coke) CSD 103.7 0.7% 112.5 0.8% -1.6% -2.6%

Sunkist (DPS) CSD 116.9 0.8% 105.2 0.8% 2.1% 0.0%

Source: Compiled from Beverage Digest Fact Book 2005 and 2010; and casewriter estimates.

a Beverage Digest Fact Book defines a “megabrand” as a “brand or trademark with total volume of more than 100 million 192-oz
cases.” A megabrand encompasses all varieties (Coke Classic, Diet Coke, Cherry Coke, and so on) of a given trademark
(“Coke”). Only single-serve products are included here.

b All changes calculated using compounded annual growth rates.

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Cola Wars Continue: Coke and Pepsi in 2010 711-462

19

Exhibit 8 Advertising Spending for Selected Refreshment Beverage Brands (in $ thousands)

Market sharea Advertising spendingb Per 2009

2009 2008 2009 2008 share pointc

Coca-Cola 15.3% 15.2% 234,000 254,000 $15,294

Pepsi-Cola 8.8% 9.0% 136,000 145,000 $15,456

Mountain Dew 4.6% 4.5% 24,000 31,000 $5,217

Dr Pepper 4.1% 3.9% 76,000 64,000 $18,537

Gatorade 3.1% 3.6% 119,000 162,000 $38,387

Source: Created by casewriter based on “Special Report: 100 Leading National Advertisers,” Advertising Age, June 21, 2010.

a Share of the total single-serve non-alcoholic beverage market. Advertising Age’s market share data may slightly differ from
Beverage Digest’s data, seen in case Exhibit 2.

b Spending as measured across 19 national media channels using data tracked by Kantar Media and Kantar Media’s Marx.

Exhibit 9 U.S. Non-CSDs Unit Case Volume (in millions)

2002 2004 2006 2007 2008 2009

Packaged water 3,221.6 3,785.6 4,588.1 4,847.2 4,712.1 4,588.9

Juice & juice drinks 3,030.5 3,034.2 2,612.2 2,534.9 2,512.4 2,498.8

Sports drinks 488.1 620.5 912.3 950.4 856.9 843.3

Ready-to-drink tea 430.7 455.2 556.6 625.4 623.7 706.1

Energy drinks 28.9 63.7 135.3 177.0 217.3 218.0

Source: Compiled from estimates provided by beverage industry sources, September 2010. One case is equivalent to 192 oz.

Exhibit 10 Gross Profit Margins for Selected Beverages (%)

Retail’s gross margin Brand’s gross margin

Ready-to-drink coffee 35% 60%

Ready-to-drink tea 35% 60%

Energy 35% 70%

Sports 35% 65%

Juice 25% 35%

Water 35% 45%

CSD 30% 70%

Source: Compiled by casewriter using data from Marc Greenberg, “Coca-Cola Company Presentation” Deutsche Bank
Securities Inc., April 12, 2010, p. 7.

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711-462 Cola Wars Continue: Coke and Pepsi in 2010

20

Endnotes

1 Beverage Digest Fact Book 2010, p. 15. Beverage Digest’s definition includes energy drinks.

2 See Exhibits 1, 3a, and 3b in this case.

3 Roger Enrico, The Other Guy Blinked and Other Dispatches from the Cola Wars (New York: Bantam Books,
1988).

4 Beverage Digest Fact Book 2010, p. 24.

5 Robert Tollison et al., Competition and Concentration (Lexington Books, 1991), p. 11.

6 Beverage Digest Fact Book 2010, p. 42.

7 Unless otherwise noted, information on industry participants and structures comes from Michael E. Porter
(with research associate Rebecca Wayland), “Coca-Cola versus Pepsi-Cola and the Soft Drink Industry,” HBS
No. 391-179 (Boston: Harvard Business School Publishing, 1994); Andrew J. Conway et al., “Global Soft Drink
Bottling Review and Outlook: Consolidating the Way to a Stronger Bottling Network”, Morgan Stanley Dean
Witter, August 4, 1997; and from casewriter interviews with industry executives.

8 Casewriter conversation with industry insider, October 2010.

9 Ibid.

10 “Dr Pepper Snapple Group Breaks Ground on $120 Million Production Facility in Southern California,” Dr
Pepper Snapple Group press release (Victorville, CA, October 22, 2008).

11 Coca-Cola 2009 Annual Report (Atlanta, The Coca-Cola Company, 2010), and PepsiCo 2009 Annual Report
(Purchase, PepsiCo, 2010).

12 Bonnie Herzog and Daniel Bloomgarden, “Coca-Cola Enterprises”, Salomon Smith Barney, February 19,
2003, pp. 31–32; Bonnie Herzog and Daniel Bloomgarden., “Pepsi Bottling Group”, Salomon Smith Barney,
February 24, 2003, pp. 26–27.

13 Timothy Muris, David Scheffman, and Pablo Spiller, Strategy, Structure, and Antitrust in the Carbonated Soft
Drink Industry (Quorum Books, 1993), p. 63; Beverage Digest Fact Book 2010, p. 73.

14 Coca-Cola 2009 Annual Report, p. 7.

15 Coca-Cola Enterprises 2009 Annual Report (Atlanta: Coca-Cola Enterprises, 2010), p. 50.

16 Beverage Digest Fact Book 2010, p. 40.

17 Casewriter conversation with industry observer, October 2010. Total store sales include those from
supermarkets, mass merchandisers, and drug stores.

18 Nikhil Deogun and Richard Gibson, “Coke Beats Out Pepsi for Contracts with Burger King, Domino’s,”
The Wall Street Journal, April 15, 1999.

19 “History” section of entry for PepsiCo, Hoover’s Online, http://www.hoovers.com, accessed December
2005; Beverage Digest Fact Book 2005, p. 62.

20 Beverage Digest Fact Book 2010, p.60.

21 Ibid, p.59. Market shares do not include duel outlets, such as those where Coke’s pouring rights overlap
with Dr Pepper’s. If such outlets were included, Pepsi and DPS’ market share would be higher.

22 Ibid, p. 63.

23 Casewriter examination of ingredients lists for Coke Classic and Pepsi-Cola, November 2005.

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Cola Wars Continue: Coke and Pepsi in 2010 711-462
21

24 Casewriter conversation with industry analyst, January 2006.

25 Beverage Digest Fact Book 2010, p. 69.

26 Ibid, p. 70.

27 Unless otherwise attributed, all historical information in this section comes from J.C. Louis and Harvey
Yazijian, The Cola Wars (Everest House, 1980); Mark Pendergrast, For God, Country, and Coca-Cola (Charles
Scribner’s, 1993); and David Greising, I’d Like the World to Buy a Coke (John Wiley & Sons, 1997).

28 Louis and Yazijian, The Cola Wars, p. 23.

29 David B. Yoffie, Judo Strategy (Harvard Business School Press, 2001), Chapter 1.

30 Pendergrast, p. 310.

31 Ibid, p. 323.

32 Timothy K. Smith and Laura Landro, “Coke’s Future: Profoundly Changed, Coca-Cola Co. Strives to Keep
on Bubbling,” The Wall Street Journal, April 24, 1986.

33 Muris, Scheffman, and Spiller, p. 73.

34 Greising, p. 88.

35 Ibid, p. 292.

36 Beverage Industry, January 1999, p. 17.

37 Beverage Digest Fact Book 2010, p. 73.

38 Ibid, p. 74.

39 Beverage Digest Fact Book 1999, p. 38.

40 Rosie Mestel, “Soft Drink, Soda, Pop: Whatever You Call Them, These Sugar Drinks Are Getting
Nutritional Heat,” The Evansville Courier, September 26, 2005, p. D1; Scott Leith, “Obesity Weighs Heavily on
Colas,” The Atlanta Journal-Constitution, February 6, 2005, p. C1; Raja Mishra, “In Battle of Bulge, Soda Firms
Defend Against Warning,” The Boston Globe, November 28, 2004, p. A1.

41 “Coke and Pepsi Are Vulnerable to Tax on Soda,” Forbes.com, September 10, 2010,
http://blogs.forbes.com/investor/2010/09/10/coke-and-pepsi-are-vulnerable-to-tax-on-soda/, accessed
September 13, 2010.

42 Tom Graves and Esther Y. Kwon, “Industry Surveys: Foods & Nonalcoholic Beverages,” Standard &
Poor’s, June 10, 2010, p. 4.

43 Melanie Warner, “For Corn Syrup, the Sweet Talk Gets Harder,” The New York Times, May 1, 2010.

44 The Coca-Cola Company 10K filing for fiscal year ending December 31, 2009, p. 14.

45 Jeremiah McWilliams, “Coke Bets of Freestyle Growth,” The Atlanta Journal – Constitution, August 1, 2010,
via Factiva, accessed September 2010.

46 Valerie Bauerlein and Robb M. Stewart, “Coke Pours the Pressure on in World Cup of Marketing,” The
Wall Street Journal, June 29, 2010.

47 “A Growing World of Refreshment,” Coca-Cola Investor Relations Overview, 2010, http://www.thecoca-
colacompany.com/investors/pdfs/investor_relations_overview , accessed October 2010.

48 Beverage Digest Fact Book 2010, p. 48.

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http://blogs.forbes.com/investor/2010/09/10/coke-and-pepsi-are-vulnerable-to-tax-on-soda/

http://www.thecoca-colacompany.com/investors/pdfs/investor_relations_overview

http://www.thecoca-colacompany.com/investors/pdfs/investor_relations_overview

711-462 Cola Wars Continue: Coke and Pepsi in 2010
22

49 Beverage Digest Fact Book 2001, p. 11, Beverage Digest Fact Book 2005, p. 11, and Beverage Digest Fact Book
2010, p.11.

50 Marc Greenberg, “Beverage Industry, A Cup Half-full: Gulping the US Profit Pool,” Deutsche Bank, May
17, 2007, p. 22.

51 Beverage Digest Fact Book 2010, p. 102.

52 Ibid, p. 25.

53 Bob Keefe, “Coke’s Bottle Recipe Sweet: New Material Includes Sugarcane, Molasses,” The Atlanta Journal-
Constitution, May 14, 2009.

54 Beverage Digest Fact Book 2010, p. 110.

55 Ibid, p. 87.

56 Christopher Williams, “Coke’s Fortunes are Set to Pop,” Barron’s, August 17, 2009, via Factiva, accessed
September 2010.

57 Citigroup Global Markets Research, “PepsiCo”, October 17, 2010.

58 Sky Canaves, Geoffrey A. Fowler, and Betsy McKay, “Coke Bets $2.4 Billion on Chinese Juice Market,” The
Wall Street Journal Asia, September 4, 2008.

59 Caroline Wilbert and Shelley Emling, “Obesity Weighs on Coke,” Atlanta Journal-Constitution, October 27,
2005, p. A1.

60 Leslie Chang, Chad Terhune, and Betsy McKay, “As Global Growth Ebbs, Coke Makes Rural Push into
China and India,” The Asian Wall Street Journal, August 11, 2004, p. A1.

61 Beverage Digest Fact Book 2010, p. 46.

62 “The Coca-Cola Company and Coca-Cola Enterprise Inc. Announce Strategic Advancement of Their
Partnership in North America and Europe,” Thomson StreetEvents Final Transcript, February 25, 2010.

63 “CSDs Have Most—and Proliferating—SKU’s, but Number Is Small Relative to Volume,” Beverage Digest,
November 22, 2002, http://www.beverage-digest.com/editorial/021122.php, accessed December 2005;
casewriter communication with industry analyst, November 2005.

64 Beverage Digest Newsletter, September 24, 2010, p. 3.

65 Beverage Digest Fact Book 2010, p. 86.

66 Chad Terhune, “Advertising: Coke Bottler in Mexico Threatens to Cut Marketing,” The Wall Street Journal,
November 1, 2005.

67 Christopher Williams, “Coke’s Fortunes are Set to Pop,” Barron’s, August 17, 2009, via Factiva, accessed
September 2010.

68 PepsiCo, “Q4 2009 PepsiCo Earnings Conference Call” transcript, February 11, 2010, p. 4.

69 “Special Issue: PepsiCo Seeks to Buy Two Big Bottlers,” Beverage Digest, April 20, 2009, vol. 54, no. 9.

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