Coca-Cola Vs Pepsi Essay, Research Paper

Coca-Cola vs. Pepsi Co.: An International Battle

The soft drink industry has been engulfed by an ongoing cola war stemming from a long-time battle between Coca-Cola and Pepsi Co. Recently both companies have introduced their products to the foreign market, but in order for either company to turn a profit, there is a large amount of red tape they must cut before production can begin. This paper will examine the new markets and the roadblocks that have stopped these companies for so long.

Established in 1886 and 1889, Coca-Cola and Pepsi Co., respectively, were among the first soft drinks invented and their popularity grew rapidly. By the 1930 s, Coca-Cola appeared on over 20,000 walls, 160,000 billboards, 5 million soda fountain glasses and 400 million newspaper and magazine advertisements (Secret Formula p. 206). When the war (Second World) ended, the Coca-Cola Company had sixty-three overseas bottling plants in operation in venues as far-flung as Egypt, Iceland, Iran, West Africa and New Guinea (Secret Formula, p.265).

Since then, international marketing has become more complex and the following will study the new territories and the advancements that the companies have made.

Eastern Europe:

In 1972, Pepsi signed an agreement with the Soviet Union which made it the first Western product to be sold to consumers in Russia. This was a landmark agreement and gave Pepsi the first-mover advantage. Presently, Pepsi has 23 plants in the former Soviet Union and is the leader in the soft-drink industry in Russia. Pepsi outsells Coca-Cola by 6 to 1 and is seen as a local brand. However, Pepsi has had some problems: there has not been an increase in brand loyalty for Pepsi since its advertising blitz in Russia, even though it has produced commercials tailored to the Russian market and has sponsored television concerts. On the positive side, Pepsi may be leading Coca-Cola due to the big difference in price between the two colas: Pepsi sells 2 liters for Rb1,300 ($1.30 US), but Coca-Cola sells 1.5 liters for Rb1,800. Coca-Cola, on the other hand, only moved into Russia 8 years ago and is manufactured locally in Moscow and St. Petersburg under a license. Despite investing $85 million in these two bottling plants, they do not perceive Coca-Cola as a premium brand in the Russian market. Moreover, they see it as a “foreign” brand that is drank by the wealthy, or on special occasions.

Romania is the second largest Central European market after Poland, and makes this a large battleground for Coca-Cola and Pepsi. When Pepsi established a bottling plant in Romania in 1965, it became the first U.S. product produced and sold in the region. Pepsi began producing locally during the communist period and has recently decided to reorganize and retrain its local staff. Pepsi owns 5 factories in Romania under a joint venture with Flora and Quadrant, which leases Pepsi the equipment and handles Pepsi’s distribution. In addition, Pepsi bought 500 Romanian trucks which are also used for distribution in other countries. While the price of Pepsi and Coca-Cola are the same (@15 cents/bottle), some consumers drink Pepsi because the company once sent Michael Jackson to Romania for a concert. Also, some Romanians drink Pepsi because, in the past, only top officials were allowed to drink it. Coca-Cola only began producing locally in November 1991, but is outselling all of its competitors. In 1992, Coca-Cola saw an increase in Romania of sales by 99.2% and outsold Pepsi by 6 to 5. While Pepsi preferred to buy its equipment from Romania, Coca-Cola preferred to bring equipment into Romania. Also, Coca-Cola brought 2 bottlers to Romania and since has invested almost $25 million into 2 factories. Furthermore, Coca-Cola has a partnership with a local company, Ci-Co, in Bucharest and Brasov. Ci-Co has planned an aggressive publicity campaign and has sponsored local sporting and cultural events.

The key to success in the Czech Republic is for both Coca-Cola and Pepsi to increase the annual consumption of soft drinks. Per capita consumption of beer, the national drink in the Czech Republic, exceeds that of soft drinks by 3 to 1(165 liters of beer per capita of beer versus 50 liters of soft-drinks). Both companies are trying to increase their market share because distribution for both products is no longer as limited as it was in 1989. Domestic producers have a market share of about 60%, as their overhead costs are lower and the price of their beverages are cheaper. Coca-Cola and Pepsi each have a market share between 10%-25%. The main hesitation may be that the price of Coke is twice the price of locally produced colas and a little higher than Pepsi. Coca-Cola has arrangements with 4 domestic bottling companies and acquired a new plant in 1992 in which it has invested almost $20 million. This may be one reason why Coca-Cola is closing in on Pepsi’s lead in the Czech Republic.

Poland, with a population of 38 million people, is the biggest consumer market in Central and Eastern Europe. Coca-Cola is closing in on Pepsi’s lead in this country with 1992 sales of 19.5 million cases versus Pepsi’s sales of 26.5 million cases. The main problems in this area are the centralized economy, the lack of modern production facilities, and poor distribution. However, since the zloty is now convertible, Coca-Cola realizes the growth potential in Poland. Coca-Cola has developed an investment plan that includes direct investment and joint ventures/investments with European bottling partners. Its investments could exceed $250 million, and it has completed the infrastructure building. Coca-Cola has divided Poland into 8 regions with strategic sites in each of these areas. In addition, it has organized a distribution network to make sure its products are widely available. This distribution network, which Coca-Cola has spent a great deal of money and time organizing, is extremely important to challenge Pepsi’s market share and to maintain a high level of customer service. Also, Coca-Cola, like Pepsi, signed counter trade agreements with Poland. Both trade their concentrate for Polish beer.

Both Coca-Cola and Pepsi are trying to have their colas available in as many locations in Eastern Europe as possible, and are recognizing the concepts which are becoming more important in marketing to these countries: color, product attractiveness, visibility, and display quality. In addition, availability, acceptability and affordability are other key factors for Eastern Europe. Both companies hope that their western images and brand products will help to boost their sales. Coca-Cola has a universal message and campaign since it feels that Eastern Europe is part of the world and should not be treated differently. Currently, it is difficult to say who is winning the cola wars since the data from the relatively new market research firms focuses on major cities. Pepsi had a commanding 4 to 1 lead in 1992 in the former Soviet Union. Without this area, Coca-Cola has a 17% share versus Pepsi’s 12% share in the soft drink industry. While both companies have been in Eastern Europe for many years, the main task now is to develop the market.

Far East & Central America:

The Mexican government recently freed the Mexican soft drink market from nearly 40 years of price controls in return for a commitment from bottling companies to invest nearly $4.5 billion and create nearly 55,000 jobs over the next 7 years. Naturally, Mexico has become another front line in the international cola wars. In Mexico, Coca-Cola and Pepsi command 50% and 21% of the market respectively. The cola war is especially important here because the per capita consumption of Coca-Cola and Pepsi exceeds that of the United States (Murphy, p.6). Mexico is the only soft-drink market in the world that can make this claim. The challenge in Mexico is to win market share through distribution efficiency (Murphy, p.6). With this in mind, each company is undertaking strategic efforts designed to bolster their shares of the Mexican market. Pepsi is moving in on the Coke-dominated Yucatan peninsula while Femsa, the Coca-Cola franchisee, has invested $600 million more for 3 new Coca-Cola plants next door to Gemex’s (Pepsi s largest bottler outside the United States) Mexico City facilities. The parent companies have joined the battles as well. Coca-Cola has made a $3 billion long-term commitment to the Mexican market, and Pepsi has countered with a $750 million investment of its own.

Coca-Cola originally entered China in 1927, but left in 1949 when the communist government tool control. In 1979, it returned with a shipment of 30,000 cases from Hong Kong. Pepsi, which only entered China in 1982, has been trying to become the top distributor ever since. Even though Coca-Cola’s head start in China has given it an edge, there is plenty of room in the country for both companies. Currently, Coca-Cola and Pepsi control 15% and 7% of the Chinese soft-drink market respectively. The Chinese market presents unique problems. For example, 2,800 local soft-drink bottlers, many of whom are state-owned, control nearly 75% of the Chinese market. Those bottlers located in remote areas have virtual monopolies (The Economist, p.67). The battle for China will take place in the interior regions. These areas are unpenetrated as most of the foreign soft-drink producers have set up in the booming coastal cities. China’s high transportation and distribution costs mean that plants must be located close to their markets. Otherwise, in a country of China’s size, Coca-Cola and Pepsi risk pricing their products as luxury items. In China, it is easier and politically safer to expand through joint ventures with local bottlers. It is expected that, in China, the company that wins the cola war will win based on the locations of their bottling plants and the quality of the partners they choose (The Economist, p.67). Coca-Cola is bottled at 13 sites across China; five of these are state-owned and as well own 2 concentrate plants in China. By 1996, Coca-Cola and its joint venture partners will have invested nearly $500 million in China. Pepsi has begun a $350 million expansion plan that will add 10 new plants. Both companies are pushing profits straight back into expansion. They reason that any returns will not come until the next century.

In Saudi Arabia, Pepsi is the market leader and has been for nearly a generation. Part of this is due to the absence of its archrival, Coca-Cola. For nearly 25 years, Coke has been exiled from the desert kingdom. Coca-Cola’s presence in Israel meant that it was subject to an Arab boycott. Because of this, Pepsi has an 80% share of the $1 billion Saudi soft-drink market. Saudi Arabia is Pepsi’s third largest foreign market, after Mexico and Canada (The Economist, p.86). In 1993, almost 7% of Pepsi-Cola International’s sales came from Saudi Arabia alone. The environment in Saudi Arabia makes the country very conducive to soft-drink sales: alcohol is banned, the climate is hot and dry, the population is growing at 3.5% a year, and the Saudis’ oil-based wealth “make it the most valuable market in the Middle East” (The Economist, p.86). Coca-Cola, long known as “red Pepsi”, has finally started to fight back. The battle for Saudi Arabia actually began 6 years ago, when the Arab boycott collapsed and Coca-Cola began to make inroads into the Gulf, Egypt, Lebanon, and Jordan. In 2000, Coca-Cola controlled approximately 35% of the market. Coca-Cola, which plans to pour over $100 million into the Saudi market, is focusing on marketing to get there. Coca-Cola put $1 million into sponsoring the Saudi World Cup soccer team and this alone has doubled Coca-Cola’s market share to almost 15%. America’s Reynolds Company is among the investors looking to cash in on Coca-Cola s return to Saudi Arabia. The company is among the investors in a new factory that, as of 1996, will be producing 1.2 billion Coca-Cola cans per year.

Coca-Cola controlled the Indian market until 1977, when the Janata Party beat the Congress Party of then Prime Minister Indira Gandhi. To punish Coca-Cola’s principal bottler, a Congress Party stalwart and longtime Gandhi supporter, the Janata government demanded that Coca-Cola transfer its syrup formula to an Indian subsidiary (Chakravarty, p.43). Coca-Cola withdrew from the country. India, now left without both Coca-Cola and Pepsi, became a protected market yet in the meantime, India’s two largest soft-drink producers have gotten rich and lazy while controlling 80% of the Indian market. These domestic producers have little incentive to expand their plants or develop the country’s potentially enormous market (Chakravarty, p.43). To obtain the license for India, Pepsi had to export $5 (US) of locally made products for every $1 of materials it imported, and it had to agree to help the Indian government to initiate a second agricultural revolution.

The new battlefield for the cola wars is in the developing markets of Eastern Europe and the Far East/Central America. With Pepsi Co. and Coca-Cola investing into these countries, they will not only increase their sales worldwide, but will help the supporting countries economy at the same time. Many issues need to be overcome before a company can begin to produce goods in a foreign market, those including, political, social and economic concerns. When companies such as Coca-Cola and Pepsi Co. are solving problems to everyone s liking, new markets can evolve into opportunities for everyone in the long run.

Works Cited

Allen, Frederick. Secret Formula. New York, New York: HarperCollins, 1994.

Chakravarty, Subrata N. How Pepsi Broke into India. Forbes 27 November 1989: 43-4

Murphy, Helen. Cola War Erupts in Mexico. Corporate Finance, May 1993: 6-7

Coke vs. Pepsi. The Economist, 29 January 1994: 67-8

A Red Line in the Sand. The Economist, 1 October 1994: 86

Bibliography

Allen, Frederick. Secret Formula. New York, New York: HarperCollins, 1994

Chakravarty, Subrata N. “How Pepsi broke into India.” Forbes, 27 November 1989: 43-4

Clifford, Mark. “How Coke Excels.” Far Eastern Economic Review, 30 December 1993 – 6 January 1994: 39.

DeNitto, Emily. “Pepsi, Coke think international for future growth.” Advertising Age, 3 October 1994: 44.

Murphy, Helen. “Cola war erupts in Mexico.” Corporate Finance, May 1993: 6-7.

Quelch, John A., Erich Joachimsthaler, and Jose Luis Nueno, “After the Wall: Marketing Guidelines for Eastern Europe.” Sloan Management Review, Winter 1991: 82-93.

Stevens, Clifford. “Soft drink wars: Pepsi vs. Coke.” Central European, July/August 1993: 29-35.

“A Red Line in the Sand. “The Economist, 1 October 1994:86.

“Coke v Pepsi.” The Economist, 29 January 1994: 67-8.

“Selling in Russia: The march on Moscow.” The Economist, 10 March 1995: 65-6.

Http://www.pepsico.com

Http://www.cocacola.com

Http://www.nsda.org (National Soft Drink Association)

Http://www.economist.com

Http://www.mcspotlight.org

Http://www.newstimes.com