Soft Drink Industry Essay, Research Paper
The Soft Drink Industry When there is industry there is competition. The bigger the player, the harder they can play. The big players always try to consume many of the small competitors. When they do this they can expand their market share. A perfect example of this is the soft drink industry; Pepsi and Coke have always been archrivals. They are always trying to gain market share, by absorbing many smaller beverage companies to appeal to the public. This paper will discuss the history between these two industry giants and how they financially stand at this point, plus how supply and demand effects this industry. Coca Cola was invented by an Atlanta pharmacist John Pemberton in 1886. His bookkeeper, Frank Robinson, named the product after two ingredients, coca leaves and Kola Nuts. By 1895 the product was available in all 50 states. By 1916 the Company was sold twice, had over 1000 bottlers, and was publicly traded (Dow Jones, Coke). During World War II, the president of Coke Woodruff said, “every soldier will have access to a 5 cent bottle of coke”(Dow Jones, Coke). The company received government aid to build 64 overseas bottling plants during that time. This is how Coke began its ties with many foreign markets. Caleb Bradham, a Pharmacist from North Carolina, invented Pepsi. He Called it Pepsi Cola because, he claimed it cured Dyspepsia or more commonly known as indigestion. He registered the trademark in 1903. Pepsi tried to follow the same root as Coke by signing up bottlers, by 1923 Pepsi was on its last leg until Loft Candy Company bought it in 1931. It increased its bottle size but kept its 5-cent price. In 1939 it introduced its first radio jingle (Dow Jones, Pepsi). Pepsi had a rough start compared to Coke, and always tried to rise out of the shadow of this industry giant. “According to Coca-Cola Company, the two most famous expressions in the world are ok and Coca-Cola” (Dow Jones, Coke). The world’s largest soft drink Company, Coke has more than 160 brands of beverages including carbonated, sports, and milk based drinks, as well as Juices, teas, and, coffees. These products are sold in almost 200 countries (Dow Jones, Coke). “Coca Cola has two of the three top selling soft drinks (#1Coca Cola classic and #3 Diet Coke, #2 is Pepsi Cola) and 44% of the U.S. market share. Sprite is the US’s fastest growing major soft drink and Coke classic is king with a 20% share of the market” (Dow Jones, Coke). The way these two giants battle is by trying to pull consumers back and forth between them by releasing new products. Brand Identity is a very strong force in this industry; it takes a long time to develop brand recognition and customer loyalty. Good recognition is opportunity for market share growth. In 1964 Pepsi Acquired Mountain Dew as a new product to attract more consumers. On April 23,1985 Pepsi blew its own horn by stating they won the Cola War. Pepsi felt they won the war because Coke changed its original formula to be more like their drink. Roger Enrico President of Pepsi Said, “It gives me great pleasure to offer Each of you my heartiest congratulations. After 87 years of going eyeball To eyeball, the other guy just blinked. Coca-Cola is withdrawing their product From the market place, and is reformulating Coke to more like Pepsi”(Enrico, 200). The whole Cola war started on Nov 11, 1983 when Coke held a taste test and Pepsi won. This began a huge ad war; the two companies had some real heat going. They had to out do one another. They came out with catchy jingles and celebrities to indorse their products. Coke figured changing the formula would give them a new edge on the war with something new and exciting. Changing the original formula was a huge mistake by Coke because, number one, Pepsi said Coke did this to make their product more like Pepsi. Number 2; new the Coke was not welcomed with open arms by the public. This was a change and it scared the public, because they felt it was a different product and there was no consumer loyalty to it. Coke recognized this very quickly and reintroduced Coca-Cola classic, the original recipe. In 1990 coke introduced PowerAde, to enter the rapidly growing sports drink market, and them introduced Fruitopia in 1994. In 1995 coke acquired Barq’s, a root beer Maker. All these new brands were acquired after the so-called war was over. In this Industry there will always be competition, the war was always there, and it just had a couple of more logs on the fire. One of the biggest mistakes Pepsi ever made was in 1983, when they ignored the pleas by nutrasweet for them to buy their newly approved aspartame sweetener to use in Diet Pepsi. Coca-Cola beat Pepsi to the punch and organized a deal with nutrasweet. This left Pepsi up in the air, while diet Coke pushed their new and better tasting product and gaining market share. After this happened Mr. Enrico Said, “I vow that I will never hang back like that again” (Deogun). Earlier this year Coke made a proposal to purchase the European based Orangina. This proposal would help coke capture more than 50% of the French soft drink market. This was help Coca-Cola be the dominant force in the beverage market in Europe. Coca-Cola was prepared to pay Orangina 840 Million dollars, which surprised Wall Street. Pepsi immediately tried to prevent this from happening, they said this was against American anti-trust laws. This is because Coca-Cola would be creating a Monopoly. This Proposal was shot down the French government. On July 20, Pepsi announced that they would be purchasing Tropicana juice business from the Seagram’s company for 3.3 billion dollars. Tropicana dominates the American chilled orange juice market, holding 42 percent of the market share. They did this to gain positioning in the orange juice market, They will now double the amount a market share captured by Minute Maid. Minute Maid who is owned by the Coca-Cola only holds 19 percent of the market (hays). Tropicana pure premium has made investment overseas, they purchased orange groves in places like China to help them better improve their market position. Andrew Conway an analyst for Morgan Stanley said, “Pepsi is getting very powerful brand equity in a growing category” (Hays). Tropicana has a hold on the not from concentrate business. This means that the company packages the orange juice with out concentrating it. Minute Maid abandoned this and went to concentrate last year (Hays). Coke was worried that they might lose market share because of this move, but it is a cheaper way to produce orange juice. President of Minute Maid Ralph H. Cooper said, “We want to own breakfast everyday, we want to own the lunch box everyday, and own the point of purchase everyday” (Hays). There is still a very competitive attitude between these industry giants. Pepsi has also taken aim at coke with a new drink. This drink is called Pepsi One; the drink using a new sugar substitute contains one calorie. The substitute is supposed to taste more like a real sugar drink. After only one hour of the approval of the new substitute Sulfame Potassium, Pepsi announced that it was releasing a new drink. This was a big risk for Pepsi since so many people are now drinking bottled water instead of soda. Pepsi One hit store shelves on Oct. 17, with a 100 million-dollar launch. The battle plan to push the new beverage is to avoid the word diet in the add campaigns and on the can. Heavily target the middle aged mail population, hoping they accept the new product. Acquire a celebrity as spokesperson, Cuba Gooding Jr. is the pitchman for the Pepsi One commercials. Have a catchy slogan, Only one has it all. Pepsi is predicting to earn one billion dollars in annual sales (Deogun). Coke is a larger corporation than Pepsi and it always has been, but we the public do not realize this. Coke has so many more overseas holding than Pepsi does, in some foreign market they have over 75% of the market share. This in the last two quarters, being such an overseas company has financially hurt them. There is an economic crisis effecting Asia, Russia, and Latin America, which has had a devastating effect on sales. Coke is now beginning to question if they are going to be able to be profitable abroad. Coke called an analyst meeting on September 22 to look at their position, the analyst predict earnings to drop. The price of a share has fallen from July high of $88.93 to $58 and lower. Last year Coke earned two thirds of its profits from overseas. The only upper hand Coke has overseas is they can withstand a hit longer than their smaller foreign competitors, so it can help them create market share. Coke has proven itself many times in that they can operate their business to be profitable in economic hard times. Coca-Colas chairman M. Douglas Ivester said, “we will strengthen our system through this difficult time and make the right decisions for the long term”(Deogun). Cokes main worries overseas are Japan and Germany. Japan is suffering one of its worst economic declines; Japan accounts for 17% of Coke’s profits. Germany accounts for about 9% of Cokes earning, so this is also a very sensitive area. Coke game plan to compete with this economic slump would be cutting prices in many markets and increasing marketing in others. The last two quarters have been a rocky road for Coke; their net income fell 12%, While Pepsi’s profit rose 38% in the third Quarter. Pepsi is protected of foreign economic troubles because they only receive 15% of profits from abroad; Coke receives more than that from Japan alone. Pepsi is also profiting more from their new products (Deogun). The soda industry revenue average is up 2.2% from last Quarter, Pepsi is Up 3.4% and Coke is down 4.2%. On the flip side, in share holdings, Coke holds $170,092,000 in market value, and Pepsi has only $58,210,000 (Dow Jones,Pepsi&Coke). Even though Coke earnings are dropping it is not scaring away investors, last weeks shares traded were 13,192,700 and, Pepsi traded 23,332,900 shares. Coke almost doubled Pepsi’s net income in the last fiscal year. Pepsi with an income of 2,142.0 million up almost 1,000.0 million since last year was not comparable to Coke’s net income of 4,129.0 million, but Pepsi’s growth rate was greater than Cokes(Dow Jones, Pepsi&Coke). Supply and demand can tie into how these companies are performing. Pricing strategies and advertisements mostly effects this out come. Coke overseas is having a hard times because due to economic factors demand is down. So supply is large and they are forced to drum up business by dropping prices to get rid of the excess supply. Soft drinks are especially sensitive to supplies; they are produced with harvested crops. Orange Juice for example needs oranges to be made. If the product is hit by a bad harvest of oranges than the supply of juice drops dramatically. This creates a demand and allows the producer to charge a lot more for it. This industry also takes place in price wars to win market share, lowing the price creates an increase in demand and an increase in supply needed. This is because the lower the price more beverages are sold and that means more demand is put on producers. This is odd because producers would prefer to sell their products at a high price and produce less when the retail price is lower. Business without competition would not offer the public a fair price, because monopolies would become dominate. If there was only one company than they could set a price and people would not have a choice but to pay that price to buy their product.