COLA WARS: COKE AND PEPSI

Arnav Singh()
Nagadevi
Abhinaya (80)
Karthik
Kannan()

ECONOMIES OF THE U.S. CSD INDUSTRY

The production and distribution of the CSDs (Carbonated soft drink) involved four
major participants:
1.
2.
3.
4.

Concentrate producers
Bottlers
Retail channels
Suppliers

Concentrate Producers: The concentrate producers blended raw materials

ingredients, packaged the mixture in plastic canisters, and shipped those containers
to the bottler. A concentrate producers most significant costs were for advertising,
promotion, market research, and bottler support.
They took charge of negotiating customer development agreements (CDAs) with
nationwide retailers like Wal-Mart. Under a CDA, coke or pepsi offered funds for
marketing and other purposes in exchange of shelf space. Bottlers paid an agreed
upon percentage typically 50% or more of promotional and advertising costs.
Major players: Coke, Pepsi, Dr Pepper Snapple group, Cott Corporation.
Bottlers: Bottlers purchased concentrate, added carbonated water and high
fructose corn syrup, bottled or canned the resulting CSD product, and delivered it to
consumer accounts. Co-operative merchandising agreements, in which retailers
agreed to specific promotional activityand discount levels in exchange for a
payment from a bottler were key ingredient of soft drink sales.
The main cost to bottlers were concentrate and syrup and other expenses included
packaging ,labor and overhead.
Agreements:
Coke was the first concentrate producer to build a nation-wise franchised bottling
network, and pepsi and DPS followed suit.

Original Coca-cola Franchise agreement 1899 Fixed price contract that did
not provide for renegotiation, even if ingredient costs changed.
Contract amended in 1921, 1978 and 1987.
1987 master bottler contract granted coke the right to determine
conecentrate price and other terms of sale. No legal obligation to assist
bottlers with advertising and marketing.

Difference between Master bottler contract of coke and pepsi

Coke
No complete pricing control but used a
formula that established a maximum
price.

Pepsi
Granted the bottler the perpetual rights
to distribute pepsis CSDs but required it
to purchase raw materials from pepsi at
prices and on terms and conditions
determined by pepsi.

Adjusted prices quarterly according to

changes in sweetener pricing.

Pepsi based price increases on

CPI(Consumer price index).

From Exhibit 5 its clear that the concentrate prices increased by 3.6%
more than the increase in CPI of 2.9% during 1988-2009.
Advantages to Bottlers

Franchise agreements with coke and Pepsi allowed bottlers to handle noncola brands of other concentrate producers.
Bottlers could chose whether to market new beverages introduced by
concentrate producer.
Bottlers could not carry direct competing brands, however.
Bottlers had final say in decisions about retail pricing, participating in test
marketing efforts, local advertising campaigns and promotions etc.

1980- Congress enacted the soft drink Interbrand Competition Act,

which preserved right of concentrate makers to grant exclusive territories.