Cola Wars Continue: Coke and Pepsi in the Twenty-First Century Case Solution

1. Why was it that the concentrate producers have been so profitable?

Concentrate producers do not have to face high capital or labor costs. Therefore, out of the revenue that they generate, the costs that they pay are relatively low; therefore, they earn higher profits. Moreover, the major costs that they face include the cost of the advertising, market research, as well as, promotion. Concentrate producers benefited because they did not have to pay for all these costs. Usually, a part of the costs were paid by the producers and bottlers. Therefore, the costs, luckily, for this industry were lower, and the profits were usually high.

2. Compare the profitability of the concentrate industry to the bottling industry -- why is the profitability so different?

The profitability of the concentrate industry to the bottling industry in terms of profits varies drastically. The foremost reason is that the initial costs of the two industries are also very different. For an industry to prosper, the initial costs are usually very essential. Concentrate industry requires less capital investment, as well as, labor investment. When it comes to producing and blending raw materials together, the costs incurred are very less. On the other hand, the bottling industry has to incur large costs, both in setting up a plant and in the process of bottling soft drinks. Therefore, the revenue that they generate is very less at margin. One reason for this is that most of the costs that the bottling industry has to incur are the cost of packaging. This cost comprises of half of all the cost of sales that the bottling industry incurs. On the other hand, for the concentrate industry, the cost of packaging is only one third of the costs of sales. This shows that the overall costs that the concentrate industry faces are less than that of the bottling industry.

3. What is happening in the soft drink industry? What are the challenges facing the industry?

The soft drink industry went to a drastic growth, where the cola segment of the industry, saw increasing demand as compared to all the other segments. Despite the fact that the leading giants of the soft drink industry i.e. Coke and Pepsi happily accept the fact that their growth and development depends mainly on the challenge that the rival company forth, the reality is different. This is because the soft drink industry has faced a setback recently. This has to do with the deteriorating financial situation in most parts of the world.

Due to the financial crisis that had hit the world and had affected the demand of various goods and services, the soft drink industry leaders, Coke and Pepsi reacted to this crisis by agreeing to reduce prices in order to boost the demand of their products. However, soon enough, when the market showed improvement, a price war was seen to take place in the soft drink industry. This was a major challenge that the industry faced because the severity of the price war was such that both Coke and Pepsi had to lower prices to such an extent that they were willingly bidding farewell to profits that the companies could have earned had they not engaged in this cut throat price competition.

The soft drink industry has another challenge which is in the form of other beverages, and in order to establish their place in the market more firmly, Coke and Pepsi fought to be the market leader in these new markets, as well.

4. Why was the Pepsi Challenge so successful? How would you evaluate Coke's response?

Coke enjoyed a considerable market share, and after the Pepsi Challenge, its response can be justified in a number of ways. The Pepsi Challenge was an attempt by Pepsi to increase the demand of Pepsi among the consumers. The challenge first took place in Texas, and it started off with a local bottler proving via blind taste tests that the consumers actually enjoyed the taste of Pepsi more as compared to the taste of Coke. This made Pepsi confident about the taste that it was selling, and it decided to take the challenge to another level and introduced the Pepsi Challenge throughout the nation. With the challenge taking place nationwide and customers taking the challenge and mostly admitting that Pepsi did taste better in the blind taste test, Coke had to react instantly in order to save its position.

Coke’s reaction of a price war, as well as, advertisements was focused on ridiculing Pepsi’s motives and challenging the validity of the whole blind taste test idea. However, this time Pepsi was taking the lead and the Pepsi Challenge was successful. Coke lost part of its market share and Pepsi took the lead in sale. The challenge was successful because it focused on the customers and customers always enjoy personal attention, as well as, challenges. However, Coke’s response to retaliate was necessary to a certain extent to keep the competition going on.

5. What should Coke and Pepsi do next?

The first thing that Coke and Pepsi need to do is to realize that they are not alone in the market and that the soft drink industry is now full of other competitors as well who can take the lead if these giants are not careful in the market. Usually, the existing firm makes use of a price war in order to drive the new firms out of competition. If Coke and Pepsi continue with the competition with each other, these new firms might sell their products at a lower price, which will lead to loss in the soft drink industry market because of the price war that will pursue. This is why Coke and Pepsi should now innovate for the sake of maintaining their market share and not indulge in price wars that will only result in losses.