ADVANCED CORPORATE STRATEGY ASSIGNMENT II COKE VS PEPSI IN BOTTLED WATER INDUSTRY

SUBMITTED BY
S.MADHULA ROLL NO: 52 IIM RAIPUR

1. Is it possible for Coke and Pepsi to repeat their success with CSDs in the water segment? At present the million dollar question in the bottled water industry is whether bottled water will be a commodity business marked by cutthroat prices, or a category where brands can command premium treatment and shopper loyalty. And the same question has left coke and Pepsi puzzled about what to do next in the bottled water industry where their similar cola marketing strategies have started failing. It was all green in the bottled water industry three years ago, as sales were rising constantly. The mergers and acquisitions reflected it. In 2007, Coca-Cola Co. pumped a $4.1 billion to buy a huge maker of Vitamin water. It was Coca-Colas largest purchase ever. Things are much less exciting now for Coca-Cola and PepsiCo. The rivals are now facing problems in the bottled water industry similar to what they faced in the CSDs a decade ago. But this time the impact will be different and hence they cant use similar strategies which they follow for CSDs as the products by nature are different. This became evident during recession when economic uncertainty caused customers to cut their spending by shifting to low priced local bottlers. According to Beverage Digest, sales of Coca-Colas Dasani brand were down by 22 percent in the first nine months of 2009 and PepsiCos Aquafina fell 9 percent. This shows that customers are not brand loyal in the case of bottled water. Both Dasani and Aquafina are strong brands, yet theres been a migration to cheaper waters and tap water. Now lets see the market structure and forces of CSDs and analyze whether Coke and Pepsi can use similar in to the bottled industry to regain the lost market share.

Porters five forces model for carbonated soft drinks industry

Barriers to entry - high Exclusive territories Consolidated Industry Substantial investment Market performance Fear of retaliation

Power of Suppliers Low Sugar& Packaging facility Weak as only basic commodity ingredients are required

Rivalryhigh Coke Pepsi Cadbury

Power of buyers high Super markets Vending machines

Threat of substitutes high Healthy non-carbonated drinks, water

The porters five forces analysis shows that the industry is already consolidated and structured by these two big players Coke and Pepsi and it is them who have been controlling and structuring it over the years. Thus for a new entrant this industry will not be an easy cake and will cost him a lot to enter and survive. Next let us do the SWOT analysis for coke and Pepsi separately and from which we can derive the driving forces and strengths which helped them to survive the cola wars under various circumstances.

Pepsi Co (SWOT Analysis) Strengths High profile global presence Worlds 2nd best selling soft drink brand Constant product innovation Aggressive marketing strategies Versatile and broad product portfolio

Weaknesses Carbonated soft drink market is declining Only target young people (Pepsi-Youngistan campaign) Opportunities Increased customer concern regarding drinking water (bottled water) Growth in healthier beverages Growth in Asian beverages Growth in functional drink industry

Threats Obesity & health concern Coca Cola increases spending on marketing and innovation Relying only on North America is bad Coca Cola (SWOT Analysis) Strengths High profile global presence Has 4 of top 5 leading brands Broad based bottling strategy 47% of global volume sales in Carbonates

Weaknesses Carbonated soft drink market is declining Over complexity of relationships with bottlers in North America

Opportunities Soft drink volume in the Asia Pacific region forecast to increase by over 45% Wise & Health concerned positioning of brands like Minute Maid & Minute Light. Threats Use distribution strengths in Eastern Europe & Latin America. Obesity & health concern Tropicana & Aquafina from Pepsi Protest in India Negative publicity by Pepsi.

Initially the common strengths of greater distribution networks and aggressive marketing strategies helped both Coke and Pepsi in the bottled water industry too. They made high profits with very high year on year growth rate in the global market share in the bottled water industry in the first eight years from 1998 to 2006. Porters five forces analysis for bottled water industry

Barriers to entry - High Any one who can afford to offer product at low price can enter High market attraction due to very high profits and less cost of production

Power of Suppliers Low (due to availability of numerous suppliers) Manufactures of PET and HDPE bottles Municipal water system Filteration equipment manufacturers

CompetitionFierce Nestle, Pepsi co and Coke are the major players

Power of buyers - Average Highly elastic product hence consumers will change brand according to pricebut will not leave as water is a basic product & hence average buyer power

Threat of substitutes high Healthy substitutes like flavoured water, non calorie, vitamin added water etc

SWOT analysis for bottled water industry

Strength

The lifestyle of people is changing and demand is increasing day by day Convenience purity and portability

Weakness

Lack of awarness in remote area Poverty

People are becoming more health consicous Opportunities

Threats

Low entry barrier Prone to economic uncertainity like recession

Major challenges faced by bottled water industry: a. Increased notion that it is not economical to buy branded water bottles compared to low price local labels. b. Environmental pollution as 75% of the bottles used are unrecyclable. c. Bromate contamination of Dasani water, owned by Coca-Cola. d. Pepsi admitting that their use of normal tap water due to the pressure created by advocacy group Corporate Accountability International e. Think outside the bottle campaign against bottled water industry.

Strategies used by the major players in bottled water industry:

Nestle
Lost cost leader Positioning by purchasing regional brands & water producers or thru joint ventures Innovation in providing different varities and even packaging

Pepsi Co
Aggresive marketing and distribution strategy Lesser carbon footprint initiatives

Coke
Vast global distribution systems Three tier pricing strategy - lower mid and premium dasani brands

Pepsi co and coke used aggressive marketing and distribution strategies to retain their shares during the cola wars. But similar strategies alone will not help them to succeed in bottled water industry because a. The product has been perceived as a commodity product my majority of the customers where the big players fail to gain brand loyalty. b. External factor disturbance is very high. (ex: Environmental and Economic impact ) Thus Pepsi and coke has to come up with new strategies to succeed in the bottled industry as the product is different, challenges are different and the entire market forces are different. 2. Will a new competitive dynamics emerge in the bottled water industry? As previously stated Coke and Pepsi should come up with new strategies to succeed in the bottled water industry. This will surely give rise to a new competitive dynamics as the opportunities available in this industry are ample. Before getting in to the competitive dynamics lets analyze the current state of coke and pepsi in bottled water industry with respect to its competitors.

According to Beverage Digest, sales of Coca-Colas Dasani brand were down by 22 percent in the first nine months of 2009 and PepsiCos Aquafina fell 9 percent. But correspondingly there was an increase in market share of low prize local labels and nestle in many places globally. This shows the highly price sensitive nature of the product. Competitive Dynamics: 1. Though there are threats like low entry barrier and economic uncertainties, coke and Pepsi should look into other opportunities available in the industry and should re position themselves through different marketing strategies or through innovative product introductions through mergers and acquisitions 2. To grow Dasani and Aquafina again, Coke and Pepsi also have to shrink the price gap between their brands and private label water. New Opportunities: Market reports predict that over the next four years sales of bottle water will grow most quickly in Asia and Latin America due to 'the poor quality of potable water' in many countries. Africa is also highlighted as a having strong potential for bottled water sales due to unsafe drinking water. In addition to limited access to clean tap water, reports mention the rising number of people with disposable incomes as a driver for growth in the industry. Thus Coke and Pepsi should roll out and capture these markets by acquiring the regional players over there. This will help them to increase their sales volume globally and also to regain their lost market share. Other than this they should involve in product innovation and differentiation in introducing different tastes (flavored), introducing new vitamins etc Bottled water market is one of the fastest growing and competitive industries in asian countries. Retail/Off trade market accounts for majority of the bottled water market while institutional sales make up for the rest Market comprises of two segments: a. Packaged drinking water: Water from any source, which is treated for consumption b. Natural Mineral water: Drawn from a natural underground source Packaged water shows greater penetration with greater sale values and market for natural mineral water is still nascent. Basically consumption varies across regions and is primarily linked to the level of prosperity.

Drivers and challenges in the Asian markets: Drivers: 1. 2. 3. 4. 5. 6. 7. Rise in income and consumption Sound economics and high profitability Water shortage and low bottled water consumption Increasing consumer awareness in health issues Increase in water borne diseases Government laws supporting ground water exploitation Growth in foreign visitors

Challenges: 1. 2. 3. 4. 5. Inefficient transport infrastructure Low entry barrier Threat from public campaigns Brand and category differentiation Increasing use of water purifiers

Thus since the drivers over weigh the challenges, Coke and Pepsi have a very good opportunity to capture greater market share in these regions using their traditional aggressive marketing and distribution strategies combined with new innovation and differentiation strategies.