Case | HBS Case Collection | March 1991 (Revised October 1994)
Coca-Cola vs. Pepsi-Cola and the Soft Drink Industry
by Michael E. Porter
Describes the competition between Coca-Cola and Pepsi-Cola. Provides a summary of the history of the soft drink industry prior to World War II, and over the period 1950-1990 in greater detail. Major strategic competitive moves and countermoves are described. Also profiles industry developments, including the Pepsi Challenge, the reformulation of Coca-Cola, and the consolidation of the bottler network. Provides a teaching vehicle for analysis of competitors and strategic rivalry. An updated and revised version of an earlier case.
Keywords: Competition; Industry Growth; Business Strategy; Food and Beverage Industry;
The Coca-Cola Company (NYSE: KO) is a global leader in the beverage industry that offers hundreds of brands, including soft drinks, fruit juices, sports drinks and other beverages. It found initial success and was made famous by the soft drink for which the company is named. The company is based in Atlanta, Georgia.
Due to the highly competitive nature of the beverage industry, large brands such as Coca-Cola are required to make large spends on multi-channel advertising campaigns. This means that if Coca-Cola does not consistently advertise, it will lose market share to other large competitors, such as PepsiCo, Inc. (NYSE: PEP).
This has caused an advertising arms race of sorts, where large brands in the beverage industry try to outspend competitors in an attempt to solidify and then gain market share. When the market share is relatively even among the top competitors, advertising in the beverage industry is used as a tool to stop from backsliding.
Coca-Cola's Commitment to Advertising Spending
Due to the nature of the Industry, Coca-Cola has made a yearly commitment to large ad spends, spending a total $3.499 billion in 2014, $3.266 billion in 2013 and $3.342 billion in 2012.
Coca-Cola's advertising spend accounted for 6.9% in total revenue for each year from 2012 to 2014. At the end of the year in 2014, Coca-Cola was the largest advertiser in the beverage industry.
This large advertising spending has allowed Coca-Cola to gain a competitive advantage in key areas. Its advertising spending and strategy has helped it successfully introduce new products into the marketplace, increase brand awareness and brand equity among consumers, increase the knowledge and education of consumers, and increase overall sales.
Comparison to Competitors in the Beverage Industry
Coca-Cola has blown away much of its competition in terms of advertising spending over the past three years.
In comparison to Coca-Cola's yearly spending, PepsiCo spent $2.3 billion in 2014, $2.4 billion in 2013 and $2.2 billion in 2012. The third competitor in the industry, Dr. Pepper Snapple Group, Inc. (NYSE: DPS), the owner of the popular drinks Dr. Pepper and Snapple, spent $473 million in 2014, $486 million in 2013 and $481 million in 2012.
Through the first quarter of 2015, Coca-Cola remains the number one ad spender in the beverage industry. In fact, when broken out by brand, Coca-Cola accounts for the top three in ad spending, and four out of the top five.
The top 10 brands by ad spending in the beverage industry for the first quarter of 2015 are Coca-Cola, Diet Coke, Coca-Cola Zero, Pepsi, Coca-Cola Life, 7Up, Fanta, Irn-Bru, Old Jamaica and Fentimans. All of the first quarter 2015 beverage data is compiled by The Grocer, a U.K.-based food and beverage industry resource.
Comparison to Leading Alcohol Companies
Similar to the beverage industry, leading breweries such as Anheuser-Busch have also found a direct correlation with advertising spend and market share. Although ad spending has a direct correlation to market share, it actually doesn't increase the size of the overall market.
For example, if a consumer has already made a decision to purchase beer, his brand preference can be influenced by advertising. Ad spending in the alcohol industry, similar to ad spending in the beverage industry in which Coca-Cola operates, does not induce consumers to purchase a soda or beer if they had not already wanted to purchase one.
This supports the importance of ad spending in the beverage industry, where brands need to outspend competitors' brands so that consumers who already are looking for a soda are induced to purchase a Coke over a Pepsi.
Ad spending in both the alcohol industry and the beverage industry does not influence the purchasing decisions of consumers who aren't already participants in those industries.