Cola Wars

Stephen Brennan

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Accounting II

Tue/Thur. 3-4:30

The Wall Street Journal recently did an article on how the soft-drink

battleground has now turned toward new overseas markets. While once the United

States, Australia, Japan, and Western Europe were the dominant soft-drink

markets, the growth has slowed down dramatically, but they are still important

markets for Coca-Cola and Pepsi. However, Eastern Europe, Mexico, China, Saudi

Arabia, and India have become the new "hot spots." Both Coca-Cola and Pepsi are

forming joint bottling ventures in these nations and in other areas where they

see growth potential. As we have seen, international marketing can be very

complex. Many issues have to be resolved before a company can even consider

entering uncharted foreign waters. This becomes very evident as one begins to

study the international cola wars. The domestic cola war between Coca-Cola and

Pepsi is still raging. However, the two soft-drink giants also recognize that

opportunities for growth in many of the mature markets have slowed. Both Coca-

Cola, which sold 10 billion cases of soft-drinks in 1992, and Pepsi now find

themselves asking, "Where will sales of the next 10 billion cases come from?"

The answer lies in the developing world, where income levels and appetites for

Western products are at an all time high.

Often, the company that gets into a foreign market first usually dominates that

country's market. Coke patriarch Robert Woodruff realized this 50 years ago and

unleashed a brilliant ploy to make Coke the early bird in many of the major

foreign markets. At the height of World War II, Woodruff proclaimed that

Awherever American boys were fighting, they'd be able to get a Coke. By the time

Pepsi tried to make its first international pitch in the 50s, Coke had already

established its brand name and a powerful distribution network.

In the intervening 40 years, many new markets have emerged. In order to profit

from these markets, both Coke and Pepsi need to find ways to cut through all of

the red tape that initially prevents them from conducting business in these

markets. This paper seeks to examine these markets and the opportunities and

roadblocks that lie within each.

In 1972, Pepsi signed an agreement with the Soviet Union which made it the first

Western product to be sold to consumers in Russia. This was a landmark

agreement and gave Pepsi the first-mover advantage. Presently, Pepsi has 23

plants in the former Soviet Union and is the leader in the soft-drink industry

in Russia. Pepsi outsells Coca-Cola by 6 to 1 and is seen as a local brand.

Also, Pepsi must counter trade its concentrate with Russia's Stolichnaya vodka

since rubles are not tradable on the world market. However, Pepsi has also had

some problems. There has not been an increase in brand loyalty for Pepsi since

its advertising blitz in Russia, even though it has produced commercials

tailored to the Russian market and has sponsored television concerts. On the

positive side, Pepsi may be leading Coca-Cola due to the big difference in price

between the two colas. While Pepsi sells for Rb250 (25 cents), Coca-Cola sells

for Rb450. For the economy size, Pepsi sells 2 liters for Rb1,300, but Coca-

Cola sells 1.5 liters for Rb1,800. Coca-Cola, on the other hand, only moved into

Russia 2 years ago and is manufactured locally in Moscow and St. Petersburg

under a license. Despite investing $85 million in these two bottling plants,

they do not perceive Coca-Cola as a premium brand in the Russian market.

Moreover, they see it as a "foreign" brand in Russia. Lastly, while Coca-Cola's

bottle and label give it a high-class image, it is unable to capture market

share.

Romania is the second largest central European market after Poland, and this

makes it a hot battleground for Coca-Cola and Pepsi. When Pepsi established a

bottling plant in Romania in 1965, it became the first U.S. product produced and

sold in the region. Pepsi began producing locally during the communist period

and has recently decided to reorganize and retrain its local staff. Pepsi

entered into a joint venture with a local firm, Flora and Quadrant, for its

Bucharest plant, and has 5 other factories in Romania. Quadrant leases Pepsi

the equipment and handles Pepsi's distribution. In addition, Pepsi bought 500

Romanian trucks which are also used for distribution in other countries.

Moreover, Pepsi produces its bottles locally through an investment in the glass

industry. While the price of Pepsi and Coca-Cola are the same (@15

cents/bottle), some consumers drink Pepsi because Pepsi sent Michael Jackson to

Romania for a concert. Another reason for drinking Pepsi is that it is slightly

sweeter than Coca-Cola and is more suited for the sweet-toothed Romanians.

Lastly, some drink Pepsi because, in the past, only top officials were allowed

to drink it, but now everyone can. Coca-Cola only began producing locally in

November 1991, but it is outselling all of its competitors. In 1992, Coca-Cola

saw an increase in Romania of sales by 99.2% and outsold Pepsi by 6 to 5. While

Pepsi preferred to buy its equipment from Romania, Coca-Cola preferred to bring

equipment into Romania. Also, Coca-Cola brought 2 bottlers to Romania. One is

the Leventis Group, which is privately owned. Coca-Cola has invested almost

$25 million into 2 factories. These factories are double the size of the

factory Pepsi has in Bucharest. Moreover, Coca-Cola has a partnership with a

local company, Ci-Co, in Bucharest and Brasov. Ci-Co has planned an aggressive

publicity campaign and has sponsored local sporting and cultural events. Lastly,

Romanians drink Coke because it is a powerful western symbol which was once

forbidden.

Both Coca-Cola and Pepsi are trying to have their colas available in as many

locations in Eastern Europe, but at a cost which consumers would be willing to

pay. The concepts which are becoming more important in Eastern Europe include

color, product attractiveness visibility, and display quality. In addition,

availability (meeting local demand by increasing production locally),

acceptability (building brand equity), and afford ability (pricing higher than

local brands, but adapting to local conditions) are the key factors for Eastern

Europe. Both companies hope that their western images and brand products will

help to boost their sales. Coca-Cola has a universal message and campaign since

it feels that Eastern Europe is part of the world and should not be treated

differently. Currently, it is difficult to say who is winning the cola wars

since the data from the relatively new market research firms focusses on major

cities. Pepsi had a commanding 4 to 1 lead in 1992 in the former Soviet Union.

Without this area, Coca-Cola has a 17% share versus Pepsi's 12% share in the

soft drink industry. While both companies have been in Eastern Europe for many

years, the main task now is to develop the market.