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Consider your findings in the first Week 2 Discussion Question




Consider your findings in the first Week 2 Discussion Question regarding those resources that you indentified as most important to Coca-Cola for gaining a competitive advantage, and those that should be invested or disinvested. Identify differences between them from a resource perspective and the industry analysis/positioning perspective. How do you think the identified key resources support and/or contradict the suggestions you made for Coca-Cola in week 1?;Attachment Preview;cola wars continue.pdf;9-706-447;REV: APRIL 16, 2009;DAVID B. YOFFIE;Cola Wars Continue: Coke and Pepsi in 2006;For more than a century, Coca-Cola and Pepsi-Cola vied for throat share of the worlds;beverage market. The most intense battles in the so-called cola wars were fought over the $66 billion;carbonated soft drink (CSD) industry in the United States.1 In a carefully waged competitive;struggle that lasted from 1975 through the mid-1990s, both Coke and Pepsi achieved average annual;revenue growth of around 10%, as both U.S. and worldwide CSD consumption rose steadily year;after year.2 According to Roger Enrico, former CEO of Pepsi;The warfare must be perceived as a continuing battle without blood. Without Coke, Pepsi;would have a tough time being an original and lively competitor. The more successful they are;the sharper we have to be. If the Coca-Cola company didnt exist, wed pray for someone to;invent them. And on the other side of the fence, Im sure the folks at Coke would say that;nothing contributes as much to the present-day success of the Coca-Cola company than...;Pepsi.3;That cozy relationship began to fray in the late 1990s, however, as U.S. per-capita CSD;consumption declined slightly before reaching what appeared to be a plateau. In 2004, the average;American drank a little more than 52 gallons of CSDs per year. At the same time, the two companies;experienced their own distinct ups and downs, as Coke suffered several operational setbacks and as;Pepsi charted a new, aggressive course in alternative beverages. Although their paths diverged;however, both companies began to modify their bottling, pricing, and brand strategies.;As the cola wars continued into the 21st century, Coke and Pepsi faced new challenges: Could;they boost flagging domestic CSD sales? Would newly popular beverages provide them with new;(and profitable) revenue streams? Was their era of sustained growth and profitability coming to a;close, or was this slowdown just another blip in the course of the cola giants long, enviable history?;Economics of the U.S. CSD Industry;Americans consumed 23 gallons of CSDs annually in 1970, and consumption grew by an average;of 3% per year over the next three decades. (See Exhibit 1U.S. Beverage Industry Consumption;Statistics.) Fueling this growth were the increasing availability of CSDs and the introduction of diet;and flavored varieties. Declining real (inflation-adjusted) prices played a large role as well.4 There;were many alternatives to CSDs, including beer, milk, coffee, bottled water, juices, tea, powdered;drinks, wine, sports drinks, distilled spirits, and tap water. Yet Americans drank more soda than any;Professor David B. Yoffie and Research Associate Yusi Wang prepared the original version of this case, Cola Wars Continue: Coke and Pepsi in;the Twenty-First Century, HBS No. 702-442, which derives from earlier cases by Professor David B. Yoffie (HBS No. 702-442 and 794-055) and;Professor Michael E. Porter (HBS No. 391-179). This version was prepared by Professor David B. Yoffie and Research Associate Michael Slind;from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements;sources of primary data, or illustrations of effective or ineffective management.;Copyright 2006, 2007, 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to No part of this publication may;be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical;photocopying, recording, or otherwisewithout the permission of Harvard Business School.;This document is authorized for use only in Liverpool Program by Faculty from February 2011 to August 2011.;706-447;Cola Wars Continue: Coke and Pepsi in 2006;other beverage. Within the CSD category, the cola segment maintained its dominance, although its;market share dropped from 71% in 1990 to 60% in 2004.5 Non-cola CSDs included lemon/lime, citrus;pepper-type, orange, root beer, and other flavors. CSDs consisted of a flavor base (called;concentrate), a sweetener, and carbonated water. The production and distribution of CSDs;involved four major participants: concentrate producers, bottlers, retail channels, and suppliers.6;Concentrate Producers;The concentrate producer blended raw material ingredients, packaged the mixture in plastic;canisters, and shipped those containers to the bottler. To make concentrate for diet CSDs, concentrate;makers often added artificial sweetener, with regular CSDs, bottlers added sugar or high-fructose;corn syrup themselves. The concentrate manufacturing process involved little capital investment in;machinery, overhead, or labor. A typical concentrate manufacturing plant cost about $25 million to;$50 million to build, and one plant could serve the entire United States.7;A concentrate producers most significant costs were for advertising, promotion, market research;and bottler support. Using innovative and sophisticated campaigns, they invested heavily in their;trademarks over time. While concentrate producers implemented and financed marketing programs;jointly with bottlers, they usually took the lead in developing those programs, particularly when it;came to product development, market research, and advertising. They also took charge of negotiating;customer development agreements (CDAs) with nationwide retailers such as Wal-Mart. Under a;CDA, Coke or Pepsi offered funds for marketing and other purposes in exchange for shelf space.;With smaller regional accounts, bottlers assumed a key role in developing such relationships, and;paid an agreed-upon percentagetypically 50% or moreof promotional and advertising costs.;Concentrate producers employed a large staff of people who worked with bottlers by supporting;sales efforts, setting standards, and suggesting operational improvements. They also negotiated;directly with their bottlers major suppliers (especially sweetener and packaging makers) to achieve;reliable supply, fast delivery, and low prices.8;Once a fragmented business that featured hundreds of local manufacturers, the U.S. soft drink;industry had changed dramatically over time. Among national concentrate producers, Coca-Cola and;Pepsi-Cola (the soft drink unit of PepsiCo) claimed a combined 74.8% of the U.S. CSD market in sales;volume in 2004, followed by Cadbury Schweppes and Cott Corporation. (See Exhibit 2U.S. Soft;Drink Market Share by Case Volume. See also Exhibit 3Financial Data for Coca-Cola, Pepsi-Cola;and Their Major Bottlers.) In addition, there were private-label manufacturers and several dozen;other national and regional producers.;Bottlers;Bottlers purchased concentrate, added carbonated water and high-fructose corn syrup, bottled or;canned the resulting CSD product, and delivered it to customer accounts. Coke and Pepsi bottlers;offered direct store door (DSD) delivery, an arrangement whereby route delivery salespeople;managed the CSD brand in stores by securing shelf space, stacking CSD products, positioning the;brands trademarked label, and setting up point-of-purchase or end-of-aisle displays. (Smaller;national brands, such as Shasta and Faygo, distributed through food store warehouses.) Cooperative;merchandising agreements, in which retailers agreed to specific promotional activity and discount;levels in exchange for a payment from a bottler, were another key ingredient of soft drink sales.;The bottling process was capital-intensive and involved high-speed production lines that were;interchangeable only for products of similar type and packages of similar size. Bottling and canning;2;This document is authorized for use only in Liverpool Program by Faculty from February 2011 to August 2011.;Cola Wars Continue: Coke and Pepsi in 2006;706-447;lines cost from $4 million to $10 million each, depending on volume and package type. In 2005, Cott;completed construction of a 40-million-case bottling plant in Fort Worth, Texas, at an estimated cost;of $40 million.9 But the cost of a large plant with four lines, automated warehousing, and a capacity of;40 million cases, could range as high as $75 million.10 While a handful of such plants could;theoretically provide enough capacity to serve the entire United States, Coke and Pepsi each required;close to 100 plants to provide effective nationwide distribution.11 For bottlers, packaging accounted;for 40% to 45% of the cost of sales, concentrate for roughly the same amount, and sweeteners for 5%;to 10%. Labor and overhead made up the remaining variable costs.12 Bottlers also invested capital in;trucks and distribution networks. Bottlers gross profits routinely exceeded 40%, but operating;margins were usually in the 7% to 9% range. (See Exhibit 4Comparative Costs of a Typical U.S.;Concentrate Bottler and Producer.);The number of U.S. soft drink bottlers had fallen steadily, from more than 2,000 in 1970 to fewer;than 300 in 2004.13 Coke was the first concentrate producer to build a nationwide franchised bottling;network, and Pepsi and Cadbury Schweppes followed suit. The typical franchised bottler owned a;manufacturing and sales operation in an exclusive geographic territory, with rights granted in;perpetuity by the franchiser. In the case of Coke, territorial rights did not extend to national fountain;accounts, which the company handled directly. The original Coca-Cola franchise agreement, written;in 1899, was a fixed-price contract that did not provide for renegotiation, even if ingredient costs;changed. After considerable negotiation, often accompanied by bitter legal disputes, Coca-Cola;amended the contract in 1921, 1978, and 1987. By 2003, more than 88% of Cokes U.S. volume was;covered by its 1987 Master Bottler Contract, which granted Coke the right to determine concentrate;price and other terms of sale.14 Under this contract, Coke had no legal obligation to assist bottlers;with advertising or marketing. Nonetheless, to ensure quality and to match Pepsi, Coke made huge;investments to support its bottling network.15 In 2002, for example, Coke contributed $600 million in;marketing support payments to its top bottler alone.16;The 1987 contract did not give complete pricing control to Coke, but rather used a formula that;established a maximum price and adjusted prices quarterly according to changes in sweetener;pricing. This contract differed from Pepsis Master Bottling Agreement with its top bottler. That;agreement granted the bottler perpetual rights to distribute Pepsis CSD products but required it to;purchase raw materials from Pepsi at prices, and on terms and conditions, determined by Pepsi.;Pepsi negotiated concentrate prices with its bottling association, and normally based price increases;on the consumer price index (CPI).17 From the 1980s to the early 2000s, concentrate makers regularly;raised concentrate prices, even as inflation-adjusted retail prices for CSD products trended;downward. (See Exhibit 5U.S. CSD Industry Pricing and Volume Statistics.);Franchise agreements with both Coke and Pepsi allowed bottlers to handle the non-cola brands of;other concentrate producers. These agreements also allowed bottlers to choose whether to market;new beverages introduced by a concentrate producer. Bottlers could not carry directly competing;brands, however. For example, a Coke bottler could not sell Royal Crown Cola, yet it could distribute;7UP if it chose not to carry Sprite. Franchised bottlers could decide whether to participate in test;marketing efforts, local advertising campaigns and promotions, and new package introductions;(although they could only use packages authorized by their franchiser). Bottlers also had the final say;in decisions about retail pricing.;In 1971, the Federal Trade Commission initiated action against eight major concentrate makers;charging that the granting of exclusive territories to bottlers prevented intrabrand competition (that;is, two or more bottlers competing in the same area with the same beverage). The concentrate makers;argued that interbrand competition was strong enough to warrant continuation of the existing;3;This document is authorized for use only in Liverpool Program by Faculty from February 2011 to August 2011.;706-447;Cola Wars Continue: Coke and Pepsi in 2006;territorial agreements. In 1980, after years of litigation, Congress enacted the Soft Drink Interbrand;Competition Act, which preserved the right of concentrate makers to grant exclusive territories.;Retail Channels;In 2004, the distribution of CSDs in the United States took place through supermarkets (32.9%);fountain outlets (23.4%), vending machines (14.5%), mass merchandisers (11.8%), convenience stores;and gas stations (7.9%), and other outlets (9.5%). Small grocery stores and drug chains made up most;of the latter category.18 Costs and profitability in each channel varied by delivery method and;frequency, drop size, advertising, and marketing. (See Exhibit 6U.S. Refreshment Beverages;Bottling Profitability Per Channel.);The main distribution channel for soft drinks was the supermarket, where annual CSD sales;reached $12.4 billion in 2004.19 CSDs accounted for 5.5% of the total edible grocery universe, and;were also a big traffic draw for supermarkets.20 Bottlers fought for shelf space to ensure visibility for;their products, and they looked for new ways to drive impulse purchases, such as placing coolers at;checkout counters. An ever-expanding array of products and packaging types created intense;competition for shelf space.;The mass merchandiser category included warehouse clubs and discount retailers, such as WalMart. These companies formed an increasingly important channel. Although they sold Coke and;Pepsi products, they (along with some drug chains) often had their own private-label CSD, or they;sold a generic label such as Presidents Choice. Private-label CSDs were usually delivered to a;retailers warehouse, while branded CSDs were delivered directly to stores. With the warehouse;delivery method, the retailer was responsible for storage, transportation, merchandising, and;stocking the shelves, thereby incurring additional costs.;Historically, Pepsi had focused on sales through retail outlets, while Coke had dominated;fountain sales. (The term fountain, which originally referred to drug store soda fountains, covered;restaurants, cafeterias, and any other outlet that served soft drinks by the glass using fountain-type;dispensers.) Competition for national fountain accounts was intense, and CSD companies frequently;sacrificed profitability in order to land and keep those accounts. As of 1999, for example, Burger King;franchises were believed to pay about $6.20 per gallon for Coke syrup, but they received a substantial;rebate on each gallon, one large Midwestern franchise owner said that his annual rebate ran $1.45 per;gallon, or about 23%.21 Local fountain accounts, which bottlers handled in most cases, were;considerably more profitable than national accounts. Overall, according to a prominent industry;observer, operating margins were 10 percentage points lower in fountain sales than in bottle and can;sales.22 To support the fountain channel, Coke and Pepsi invested in the development of service;dispensers and other equipment, and provided fountain customers with cups, point-of-sale;advertising, and other in-store promotional material.;After Pepsi entered the fast-food restaurant business by acquiring Pizza Hut (1978), Taco Bell;(1986), and Kentucky Fried Chicken (1986), Coca-Cola persuaded competing chains such as Wendys;and Burger King to switch to Coke. In 1997, PepsiCo spun off its restaurant business under the name;Tricon, but fountain pouring rights remained split along largely pre-Tricon lines.23 In 2005, Pepsi;supplied all Taco Bell and KFC restaurants and the great majority of Pizza Hut restaurants, and Coke;retained exclusivity deals with Burger King and McDonalds (the largest national account in terms of;sales). Competition remained vigorous: In 2004, Coke won the Subway account away from Pepsi;while Pepsi grabbed the Quiznos account from Coke. (Subway was the largest account as measured;by number of outlets.) And Coke continued to dominate the channel, with a 68% share of national;pouring rights, against 22% for Pepsi and 10% for Cadbury Schweppes.24;4;This document is authorized for use only in Liverpool Program by Faculty from February 2011 to August 2011.;Cola Wars Continue: Coke and Pepsi in 2006;706-447;Coke and Cadbury Schweppes had long retained control of national fountain accounts;negotiating pouring-rights contracts that in some cases (as with big restaurant chains) covered the;entire United States or even the world. Local bottlers or the franchisors fountain divisions serviced;these accounts. (In such cases, bottlers received a fee for delivering syrup and maintaining machines.);Historically, PepsiCo had ceded fountain rights to local Pepsi bottlers. In the late 1990s, however;Pepsi began a successful campaign to gain from its bottlers the right to sell fountain syrup via;restaurant commissary companies.25;In the vending channel, bottlers took charge of buying, installing, and servicing machines, and for;negotiating contracts with property owners, who typically received a sales commission in exchange;for accommodating those machines. But concentrate makers offered bottlers financial incentives to;encourage investment in machines, and also played a large role in the development of vending;technology. Coke and Pepsi were by far the largest suppliers of CSDs to this channel.;Suppliers to Concentrate Producers and Bottlers;Concentrate producers required few inputs: the concentrate for most regular colas consisted of;caramel coloring, phosphoric or citric acid, natural flavors, and caffeine.26 Bottlers purchased two;major inputs: packaging (including cans, plastic bottles, and glass bottles), and sweeteners (including;high-fructose corn syrup and sugar, as well as artificial sweeteners such as aspartame). The majority;of U.S. CSDs were packaged in metal cans (56%), with plastic bottles (42%) and glass bottles (2%);accounting for the remainder.27 Cans were an attractive packaging material because they were easily;handled and displayed, weighed little, and were durable and recyclable. Plastic packaging;introduced in 1978, allowed for larger and more varied bottle sizes. Single-serve 20-oz PET bottles;introduced in 1993, steadily gained popularity, in 2005, they represented 36.7% of CSD volume (and;56.7% of CSD revenues) in convenience stores.28;The concentrate producers strategy toward can manufacturers was typical of their supplier;relationships. Coke and Pepsi negotiated on behalf of their bottling networks, and were among the;metal can industrys largest customers. In the 1960s and 1970s, both companies took control of a;portion of their own can production, but by 1990 they had largely exited that business. Thereafter;they sought instead to establish stable long-term relationships with suppliers. In 2005, major can;producers included Ball, Rexam (through its American National Can subsidiary), and Crown Cork;Seal.29 Metal cans were essentially a commodity, and often two or three can manufacturers competed;for a single contract.;The Evolution of the U.S. Soft Drink Industry30;Early History;Coca-Cola was formulated in 1886 by John Pemberton, a pharmacist in Atlanta, Georgia, who sold;it at drug store soda fountains as a potion for mental and physical disorders. In 1891, Asa Candler;acquired the formula, established a sales force, and began brand advertising of Coca-Cola. The;formula for Coca-Cola syrup, known as Merchandise 7X, remained a well-protected secret that the;company kept under guard in an Atlanta bank vault. Candler granted Coca-Colas first bottling;franchise in 1899 for a nominal one dollar, believing that the future of the drink rested with soda;fountains. The companys bottling network grew quickly, however, reaching 370 franchisees by 1910.;5;This document is authorized for use only in Liverpool Program by Faculty from February 2011 to August 2011.;706-447;Cola Wars Continue: Coke and Pepsi in 2006;In its early years, imitations and counterfeit versions of Coke plagued the company, which;aggressively fought trademark infringements in court. In 1916 alone, courts barred 153 imitations of;Coca-Cola, including the brands Coca-Kola, Koca-Nola, and Cold-Cola. Coke introduced and;patented a 6.5-oz bottle whose unique skirt design subsequently became an American icon.;Candler sold the company to a group of investors in 1919, and it went public that year. Four years;later, Robert Woodruff began his long tenure as leader of the company. Woodruff pushed franchise;bottlers to place the beverage in arms reach of desire, by any and all means. During the 1920s and;1930s, Coke pioneered open-top coolers for use in grocery stores and other channels, developed;automatic fountain dispensers, and introduced vending machines. Woodruff also initiated lifestyle;advertising for Coca-Cola, emphasizing the role that Coke played in a consumers life.;Woodruff developed Cokes international business as well. During World War II, at the request of;General Eisenhower, Woodruff promised that every man in uniform gets a bottle of Coca-Cola for;five cents wherever he is and whatever it costs the company. Beginning in 1942, Coke won;exemptions from wartime sugar rationing for production of beverages that it sold to the military or to;retailers that served soldiers. Coca-Cola bottling plants followed the movement of American troops;and during the war the U.S. government set up 64 such plants overseasa development that;contributed to Cokes dominant postwar market shares in most European and Asian countries.;Pepsi-Cola was invented in 1893 in New Bern, North Carolina, by pharmacist Caleb Bradham.;Like Coke, Pepsi adopted a franchise bottling system, and by 1910 it had built a network of 270;bottlers. Pepsi struggled, however, it declared bankruptcy in 1923 and again in 1932. But business;began to pick up when, during the Great Depression, Pepsi lowered the price of its 12-oz bottle to a;nickelthe same price that Coke charged for a 6.5-oz bottle. In the years that followed, Pepsi built a;marketing strategy around the theme of its famous radio jingle: Twice as much for a nickel, too.;In 1938, Coke filed suit against Pepsi, claiming that the Pepsi-Cola brand was an infringement on;the Coca-Cola trademark. A 1941 court ruling in Pepsis favor ended a series of suits and countersuits;between the two companies. During this period, as Pepsi sought to expand its bottling network, it;had to rely on small local bottlers that competed with wealthy, established Coke franchisees.31 Still;the company began to gain market share, surpassing Royal Crown and Dr Pepper in the 1940s to;become the second-largest-selling CSD brand. In 1950, Cokes share of the U.S. market was 47% and;Pepsis was 10%, hundreds of regional CSD companies, which offered a wide assortment of flavors;made up the rest of the market.32;The Cola Wars Begin;In 1950, Alfred Steele, a former Coke marketing executive, became CEO of Pepsi. Steele made;Beat Coke his motto and encouraged bottlers to focus on take-home sales through supermarkets.;To target family consumption, for example, the company introduced a 26-oz bottle. Pepsis growth;began to follow the postwar growth in the number of supermarkets and convenience stores in the;United States: There were about 10,000 supermarkets in 1945, 15,000 in 1955, and 32,000 in 1962, at the;peak of this growth curve.;Under the leadership of CEO Donald Kendall, Pepsi in 1963 launched its Pepsi Generation;marketing campaign, which targeted the young and young at heart. The campaign helped Pepsi;narrow Cokes lead to a 2-to-1 margin. At the same time, Pepsi worked with its bottlers to modernize;plants and to improve store delivery services. By 1970, Pepsi bottlers were generally larger than their;Coke counterparts. Cokes network remained fragmented, with more than 800 independent;franchised bottlers (most of which served U.S. cities of 50,000 or less).33 Throughout this period, Pepsi;6;This document is authorized for use only in Liverpool Program by Faculty from February 2011 to August 2011.;Cola Wars Continue: Coke and Pepsi in 2006;706-447;sold concentrate to its bottlers at a price that was about 20% lower than what Coke charged. In the;early 1970s, Pepsi increased its concentrate prices to equal those of Coke. To overcome bottler;opposition, Pepsi promised to spend this extra income on advertising and promotion.;Coke and Pepsi began to experiment with new cola and non-cola flavors, and with new packaging;options, in the 1960s. Previously, the two companies had sold only their flagship cola brands. Coke;launched Fanta (1960), Sprite (1961), and the low-calorie cola Tab (1963). Pepsi countered with Teem;(1960), Mountain Dew (1964), and Diet Pepsi (1964). Both companies introduced non-returnable glass;bottles and 12-oz metal cans in various configurations. They also diversified into non-CSD industries.;Coke purchased Minute Maid (fruit juice), Duncan Foods (coffee, tea, hot chocolate), and Belmont;Springs Water. In 1965, Pepsi merged with snack-food giant Frito-Lay to form PepsiCo, hoping to;achieve synergies based on similar customer targets, delivery systems, and marketing orientations.;In the late 1950s, Coca-Cola began to use advertising messages that implicitly recognized the;existence of competitors: Americans Preferred Taste (1955), No Wonder Coke Refreshes Best;(1960). In meetings with Coca-Cola bottlers, however, executives discussed only the growth of their;own brand and never referred to its closest competitor by name. During the 1960s, Coke focused;primarily on overseas markets, apparently basing its strategy on the assumption that domestic CSD;consumption was approaching a saturation point. Pepsi, meanwhile, battled Coke aggressively in the;United States, and doubled its U.S. share between 1950 and 1970.;The Pepsi Challenge;In 1974, Pepsi launched the Pepsi Challenge in Dallas, Texas. Coke was the dominant brand in;that city, and Pepsi ran a distant third behind Dr Pepper. In blind taste tests conducted by Pepsis;small local bottler, the company tried to demonstrate that consumers actually preferred Pepsi to;Coke. After its sales shot up in Dallas, Pepsi rolled out the campaign nationwide.;Coke countered with rebates, retail price cuts, and a series of advertisements that questioned the;tests validity. In particular, it employed retail price discounts in markets where a company-owned;Coke bottler competed against an independent Pepsi bottler. Nonetheless, the Pepsi Challenge;successfully eroded Cokes market share. In 1979, Pepsi passed Coke in food store sales for the first;time, opening up a 1.4 share-point lead. In a sign of the times, Coca-Cola president Brian Dyson;inadvertently uttered the name Pepsi at a 1979 bottlers conference.;During this period, Coke renegotiated its franchise bottling contract to obtain greater flexibility in;pricing concentrate and syrups. Its bottlers approved a new contract in 1978, but only after Coke;agreed to link concentrate price changes to the CPI, to adjust the price to reflect any cost savings;associated with ingredient changes, and to supply unsweetened concentrate to bottlers that preferred;to buy their own sweetener on the open market.34 This arrangement brought Coke in line with Pepsi;which traditionally had sold unsweetened concentrate to its bottlers. Immediately after securing;approval of the new agreement, Coke announced a significant concentrate price increase. Pepsi;followed with a 15% price increase of its own.;Cola Wars Heat Up;In 1980, Roberto Goizueta was named CEO of Coca-Cola, and Don Keough became its president.;That year, Coke switched from using sugar to using high-fructose corn syrup, a lower-priced;alternative. Pepsi emulated that move three years later. Coke also intensified its marketing effort;more than doubling its advertising spending between 1981 and 1984. In response, Pepsi doubled its;7;This document is authorized for use only in Liverpool Program by Faculty from February 2011 to August 2011.;706-447;Cola Wars Continue: Coke and Pepsi in 2006;advertising expenditures over the same period. Meanwhile, Goizueta sold off most of the non-CSD;businesses that he had inherited, including wine, coffee, tea, and industrial water treatment, while;retaining Minute Maid.;Diet Coke, introduced in 1982, was the first extension of the Coke brand name. Many Coke;managers, deeming the Mother Coke brand sacred, had opposed the move. So had company;lawyers, who worried about copyright issues. Nonetheless, Diet Coke was a huge success. Praised as;the most successful consumer product launch of the Eighties, it became within a few years not only;the most popular diet soft drink in the United States, but also the nations third-largest-selling CSD.;In April 1985, Coke announced that it had changed the 99-year-old Coca-Cola formula. Explaining;this radical break with tradition, Goizueta cited a sharp depreciation in the value of the Coca-Cola;trademark. The product and the brand, he said, had a declining share in a shrinking segment of;the market.35 On the day of Cokes announcement, Pepsi declared a holiday for its employees;claiming that the new Coke mimicked Pepsi in taste. The reformulation prompted an outcry from;Cokes most loyal customers, and bottlers joined the clamor. Three months later, the company;brought back the original formula under the name Coca-Cola Classic, while retaining the new;formula as its flagship brand under the name New Coke. Six months later, Coke announced that it;would henceforth treat Coca-Cola Classic (the original formula) as its flagship brand.;New CSD brands proliferated in the 1980s. Coke introduced 11 new products, including CaffeineFree Coke (1983) and Cherry Coke (1985). Pepsi introduced 13 products, including Lemon-Lime Slice;(1984) and Caffeine-Free Pepsi-Cola (1987). The number of packaging types and sizes also increased;dramatically, and the battle for shelf space in supermarkets and other stores became fierce. By the late;1980s, Coke and Pepsi each offered more than 10 major brands and 17 or more container types.36 The;struggle for market share intensified, and retail price discounting became the norm. Consumers grew;accustomed to such discounts.;Throughout the 1980s, the growth of Coke and Pepsi put a squeeze on smaller concentrate;producers. As their shelf space declined, small brands were shuffled from one owner to another.;Over a five-year span, Dr Pepper was sold (all or in part) several times, Canada Dry twice, Sunkist;once, Shasta once, and A&W Brands once. Philip Morris acquired Seven-Up in 1978 for a big;premium, racked up huge losses in the early 1980s, and then left the CSD business in 1985. In the;1990s, through a series of strategic acquisitions, Cadbury Schweppes emerged as the third-largest;concentrate producerthe main (albeit distant) competitor of the two CSD giants. It bought the Dr;Pepper/Seven-Up Companies in 1995, and continued to add such well-known brands as Orangina;(2001) and Nantucket Nectars (2002) to its portfolio. (See Appendix ACadbury Schweppes;Operations and Financial Performance.);Bottler Consolidation and Spin-Off;Relations between Coke and its franchised bottlers had been strained since the contract;renegotiation of 1978. Coke struggled to persuade bottlers to cooperate in marketing and promotion;programs, to upgrade plant and equipment, and to support new product launches.37 The cola wars;had particularly weakened small, independent bottlers. Pressures to spend more on advertising;product and packaging proliferation, widespread retail price discountingtogether, these factors;resulted in higher capital requirements and lower profit margins. Many family-owned bottlers no;longer had the resources needed to remain competitive.;At a July 1980 dinner with Cokes 15 largest domestic bottlers, Goizueta anno


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