IBS A

Executive
Project forBatch 2009-10
Pricing Strategy for
Accounting for
Decision Making

Soft Drink Industry

Submitted to:

Submitted By:
Amit Kumar (09ESHYD003)
Ashwin Bhadviya (09ESHYD008)
Deepa Patnaik (09ESHYD012)
Jinson Rajgopalan (09ESHYD016)
Table of Contents
Introduction...................................................................................................................3
Entry Barriers in Soft Drink Market...................................................................................3
SWOT Analysis:............................................................................................................4
Various Cola Brands Products Available:..........................................................................5
Pricing Strategy.............................................................................................................6
Coke – Price..............................................................................................................6
Pepsi – Price.............................................................................................................6
Pricing strategy for Buyer and Suppliers..................................................................................6
Effect of Competition and Price War on Industry Profits:..........................................................7
Pricing Strategy Used for Market Capitalization:......................................................................7
Penetration Pricing:..................................................................................................................8
Conclusion:...................................................................................................................9
Conclusion:
 Soft drink Industry
Introduction
The soft-drink industry comprises companies that manufacture nonalcoholic beverages and
carbonated mineral waters or concentrates and syrups for the manufacture of carbonated
beverages.

Soft drinks are available in glass bottles, aluminum cans and PET bottles for home
consumption. Non-alcoholic soft drink beverage market can be divided into fruit drinks and soft
drinks. Soft drinks can be further divided into carbonated and non-carbonated drinks. Cola,
lemon and oranges are carbonated drinks while mango drinks come under non carbonated
category. Cola products account for over 60% of the total soft drink market and include popular
brands such as Coca-Cola, Pepsi, and Thumps up etc. Non-cola segment constitutes for over
35% of the market.

Until 1990s, domestic players like Parle Group (Thumps Up, Limca, Goldspot) dominated the
soft drink market in India. However, with the advent of the MNC players like Pepsi (1991) and
Coke (re-entered in 1993 after it was banned in 1977) in the early 1990s, the market control
shifted towards them by the late 1990s.

The per capita consumption of soft drinks in India is among the lowest in the world - 5 bottles
per annum compared to the 800 bottles per annum in the USA. Delhi reports the highest per
capita consumption in the country – 50 bottles per annum. The consumption of PET bottles is
more in the urban areas [75% of total PET bottle (plastic bottles) consumption] whereas the
sales of 200ml bottles were higher in the rural areas. According to a survey, 91% of the soft
drink consumption in India is in the lower, lower middle and upper middle class section.

Last one century witnessed the entry of various soft drink companies but only few of them were
able to survive. The major among them are COKE and PEPSI. These are the only two
companies that has shared the whole market between them and left a very small share for the
remaining ones. This made the word cola drink synonymous to the word soft drink.

We will basically focus on the pricing strategies adopted by these two affluence companies, how
the change in the strategy of one of them reflects in the strategy of the other.

Entry Barriers in Soft Drink Market

Before coming on to the core topic of price strategy, we will discuss what are the factors that
made the soft drink market a duopoly market.
The several factors that make it very difficult for the competition to enter the soft drink market
include:

The factors that made the duopoly soft drink market and that make it very difficult for the
competition to enter the soft drink market include:

Network Bottling:

Both Coke and PepsiCo have franchisee agreements with their existing bottler’s who have
rights in a certain geographic area in perpetuity. These agreements prohibit bottler’s from taking
on new competing brands for similar products. Also, with the recent consolidation among the
bottler’s and the backward integration with both Coke and Pepsi buying significant percent of
bottling companies, it is very difficult for a firm entering to find bottler’s willing to distribute their
product.

The other approach to try and build their bottling plants would be very capital-intensive effort
with new efficient plant capital requirements in 2009 being more than $500 million.

Advertising Spend:

The advertising and marketing spend in the industry is very high by Coke, Pepsi and their
bottler’s. This makes it extremely difficult for an entrant to compete with the incumbents and
gain any visibility.

Brand Image / Loyalty:

Coke and Pepsi have a long history of heavy advertising and this has earned them huge
amount of brand equity and loyal customer’s all over the world. This makes it virtually
impossible for a new entrant to match this scale in this market place.

Retailer Shelf Space (Retail Distribution):

Retailers enjoy significant margins of 15-20% on these soft drinks for the shelf space they offer.
These margins are quite significant for their bottom-line. This makes it tough for the new
entrants to convince retailers to carry/substitute their new products for Coke and Pepsi.

Fear of Retaliation:

To enter into a market with entrenched rival behemoths like Pepsi and Coke is not easy as it
could lead to price wars which would affect the new comer.

SWOT Analysis:
Strength:

Pepsi Coke
PepsiCo brands enjoy a high-profile global presence Coke brands enjoy a high-profile global

presence

Pepsi owns the world’s 2nd Best-Selling Soft Drinks brand Four of the top five leading brand

Constant product innovation Broad-based bottling strategy

Aggressive marketing strategies using famous celebrities 47% of global volume sales in carbonates

Weakness:

Pepsi Coke
Carbonates market is in decline Carbonates market is in decline

Pepsi is the strongest in North America Over-complexity of relationship with bottlers in North America

They only the target young crowd Execution ability

Opportunities:

Pepsi Coke
Increased consumer concerns with regard to drinking Soft drinks volumes in the Asia-Pacific region forecast to
water increase by over 45%

Growth in the functional drinks industry Brands like Minute Maid Light and Minute Maid Premium
Heart Wise are positioned well with the “Health-concerned”
market

Growth in RTD Tea , Asian Beverages and Healthier Use distribution strengths in Eastern Europe and Latin
Beverages America

Threats:

Pepsi Coke
Obesity and health concerns Growing "health-conscience" society

Coca-Cola increases marketing and innovation PepsiCo’s Gatorade, Tropicana and Aquafina are stronger
spending to $400M globally brands

Relying only on North America. Boycott in the Middle East.

Protest against coke in India.

Various Cola Brands Products Available:
Coca Cola Pepsi
Limca (1971) Teem (1960)

Sprite (1999) Mountain Dew(1964)

Low calorie cola Tab (1963) Diet Pepsi (1964)

Diet Coke (1982) Lemon Lime Slice (1984)

Caffeine free coke (1983) Caffeine Free Pepsi Cola (1987)

Coca-Cola classic (1985) Sierra Mist (2000)

New Coke (1985) Mountain Dew Code Red (2001)

Cherry Coke (1985) Pepsi one (2005)

Thums Up (1977) 7 up (1984)

Kinley (2001) Aquafina (2001)

Fanta (1993) Mirinda (1993)

Maaza (1993) Slice (1993)

Minute Maid Pulpy Orange Mountain Dew MDX (2005)

(2008)

Pricing Strategy
In economics and business, the price is the assigned numerical monetary value of a good,
service or asset .Price is also central to marketing where it is one of the four variables (4 P’s
namely Product, Price, promotion, Place) in the marketing mix that business people use to
develop a marketing plan.
Pricing is a big part of the marketing mix. Choosing the right price and the right pricing strategy
is crucial to the marketing process. The price of the product is not something that is fixed .On
the other hand the price of the product depends on many other factors .Sometimes the price of
the product has got nothing to do with the actual product itself .The price may act as a way to
attract target customers. The price of the product is decided keeping many things in mind.
These things include factors like cost incurred on the product, target market, competitors,
consumer buying capacity etc.

Coke – Price
Coke was a company ruling the markets before Pepsi entered. Earlier the price of coke was
cost based i.e. it was decided on the cost which was spent on making the product plus the profit
and other expenses. But after the emergence of other companies especially the likes of Pepsi,
Coca-cola started with a pricing strategy based on the basis of competition .Nowadays more
expenses are spent on advertising by soft -drink companies rather than on manufacturing .Coke
has brought in a revolution especially in Indian markets with the Rs.5 pricing strategy which was
very famous. It was the first company to introduce the small bottle of Coke for just Re.5 .This
campaign was very successful especially with the price conscious Indian consumers. Even
today most prices of Coke are decided on the basis of the competition in the market.

Pepsi – Price
Pepsi again decides its price on the basis of competition .The best think about the company
Pepsi is that it is very flexible and it can come down with the price very quickly. The company is
renowned to bring the price down even up to half if needed. But this risk taking attitude has also
earned Pepsi losses. Though lowering the price would attract the customers but it would not
help them cover up the cost incurred in production hence causing them losses. This was the
situation earlier but now Pepsi is a full-fledged and growing company. It has covered all its
losses and is now growing at a rapid rate.

Pricing strategy for Buyer and Suppliers

Suppliers:

The soft drink industry have a negotiating advantage from its suppliers as most of the raw
materials needed to produce concentrate are basic commodities like Color, flavor, caffeine or
additives, sugar, packaging. The producers of these products have no power over the pricing
hence the suppliers in this industry are weak. This makes the soft drink industry a cheap input
industry which helps in increasing their gross margin.

Buyers:

The major channels for the Soft Drink industry are food stores, Fast food fountain, vending,
convenience stores and others in the order of market share. The profitability in each of these
segments clearly illustrate the buyer power and how different buyers pay different prices based
on their power to negotiate.

Food Stores:

These buyers in this segment are somewhat consolidated with several chain stores and few
local supermarkets, since they offer premium shelf space they command lower prices, the net
operating profit before tax (NOPBT) for concentrate producer’s is high.

Convenience Stores:

This segment of buyer’s is extremely fragmented and hence has to pay higher prices.

Fountain:

This segment of buyer’s are the least profitable because of their large amount of purchases they
make, it allows them to have freedom to negotiate. Coke and Pepsi primarily consider this
segment “Paid Sampling” with low margins. NOPBT in this segment is very low.

Vending:
This channel serves the customer’s directly with absolutely no power with the buyer.

Effect of Competition and Price War on Industry Profits:

• During 1960’s and 70’s coke and Pepsi adopted differentiation and advertising strategy.
Pepsi came with “Pepsi challenge” strategy where blind taste test were hosted by Pepsi
in order to differentiate itself as a better tasting product compare to coke.
• In the early 1990’s Coke and Pepsi employed low price strategy in the supermarket
channel in order to compete with store brands.
• Coke and Pepsi however in the late 90’s decided to abandon the price war, which was
not doing industry any good by raising the prices.
• Coke was more successful internationally compared to Pepsi due to its early lead as
Pepsi had failed to concentrate on its international business after the world war and prior
to the 70’s. Pepsi however sought to correct this mistake by entering emerging markets
where it was not at a competitive disadvantage with respect to Coke as it failed to make
any heady way in the European market.

Pricing Strategy Used for Market Capitalization:

Price is a very important part of the marketing mix as it can affect both the supply and demand
for soft drinks. The price of soft drinks products is one of the most important factors in a
customer‘s decision to buy. Price will often be the difference that will push a customer to buy
our product over another, as long as most things are fairly similar. For this reason pricing
policies need to be designed with consumers and external influences in mind, in order to
effectively achieve a stable balance between sales and covering the production costs.
Till the late 1980s, the standard SKU (Stock Keeping Unit) for a soft drink was 200 ml.
In 1989, when Indian government opened the market to multinationals, Pepsi was the first to
come in. Thums Up (a product of Parle) went up against the international giant for an intense
onslaught with neither side giving any quarter.
Around 1989, Pepsi launched 250 ml bottles and the market also moved on to the new standard
size. When Coke re-entered India in 1993, it introduced 300 ml as the smallest bottle size.
Soon, Pepsi followed and 300 ml became the standard. With large population and low
consumption the rural market represented a significant opportunity for penetration and market
dominance. Competitive pricing was the key.
Then the capacity went from 250ml to 300ml, aptly named MahaCola. This nickname gained
popularity in smaller towns where people would ask for "Maha Cola" instead of Thumps Up.
The consumers were divided where some felt the Pepsi’s mild taste was rather bland.
In 1993 Coca-Cola re-entered India after prolonged absences from 1977 to 1993. But Coca-
Cola’s entry made things even more complicated and the fight became a three-way battle. That
same year, in a move that baffled many, Parle sold out to Coke for a meager US$ 60 million
(considering the market share it had). Further, as the demand changed, both Pepsi and Coke
introduced 1 liter returnable glass bottles.

Available Type Measure Year Price (Rs)

RGB 250ml 1989 Rs 8

RGB 300ml 1993 Rs 9

RGB 300ml 1994 Rs 9

RGB 300ml 1996 Rs 11

Pet bottles 1lt, 2lt 1996 Rs 25, Rs 42

RGB 300ml 1997 Rs 7

Pet bottles 1 lt, 2 lt 1997 Rs 20, Rs 38

RGB 200ml, 300ml (negligible) 2002-03 Rs 5, Rs 11

Pet bottles 500ml, 1 lt, 1.5 lt, 2 lt 2002-03 Rs 18, Rs 25

Can 330ml 2002-03 Rs 35

RGB 200ml, 300ml (negligible) 2009 Rs 8, Rs 12

Pet bottles 500ml, 1 lt, 1.5 lt, 2 lt 2009 Rs 20, Rs 35, Rs 45,Rs 52

Fountain Various 2009 Variable

Can 330ml 2009 Rs 30

Penetration Pricing:
Coke launched smaller bottle priced almost 50% of the traditional package. The accessibility
campaign introduced a new 200ml bottle, smaller than the traditional 300ml bottle found in
urban market, concurrently cutting the price to half to Rs 5. This closed the gap between coke
and basic refreshments like lemonade, sugarcane juice and tea, making soft drinks really
accessible for the first time.

In the past (in 2002-03), Coke had already targeted rural consumers by bringing down the entry
price (Rs 5 a bottle) for its product. Now, it has stepped up distribution of its 200-ml (priced at
Rs 7 and Rs 8) returnable-glass-bottles.

To surmount the penetration policy of Coke, Pepsi too came up with the same Price penetration
policy by launching products like “Chota Pepsi” with the price of Rs 5 to challenge the coke
product. The small size was basically used to target rural market to make new customer
habitual to it.

Conclusion:
By studying the pricing strategy of Coke and Pepsi, we found that there is not much variation in
there price. Being most of the soft drink market is covered by these two major brands, it’s a
duopoly market. The price data of last few years of various brands of these two giants shows
that instead of moving into the price war by reducing the price, they try to launch the parallel
product to compete with the others product. In several pockets of the country, the bruising cola
wars between Coca-Cola India and Pepsi has seen a rollback in prices of colas and other
flavored drinks. According to industry analysts, the current prices of these soft drinks in select
markets are the same as what it was way back in 1997. Thus giving the customers the best
value.