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The soft-drink industry in the United States is an integral part of daily life. Competition in the soft-drink industry is very fears. The battles among industry participants have continued into the 1990s, and the fight for shelf, aisle and vending machine space has reached large dimensions as the colas receive competition from bottled water, iced tea, fruit juices, lemon-lime drinks, and private labels (Hays 34). The world of the one perfect soft drink for everyone is gone as strategies of market segmentation and product differentiation are used separately and together.
The development of the U.S. soft-drink industry started in the early 1800s, when numerous mineral waters were sold by druggists. Druggists often flavored mineral water with various extracts, such as root beer or ginger ale, to please customers at their soda fountains. By the late 19th century, most soft drinks were local in origin, and while there was some attempt to distribute beyond local trading areas, these attempts were insignificant. This paper, by referring to a number of scholarly articles and sources discussing soft drinks industry in general and Coca-Cola Company in particular, analyzes the marketing strategies employed by this corporation (both successful and disastrous ones), which were used to build the Coke brand and win over the competition in the last few decades.
Company history and market analysis
Coca-Cola was developed by Dr. John Pemberton, a pharmacist in Atlanta, Georgia, in 1886 (Hays 37). Eventually the rights to the soft drink were sold to Asa Candler. Although Coca-Cola was first sold as a headache cure, a modification of the formula was soon unveiled and distributed to soda fountains in used beer bottles. In 1919, Ernest Woodruff purchased the Coca-Cola Company, and in 1923 his son, Robert W. Woodruff, took over; he was to become the most important figure in Coca-Cola's history (Pendergrast 2).
Gaining national distribution was an important factor in the success of Coca-Cola. There were many obstacles in this venture. The product sold for only a nickel, and therefore profitability depended upon volume sales. Moreover, its ingredients were heavy and bulky. If repeat sales were to be generated, the product needed widespread distribution. This meant that the product had to be available in all types of retail outlets. Coca-Cola quickly established a strong trademark with high consumer identification that was able to withstand competitors (Stanley et al. 20-21).
The early history of Coca-Cola is closely tied to a scenario of innovation. Innovation was present with the development of the bottler network and even the development of the sizes and shapes of the bottles. This network and the successful image of brand identity was developed by the early pioneers of Coca-Cola, who had entrepreneurial vision—John Pemberton, Asa Candler, and later Robert Woodruff.
The strategy of the soft-drink industry from the mid-20th century was market-segmentation and product-differentiation as diet drinks and caffeine-free drinks were developed. The soft-drink industry became successful not only in the United States but throughout the world. Physical resources emphasized intensive distribution, with salespeople going everywhere and bottlers in convenient locations. The soft-drink industry has been successful in the implementation of a vertical marketing system, brand identity, and making product purchases convenient for customers.
The main criticism of the soft-drink industry is complacency, and this has plagued Coca-Cola. In 1933 Pepsi-Cola developed the 12-ounce bottle and priced it the same as Coca-Cola's 6-ounce bottle (Sellers 69). Pepsi-Cola previously had been no more successful challenging Coca-Cola than ginger ale. The “Pepsi Generation” campaign made further inroads. From the mid-20th century to the present, 7-Up and the bottled water industry have also made successful inroads into the cola market share. Coca-Cola and even now Pepsi-Cola, to some extent, have been slow to recognize the advent of potential competition. Pepsi-Cola made the mistake of committing major financial resources to restaurants. These resources may have been better allocated to their primary soft-drink business. Therefore, to some extent Pepsi shares the modern day complacency of Coca-Cola to the advent of potential competition (Porter 90-93).
?n Overview of the Soft-Drink Industry in 1996
Coke, Diet Coke, Tab, Sprite, Fresca, Mr. Pibb, Minute Maid, Hi-C, PowerAde, Barq
Pepsi, Diet Pepsi, Mountain Dew, Crystal Pepsi, Pepsi-Lipton Tea, All-Sport
Dr. Pepper, 7-Up, AScW Root Beer, Sunkist, Schweppes, Crush, IBC Root Beer, Welch's, Squirt, Canada Dry
Royal Crown Cola, Diet Rite, Nehi, Mistic Ice, Snapple beverages
Arizona Iced Tea
Arizona Iced Tea
Private Store Brands
Source: Hays, Constance L. The Real Thing: Truth and Power at the Coca-Cola Company, New York: Random House, 2005.
Table 1 shows selected brands and market-share range of important manufacturers. Private store brands and manufacturers of bottled water, iced teas, and other types of drinks constitute approximately 10 percent to 20 percent market share. Coca-Cola and Pepsi-Cola dominate the soft-drink industry. Table 1 depicts other brands that are sold in supermarket chains in the soft-drink grocery aisle. The placement of bottled water, iced teas, and citrus drinks will vary from supermarket chain to supermarket chain and across geographical regions. Cadbury-Schweppes is prominently in third place in the soft-drink industry and has a product line with high brand-name recognition. Dr. Pepper is the oldest nationally distributed soft drink in the United States. Welch's fruit-flavored carbonates consist of a variety of flavors, and the Welch's Grape brand has become the leading grape-flavored carbonated soft drink (Porter 90-93).
Coca-Cola and Pepsi-Cola dominate the cola market. A direct challenge to the cola market is the lemon-lime segment of the market. The 7-Up brand has presented an “Uncola” challenge, but Coca-Cola owns Sprite, so the impact of this assault has been diminished. Such has been the competition from Sprite that Cadbury-Schweppes is planning to reformulate its 7-Up drink by making it less sweet and giving it a crisper taste. One problem for Cadbury-Schweppes is that some of the licensed bottlers of their product line also distribute Coca-Cola and Pepsi-Cola products.
Although Triarc with Royal Crown Cola has only a 2 percent market share, Snapple was acquired from Quaker Oats in 1997, and therefore Triarc may be in a position to increase its market share. Triarc plans to reduce costs by jointly marketing Snapple with brands such as Mistic, RC Cola, Diet Rite, and Nehi. Triarc's relationship with distributors is strong, and its marketing program has improved in recent years. Triarc also has an alliance with Saratoga Bottled Water and Celestial Seasonings (Michman 78-79).
Cadbury-Schweppes is one of the largest British-owned confectionery and soft-drink companies in the world. The company has been better known in the past for its ginger ale and its Schweppes and Canada Dry products. Dr. Pepper and 7-Up are more recent acquisitions. The dominant position of Canada Dry and Schweppes in the soft-drink market has made the task of obtaining shelf space somewhat easier, since these product lines are not confronted with keen competition. However, the Dr. Pepper and 7-Up product lines face heavy competition, and adequate shelf space for these product lines is more difficult to obtain (Michman 78-79).
Coca-Cola and Pepsi-Cola dominate the soft-drink industry. Coca-Cola in the middle of the 1970s became an aggressive competitor. Diet Coke became successful in 1982, Caffeine-Free Coke and Caffeine-Free Diet Coke were added in 1983, and Cherry Coke was added in 1985. The Coca-Cola name and logo were even franchised for use by apparel and other manufacturers. Pepsi-Cola launched the “Pepsi Challenge”. However, Pepsi was still the follower rather than the leader. In recent years Pepsi has marketed Pepsi-Lipton Tea, Mountain Dew, and Crystal Pepsi, and these brands have been moderately successful. However, Pepsi is still number two and Coke remains number one in the soft-drink industry. In 1995 Coca-Cola acquired Barq, a root beer, as part of its strategy of diversification, and Barq now competes directly with A&W Root Beer for market leadership. Coca-Cola has also achieved a differential advantage due to the Coke brand name and a strong-bottlers network (Pendergrast 45-49).
One of the important changes in the soft-drink market has been the decline of diet drinks. One reason is that many consumers are becoming more health conscious and favor drinking bottled water. Another reason for the decline in the soft-drink market is that baby boomers are getting older and many of them no longer seem to be as concerned as previously about maintaining their weight or losing extra pounds. As a result, in 1996 diet drinks accounted for less than 24 percent of carbonated soft drinks, a decline of market share from 30 percent in 1990 (Pendergrast 45-49).
Coca-Cola’s marketing strategies
Coca-Cola 1985’s disaster
Coca-Cola in 1985 made one of the most memorable mistakes in marketing history. Based upon information gathered from blind taste tests, a decision was made to change the original formula to a sweeter type of formula. Reasons for this change were the growing popularity of Pepsi, especially with young people, as a result of the Pepsi Generation campaign, and Coca-Cola bottlers’ desire for the company to take a more aggressive position in its competition with Pepsi. What Coca-Cola never anticipated was the negative public reaction (Pendergrast 67). The product failed miserably, and it never got out of the introductory stage of the product life cycle.
There is a high failure rate during the introductory stage of the product life cycle in the food and beverage industry, but Coke never expected such consumer anger and demand to change back to the original formula. Thus New Coke was removed from the shelves and the original Coke was marketed again in less than a year under the name of Coca-Cola Classic. Through hard work, Coca-Cola eventually regained its lost market share (Sloan 37).
The background of this infamous decision to change the formula of Coca-Cola was that Pepsi was significantly increasing its market share with a Pepsi Generation campaign that captured the imagination of the baby boomers with its idealism and youth. The association with youth and vitality favorably enhanced the image of Pepsi. Furthermore, taste tests revealed that consumers liked the taste of Pepsi better than Coke, Pepsi was beginning to close the gap in market-share sales, and Coca-Cola was becoming alarmed, especially since Coca-Cola was outspending Pepsi in advertising and dominated fountain and vending machine sales. Since Coke's market share had declined in the late 1970s into the 1980s despite superior promotion and distribution, the belief was maintained, supported by the taste tests, that taste was the most important factor in the decline of Coke's market share. Thus in 1985 the decision was made to reformulate Coke. Critics were to label this decision “the Edsel of the 1980s” and the marketing blunder of the decade (Pendergrast 74, 90).
The marketing-research design had been flawed. Taste tests are subject to inconsistencies. Unless the flavor difference is extreme, brand image can be a more powerful sales stimulant. Brand image is important if it is an inherent part of the culture and societal values. Coke had been around for a hundred years, and consumers did not take kindly to tampering with tradition. The marketing of two Cokes—“the New Coke” and “Classic Coke”, caused confusion not only among consumers but retailers as well. Pepsi had launched effective campaigns with the Pepsi Challenge and the Pepsi Generation. Greater advertising expenditures alone would not change this circumstance. Coca-Cola needed an effective campaign to counter Pepsi's strategies (Sloan 37). This mistake turned out well for Coca-Cola, since free publicity was generated, and soon market share was recovered and even increased.
Coca-Cola’s winning marketing strategies
Coca-Cola has been the acknowledged leader in the soft-drink industry. Pepsi did mount a serious rivalry campaign with its “You're in the Pepsi Generation” slogan. A fundamental in marketing strategy is not to attack the industry leader with an imitative strategy. The inherent advantages in the industry's leader's position will probably overcome such a challenge and exhaust the resources of the challengers. In order to successfully attack the market leader, the challenger must have a sustainable competitive advantage in either cost or differentiation. Independent bottlers are crucial to differentiation. Coca-Cola expends much attention and considerable financial resources endeavoring to upgrade bottlers and improve their effectiveness. Coca-Cola has been arranging the sale of less efficient bottlers to stronger organizations (Benezra 10-11).
Yet, no firm is invulnerable to competition. From 1950 to 1960 Pepsi-Cola increased its market share from approximately 17 percent to 31 percent. The product's taste was inconsistent from bottler to bottler, so a uniform formula was adopted. Packaging and packaging size became competitive. The target market was shifted away from the poor to a growing and affluent middle class. Vending machine operations were more quickly cultivated by Pepsi than by Coca-Cola.
In the 1950s the promotional theme of “the light refreshment” worked wonders (Burke 33). All of this was accomplished because of the complacency of Coca-Cola. The corporation had neither changed its bottle size nor its promotional strategies in years. Coke was content to do things without making any changes. Also, the importance of dealer-bottler relations cannot be underestimated. Furthermore, Pepsi motivated its dealers to contribute heavily to advertising, increased vending machine operations, expanded geographical presence through new plants, and maintained strict product quality control.
There are some target-market strategies that are used for attaining competitive advantage. For example, Coca-Cola's introduction of Tab, the original diet soda, prompted Pepsi to introduce Diet Pepsi. Tab was originally targeted for the female market, and eventually Coca-Cola desired to broaden its base by appealing to men and the entire family. Therefore, Diet Coke was introduced to satisfy these objectives, but it damaged the Tab brand in the process. Many marketing professionals would contend that this was a sound strategy, although the impact of the Tab brand was diminished (Burke 33).
Pepsi, with a strategy of targeting a core market instead of the total market, demonstrated the opportunities created by narrowing the target market. Coke's strength was its tradition, which meant that older consumers had a stronger attachment, whereas younger consumers would more easily switch brands. In many instances, younger customers would want to drink something different than older consumers. The Pepsi Generation campaign capitalized on younger consumers' desires to drink something different. Teenagers drink more soft drinks than any other market segment. All age groups purchase substantial quantities of soft drinks, and this appeal also attracted consumers who perceived themselves as young and physically active. Thus Pepsi was able to close a wide gap between the market leader and itself by effectively using a lifestyle-segmentation strategy.
Diet Coke and Diet Pepsi with and without caffeine use strategies of market segmentation and product differentiation to reach their target markets. Tab was introduced in 1963 as a diet cola positioned for women, and in 1983 caffeine-free versions of Coca-Cola, Diet Coke, and Tab were positioned for health-oriented consumers. Coca-Cola also launched Minute Maid soda as a fruit-based drink in reaction to Pepsi's introduction of Slice. Minute Maid is positioned to attract a market segment that likes fruit juice as well as to health-and nutrition-conscious consumers. 7-Up popularized the appeal of the health-oriented market segment with a lemon-lime entry positioned to consumers who like a lemon-lime flavor. Coca-Cola fought back with Sprite for the lemon-lime market (Alwitt and Prabhaker 12-14).
Brand loyalty is usually based upon careful deliberation and is a high-involvement purchase decision. It is somewhat surprising to note that the outcry over Coca-Cola's decision to eliminate the original formula for its leading brand caused such consumer dissatisfaction. Obviously, for some consumers Coca-Cola was not just another soft drink; it had become a symbol of the culture and environment of their youth and current preferences. The change of formula resulted in a change of taste, or a change in product-differentiation strategy, that was unacceptable to those consumers who were loyal to the brand (Sloan 36).
Vertical integration represents a potential growth direction for Coca-Cola in an industry where sales have become almost flat in the United States. Coca-Cola has made various moves toward integrating their corporate systems. Coca-Cola has provided an offer to purchase Coca-Cola Bottling of New York, the largest bottler in the Northeast. Vertical integration can result in possible benefits and costs. One benefit of vertical integration is certain operating economies such as economies of scale, allowing the sharing of warehouses, accounting, operations, computer facilities, and such staff activities as marketing research. Moreover, savings can result in handling, transportation, and inventory costs. A second benefit would be more and better control of the product system. A third possible benefit would be enhancing technological innovation. Information may be more freely exchanged, and the selling job needed to implement innovations or new-product introductions may be facilitated.
The soft-drink industry is in the market-maturity stage of the product life cycle. The first clue as to its arrival is evidence of market saturation. This means that sales grow about on a par with the population. Price competition becomes intense. Coca-Cola is aggressively aiming price competition at the fountain-sales market. Competitive strategies to maintain brand preference involve finer differentiation in the product, customer services, and promotional practices. A concentrated effort is made to secure more intensive distribution. Manufacturers such as Coca-Cola and Pepsi-Cola, instead of relying on retailers, are communicating directly with consumers. Appeals to users are made on the basis of price, product distinctions, or both. The soft-drink industry is promoting fine product differences through packaging and advertising and appealing to special market segments. Extension strategies have helped to stabilize forces. The soft-drink market in the United States is in danger of a gradual but steady per-capita decline, as in the case of beer.
The soft-drink industry has had a successful record in the past of achieving profit through volume, intensive distribution, and innovation. Strategies of market segmentation and product differentiation have been a model for the entire food industry. It will be interesting to observe how the soft-drink industry will meet the challenges of the progressing 21st century.