Coke vs Pepsi, Marketing, College Term Papers.com


		Data Bases
		• Custom Term Papers • Free Term Papers • Free Research Papers • Free Essays • Free Book Reports • Plagiarism?

		Links
		• Top 100 Term Paper Sites • Top 25 Essay Sites • Top 50 Essay Sites • Search 97,000 Papers @ DirectEssays.com • Search 101,000 Papers @ ExampleEssays.com • Search 90,000 Papers @ MegaEssays.com

		Free Essays
		• Term Paper Sites • Chuck III's Free Essays • Free College Essays • TermPaperSites.com • My Term Papers • Get Free Essays • Essay World • Planet Papers

Search Lots of Essays

Back to Subjects - Marketing

Coke vs Pepsi

Coke vs Pepsi The company known as Coca-Cola today was started in September of 1919, but the first Coke brand was served as early as 1886. Since that time it has grown to be one of the most globally recognized brand names with a stock value of $167 billion. Coke’s plan has always been developed with the future in mind. Right away the company realized that it was more profitable to manufacture the concentrate used to make carbonated drinks than to bottle it. From that point on they saw the entire world, not simply the originating country, as their desired market. It seems only practical that the company should pursue this agenda until conquered then focus the effort on expanding into different product lines. This logical idea has catapulted them into the much sought after position of number one. Manufacturing the concentrate requires only a limited capital and a minimal reinvestment, but yields huge profits. The company focuses their efforts on capturing more buyers for the most profitable product while distancing itself from the less profitable operations. In order to do this; Coke must have a loyal relationship with its bottlers in order to insure the completion and delivery of its product. They have found that maintaining a close association, as well as partial ownership in the less profitable business encourages both businesses to work together because they depend on one another. More importantly, it gives Coke the cash needed to chase after customers because they operate only in the highly profiting part of operations. Pepsi operates its beverage business quite differently than Coke. Coke sells concentrate to independent bottlers while Pepsi owns its bottling and concentrate operations. This makes Pepsi more vulnerable to price wars that put pressure on its bottling margins. For years, Pepsi operated under the so-called three-legged stool strategy-drinks, snacks, and restaurants (Sellers 26). When Roger Enrico, Chief Executive Officer for PepsiCo, took over he began to examine the corporation. Going on the belief that if you can't make diversification work, give it up. For nearly three years PepsiCo has been undergoing a major strategic transformation. PepsiCo's chairman, Roger A. Enrico, stated in his letter, "…And while 1998 certainly offered its share of challenges, I'm very pleased to report that our strategy is beginning to payoff." Consumers around the world bought more snacks and beverages than ever before. They have gained market share in both snacks and beverages in the United States, their biggest market. Internationally snack and beverage units both posted healthy volume growth, even amid economic turbulence. In 1996 Coca-Cola began the jump on its competition by sponsoring the Summer Olympic Games. This event was a marketing gift. Not only because it was globally televised, but it also projected the idea of countries coming together to compete, but also promoting sportsmanship, wholesomeness, and goodwill. Additionally, in November the Minute Maid Company, a division of Coke, put forth a campaign aimed to compete in the fruit juice division against Tropicana. These factors coupled with the continued expansion of worldwide operations, helped the soft drink company sell 6 percent more throughout the world, and obtain 43% of the United States market (Steinriede 32). The boost from 1996 turned 1997 into one of the best years on the books for Coca- Cola. Sales of the ownership of Schwepp’s beverages plants as well as other bottling subsidiaries in New York and elsewhere added a dramatic boost to the company’s financial statements in other income. The soft drink company used the money to reduce debt and continue plans for overseas expansion. While this sale looks good, the act cannot be repeated in subsequent periods. The only real way to make money is increase sales or reduce costs. Also, the investor must consider if earnings are within a company’s control. Favorable exchange rates or inflation rates that raise the selling price for products create a temporary profit, but are not within the company’s control. These actions triggered a decline in 1998. When that decline is added to weak economic situations in the rest of the world and a costly recall because of quality control problems in Europe, even the experienced, strong company like Coca-Cola shows the impact. In 1996, PepsiCo's goal was to build a stronger company. During that year they refranchised a large number of their restaurants and closed several underperforming ones. During 1997, PepsiCo announced a plan to spin off its restaurant businesses to its shareholders as an independent publicly traded company. This new company will be comprised, among other restaurants, of the world's most powerful and well-known restaurants, including Pizza Hut, Taco Bell and KFC. Pepsi's stock was languishing and Wall Street was on their back (Sellers 26). Ironically, after the announcement of the spin off, the stock shot up 11%. Motivation to meet Wall Street earnings expectations could have played a major part in the announcement, but in reality with the spin off of the restaurants; PepsiCo will be eliminating it low-return business. In 1997, with the spin off of its restaurant businesses to shareholders (sales of approximately $9.4 billion) provided the huge percentage increase of cash and cash equivalents. This is only a temporary growth and not repeatable. In 1998, the percentage was back to a reasonable increase of 1% while the company is on the first rung of the ladder of restructuring. Another restructuring effort consisted of separating their bottling and concentrate parts of the beverage business so both could operate more effectively. PepsiCo created a separate unit for the company owned bottling operations called The Pepsi Bottling Group. They plan to sell a majority interest to the public this year. The spin off of PepsiCo's bottling operations would remove billions of dollars of debt from PepsiCo's balance sheet. With this restructuring, returns would significantly improve. Coca-Cola did the same thing a decade ago, separating its bottling operations into a publicly owned company. This allows management to focus on marketing its brands and selling high-margin soft-drink concentrate. The public believes if Enrico could make his company look like Coca-Cola, he would. PepsiCo's chairman believes the business will flourish with two separate and distinct management and corporate structures. PepsiCo, Inc. will consist of two core businesses: Frito-Lay Co., the world's largest maker of salty snacks; and Pepsi-Cola Company, the worlds second largest beverage company. In 1998, PepsiCo acquired Tropicana Products Inc., the worlds most successful juice company, which gives PepsiCo lots of growth potential. Pending shareholders approval, in 1999 they plan to combine certain PepsiCo owned bottling operations in the United States and Central Europe with Whitman Corporation (the largest independent Pepsi bottler). This will allow them to devote all of their attention to marketing and brand building. Currently, PepsiCo's principle divisions are Pepsi-Cola Co., Frito-Lay Co., Pepsi Bottling Group, and Tropicana Products, Inc. PepsiCo now offers a broader portfolio of strong brands to offer the retail customer and this will strengthen their ability to achieve consistent earnings growth. Future plans are to reduce debt by using proceeds expected from the bottling transactions. With the restructuring, PepsiCo's main objective is to make a much stronger and more competitive business for the long run. The strategy has generated billions of dollars in cash. This abundance in cash has allowed the company to do two important things: spend aggressively to reinvigorate sales momentum and deliver solid earnings per share growth. (PepsiCo, Inc. Letter from the Chairman) The restructured PepsiCo has more revenue than Coca-Cola, but its operating profits and stock performance don't match Coke's. The company's operating profits were down due to investments in advertising and marketing and strengthened the sales and distribution systems. Looking into the future, as PepsiCo's sales momentum continues, operating profits should follow. PepsiCo's international operations span over 40 countries, which makes up for only about 20% of revenues. For the first time, Pepsi was sold more in international markets than in the United States, according to the chairman. Coke’s expansion plans into Chinas, India, and Russia can also be seen as a liability. Two-thirds or sales and three-fourths of profits in 1997 came from outside the United States. This leaves Coke dependent on overseas operations. With most of the developing world in uncertainty, these large investments in non-U.S. sources look risky to short-term investors. Coca-Cola thinks the payoffs of a larger market will benefit the company in the long run. The cash allows Coke to pay dividends, expand, and buy back stock until overseas economies stabilize. For long-term investors the factors of overseas investments will not seem offensive. In several years, the company should be able to overcome this obstacle and to ensure stable income ( Knestout 46). On the other hand, Pepsi has spread its interests to manufacturing concentrate, bottling, restaurant operations, and snack production. The division from Taco Bell, KFC and Pizza Hut benefited the company tremendously. While Pepsi seemed to be generating enough revenue, the company was making less profit than its competitor. More importantly, owning fast food restaurants virtually locked them out of the fast food industry for the sale of fountain drinks. Large chains like McDonald’s and Burger King have long term contracts with Coke, so Pepsi is left trying to gather smaller establishments. Using the current ratio to compare current assets with current liabilities to determine the company's ability to pay its maturing obligations, the comparison for PepsiCo is hard to determine since 1997 was an unusual year. Taking this into consideration, PepsiCo's ratio of 55% doesn't look good comparing to Coca-Cola's 74%. PepsiCo did invest a lot of money on advertising, marketing and acquisition of Tropicana Products. Eliminating inventories and prepaids from current assets, PepsiCo is on-line with Coca-Cola at .36 times and .40 times respectively. The number of times on average inventory was sold has increased over a three year period for Coca-Cola from 56 days to 60 days while PepsiCo's has decreased from 41 days to 34 days. This is not a good sign for PepsiCo - appears the inventory is building up. With the acquisition of Tropicana, the increase in inventory is reasonable. The dollars of sales provided by each dollar invested in assets is determined using the asset turnover ratio which divides net sales by average total assets. This shows how efficiently assets were used to generate sales. Coca-Cola and PepsiCo are at the same level of 1.04 for 1998. Coca-Cola's has declined from 1.20 while PepsiCo's has increased from .85. The amount of net income generated by each dollar of sales for Coca-Cola has increased slightly from 18.70% in 1996 to 18.87% in 1998. PepsiCo's has increased from 5.65% to 8.91% for the same period. Coca-Cola's profit margin is significantly higher than PepsiCo because Coke owns only the concentrate manufactures and stays away from the less profitable restaurant and bottling operations. Plans for the future of both companies is expansion; which means capturing more customers around the world. Many analyses suggest that in order for Pepsi to compete in new markets with Coke, it must separate from the bottlers. Owning these independent bottlers make Pepsi more vulnerable to price wars because it will put pressure on bottling margins. Recently Pepsi announced a separate management unit for its domestic bottlers, and many expect plans for another spin-off. The one area where Pepsi has overpowered Coke is the sale of their snack foods from Frito-Lay. This unit more holds more than 50% of the U.S. snack market and plans to acquire snack brands abroad according to PepsiCo’ Chief Executive Officer, Roger Enrico (Sellers 26). Considering the spin-off from its restaurants, in addition to the probable spin-off from bottlers and expansion of high profit concentrate and snack food systems into overseas markets, PepsiCo will soon be able to operate like Coca-Cola. In the meantime, Coca-Cola has a superior strategic plan that produces profits that produce plenty of money to expand, buy back stock, and meet financial obligations. Bibliography: Works Cited Knestout, Brian. “The Mighty Coke is Getting Beaten Up.” Kiplinger’s Personal Financial Magazine. Dec. 1998. Sellers, Patrica. “Is Bigger Better.” Fortune. 28 Oct. 1996. Sellers, Patrica and Erin Davies. “Why Pepsi Needs to be More Like Coke.” Fortune. 3 March 1997. Steinriede, Kent. “Fountain War Heats Up” Beverage Industry. Oct 1998. “Letter from the Chairman of PepsiCo. Inc.” 1998.

Word Count: 2068