Pepsi vs Coke Duopoly and Rivalry Strategies Essay

Category: Economy

Pepsi vs Coke

Pepsi and Coke, the brands of a duopoly market, is the ongoing buzz and criticism in the economic world. Many of the economic pundits view Pepsi and Coke as a true revelation of what how two iconic giants can determine the direction of the market. In light of their cutthroat rivalry, their duopolistic nature stems, in their strengths, in various aspects of the beverage industry. With a market share of Coke’s 43% and Pepsi’s 32%, many economists believe the destination to pure duopoly is close in range (Stengel, 2011). Hence, the questions that flow in various minds of economic critics are divided into two. The first question is what are the barriers that make the Pepsi and Coke control the market. Secondly, apart from pricing, what other initiatives are used by Pepsi and Coke in competing. Consequently, I will analyze the barriers of entry that the two brands have and the strategies used by Pepsi and coke in maintaining their non-pricing rivalry.

Duopolistic Strengths

A pure duopoly market exists where two firms have a control of the market. Accordingly, the two firms also have strong barriers to entry and also use non-pricing competitive strategies. Hence in the beverage industry is a hugely competitive industry the chances of survival lie on a slim thread of life (Hill & Jones, 2012). As such, the market has a duopolistic grip by Pepsi and Coke that control over 70% share of the market. These two iconic brands enjoy access to raw materials in bulk. Sweeteners sugars and flavorings are some of the ingredients. They, thus, buy from the various manufacturers in bulk thus enjoying economies of scale (Carbaugh, 2010). Additionally, they have a hip by hip relationship with the bottlers and suppliers in the beverage industry.

Accordingly, they ship large amounts of bottles through which they highly benefit the various bottlers. The mutual profiting between Pepsi, Coke and the bottlers is unrivaled and makes it hard to the small soda companies to maintain such relationship (Stengel, 2011). Correspondingly, regional economies of scale play out in vividly, in this market. The cause of these regional economies is due to the fact that Pepsi and Coke sell to over 70% of the global markets (Batra, 2009). Through their franchises and licensed suppliers, their distribution power is a daunting task to cope. Therefore, with two firms controlling a wide network of distribution, it makes it extremely hard for an upcoming soda company to break even (Stengel, 2011). The upcoming soda business acts as a peddler in a 5% to 60% market in the USA alone. Hence, the chances of establishing fruitful margins are particularly slim. Finally, as two strong rivals in the beverage market, their competitive nature makes advertisement and product development costs are fixed (Boyes, 2011). As for Boyes (2011), the fixed cost nature of advertisement and product development makes it hard for small soda businesses to enter and conduct operations. Continuously, in the previous year, Coke spent over $ 250 million in advertisement while the rivals spent $150 million. These colossal amounts of money spent on advertisement and product development are a particularly daunting task to the various beverage companies in the world. Lastly, there is a need for constant innovation and product launching is an aspect that surrounds and shrouds in the beverage market. To sustain viability in market share, Pepsi differentiates in terms of chips and drinks initiative. While the latter, Coke maintains its viability in the market through buying out its competitors.

Consequently, the wiry survival of a small soda business further dwindles by the fact that if successful, the chances of being bought out are imminent. However, despite these strong barriers of entry that Pepsi and Coke have in their arsenal, their rivalry spans a century. John Premberton and Caleb Bradham, the founders of Coke and Pepsi respectively, could not envision the echelon of competition that the two firms have reached. The non-price competitive strategy is evident through many ways as per the analysis of various economists (Froeb & McCann, 2007). The non-price strategies are discussed henceforth.

As stated above, on pricing competition involves maneuvers by both parties in the beverage industry to maintain strong demand and profits through means that are not price oriented. Remarkable history of Pepsi and Coke since their onset is written in various instances of price wars. The end consumer as the beneficiary to these price wars, the cost of a price war was too high to maintain profitability (Froeb & McCann, 2007). Hence, Pepsi and Coke, as from 1980s, have taken up other strategies to maintain a grasp on the billions of beverage consumers’ worldwide.

Constant Product Launch

In order to establish a strong platform in the beverage industry, new products are a must. The beverage industry calls for new products to maintain a strong hook on the consumers. As such, the hip and trendy drinks do not miss a hold by the long witty arms of Pepsi and Coke (Erickson, 2003). Evidently, Pepsi and Coke maintain a keen eye in terms of the business undertakings of each other. A clear example is a coincidence in terms of the way in which each company launches its product. Coke in 2003 Coke launched its Vanilla coke and Spirit remix novel drinks (Haig, 2011). Their rivals were competing with the immediate launching of Mountain Dew, Pepsi Blue and the Sierra Mist. The simultaneous counter launching of products was highly put in the limelight. The span of days that the two companies took in launching the two products was 5 days (Haig, 2011). Additionally, within the last half a decade, the two rivals have also ventured to the bottled water industry. Admittedly, Aquafina and Dasani, water products of Pepsi and coke paint this picture. Most recent is the low-carb buzz that is taking consumer demand to a whole new level. Within just two weeks of Coke’s launching of C2, Pepsi took response by launching the Pepsi edge. Intertwined to this venture into the products that are hip in the market, both Pepsi and Coke have ventured to the vitamin industry. They both acquired the Glaeau and the UK based water Company respectively. Not forgetting, on the other hand, the ideas of increasing profit margins have taken a new notch in these two firms. Coke went ahead to introduce the 1.5 litter bottling in view of phasing out the 2litre bottles. The same initiative was taken by Pepsi. Hence, the need to maintain relevance and competitive edge in terms of trend in the market is a policy that oozes from these two companies. Their rivalry yields the product launch strategy that aims to maintain parity in competition among the two.

Global Expansion Advertisement Strategies

Pepsi and Coke are spending millions in advertising and launching their products across the globe. From the edge of the world, these two rivals aim at making their names a word of global uniformity in acknowledgment and popularity (Erickson, 2003). Hence, the need to use local famous individuals in the various regions is evident. Bollywood movie stars, football stars such as Messi, Lampard and Aguero have featured in recent Pepsi advertisements (Hill & Jones, 2012). This strategy aims at hooking and maintaining a grip on the various fans that idolize the individuals (Jeannet, Gillespie & Hennessey, 2010). On the other hand, the adversary, coke, is planning to use Taylor swift in the recent diet coke commercial. Despite these initiatives, they have gone to as much as lawsuits in courts as a result of bullying tendencies in terms of acquiring endorsements. The most widely known feud was between Pepsi and Coke over the use of Yao Ming in the advertisements (Jeannet, Gillespie & Hennessey, 2010).

Sports Sponsorship Plans

Thirdly, Pepsi and Coke are perpetually taking part in sports sponsorship and advertisement spending. In last year alone, both Pepsi and Coke were ranked top 50 globally in terms of spending in sports. Pepsi used a staggering 80 million dollars while coke spent 70 million (Kaynak, 2012). Their plans in sports sponsorship mainly line towards capturing a certain segment of consumers. For example, the NFL is a highly lucrative venue of making sales in the USA. Millions of fans across the globe and locally travel to the stadiums or watch these games make a bountiful resource for profits. Last year alone, estimates revealed that over 50 million people watched the NFL from their TV networks, stadiums and also online (Kaynak, 2012). In accordance with Kaynak (2012), a contract of sports sponsorship is extremely likely to boost sales of both rivals. This rivalry was evident in the previous year when both Pepsi and Coke fought for the chance to sponsor the Dallas cowboys. Cutthroat policies, initiatives and behind the board deals, paint the huge rivalry between Pepsi and Coke.

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All in all, from the above analysis, the duopoly nature of Pepsi and Coke are perpetually expanding scenario. Their initiatives through buying out competitors, advertisement initiatives and irrefutable barriers of entry, further solidify their duopoly state. However, on their non-price rivalry wars, it is evident that their initiatives are paying off. Their somewhat tacit collusion in terms of pricing ensures that they compete in different areas. Use of sponsorships, launching new products perpetually and global expansion through expensive advertising, is making an impact on both opponents. Hence, as two known brands, their maven policies make them mercurial rivals with profound strategies.