Key External Factors Weight Rating Weighted

Score
OPPORTUNITIES

1. Growing Health/Fitness Conscious Market 0.14 3 0.42

a) Increased market share Diet drinks (Diet Coke/Coca
Cola & Diet Mountain Dew/Pepsi)
(Market Share by Case Volume – Diet Coke - 9.8% in 2005 -
9.9% in 2009)
(Market Share by Case Volume – Diet Mountain Dew – 1.4% in
2005 – 1.9% in 2009)
(Exhibit 2)

b) Better margins offered by energy, sports drinks in

particular

(65% brand’s gross margin – Sports) (70% brand’s gross margin

– Energy) (Exhibit 10)
(Juice Consumption – 8.2 gallons per capita in 2005 – 8.1
gallons per capita in 2009) (Sports Drinks – 4.2 gallons per
capita in 2005 – 4.0 gallons per capita in 2009) (Exhibit 2)

2. Better performing Global/International Markets 0.13 3 0.39

(Coke $16,345 million in 2005 vs. $22, 231 million in 2009)
(Exhibit 3a)

3. Better Performing Bottled Water Category 0.13 2 0.26

(Bottled Water Consumption – 19.5 gallons per capita in 2005
vs. 20.6 gallons per capita in 2009)
(Exhibit 1)

4. Profitable Retail Channels (Drug stores, Fountain/vending, Mass 0.01 4 0.04

Retailers & Club Stores)
(Variable profit 1.56, share of industry volume 31%) –
Fountain/vending
(Variable profit 1.68, share of industry volume 2%) – Drug
Stores
(Variable profit 1.39, share of industry volume 2%) – Mass
Retailers
(Variable profit 1.37, share of industry volume 7%) – Club
Stores
Exhibit 6

5. Optimize Production & Bottling Framework 0.12 1 0.12

(Gross Profit 78% vs. 42% - Concentrate producers vs. Bottlers)
Operating Income 32% vs. 8% Concentrate producers vs.
Bottlers)
(Exhibit 4)

THREATS
 6. Changing consumer behavior/trends in beverage consumption 0.13 3 0.26
CSD Consumption - 51.7 gallons per capita in 2005 – 46.0
gallons per capita in 2009)
(Exhibit 1)
CSD Consumption 51.10 gallons per capita in 2006 to 46.00
gallons per capita in 2009)
Change in Consumption (CSD) -0.4% in 2006 to -3.0% in 2009
(Exhibit 5)

7. Declining CSD Performance 0.12 2 0.24

Annual Volume Change 2004- 2009 = -2.3% (Coke)
Annual Change in Market Share 2004-2009 = - 3.5% (Coke)
Annual Volume Change 2004- 2009 = -4.3% (Pepsi)
Annual Change in Market Share 2004-2009 = -5.5% (Pepsi)
Annual Volume Change 2004-2009 = 0.7% (Mountain Dew)
Annual Change in Market Share 2004-2009 = -0.3% (Mountain
Dew)
Annual Volume Change 2004- 2009 = -3.5% (Sprite)
Annual Change in Market Share 2004-2009 = -4.5% (Sprite)
(Exhibit 7)

8. Growing concerns of bottlers (Exhibit 4), staggering difference 0.11 1 0.11

in operating margins compared to concentrate producers (8% vs.
32%)

9. Unwarranted price raises by concentrate producers/ Increased 0.11 2 0.22

Bargaining power of Concentrate Producers and Decreased
Bargaining Power of Bottlers
(Change in Concentrate price 2.7% in 2006 to 3.8% in 2009)
(Exhibit 5)

Total 1.00 2.06

EXPLANATION:

(a) WEIGHTS

The most significant external factor in this case was growing health/fitness conscious market; hence it
was given the highest weight (0.14), followed by better performing bottled water category (0.13), better
performing Global Market (0.13) and changing trends in beverage consumption (0.13). Another factor
that was found to be of importance was declining CSD performance, which was given a weight of
(0.12%). Growing concerns of bottlers due to intensive setup costs and less share in profits was one of the
major threats for Coke and Pepsi, (0.11), which offers them with an opportunity to consolidate or
optimize their production & bottling framework by either vertical integration or by consolidating bottling
with concentrate production, hence the factor has been given a weight of (0.12). Another major threat was
declining CSD performance (which is Coke’s and Pepsi’s flagship category) as evident from exhibit 7;
hence it was given a weight of 0.12. Other than that concentrate producers were found to raise prices on a
regular basis from the last two decades often by more than the increase in inflation, which again increases
the bargaining power of concentrate producers making it difficult for both brands to negotiate concentrate
prices with bottlers, hence it was given a weight of 0.11. Last but not the least, both brands have the
opportunity to leverage the power of profitable retail channels to make profit by growing the share of
industry volume of those channels. This factor was given a weight of 0.01.

(b) RATING

Currently the Coke and Pepsi strategy on leveraging lucrative channels for profits is “superior’, hence it is
given a rating of 4. Both brands are looking to venture into the growing fitness conscious market by
introducing diet drinks and trying alternative healthy ingredients, however, they need to focus more on
diversifying into “all natural juices”, sports and energy drinks as these categories are growing in
popularity; the strategy of both brands responds ‘above averagely’ to this opportunity, hence a rating of 3
is given. Furthermore, the brands are doing well in global markets, in fact according to a statement in the
case, “Coke grabbed 80% of its sales from International markets” (Page 11, para 2), in the same
paragraph it is mentioned that Pepsi relies more on the US for roughly half of its sales; overall the current
strategy of both brands responds “above averagely” to this opportunity, hence it is given a rating of 3.
Better performing bottled water category is another opportunity for both brands as evident from
consumption trends, however, consumers in this category are more price conscious and less brand loyal,
and therefore price is the single most important factor to grab profits in this category. Currently, Coke and
Pepsi are doing too good in this category because of high priced bottled water and so are responding
“below averagely” to this opportunity, hence it is given a rating of 2. Both Brands is “poorly responding”
to the opportunity of optimizing its framework to gain back control on its supply chain, hence it is given a
rating of 1. The connected threat to this point is the growing concern of bottlers, mainly because the cost
of setting up a bottling plant is high and including all expenses and costs, their operating income is only
8% compared to concentrate producers with 32% operating income. Both Pepsi and Coke‘s current
strategy responds “poorly” to this threat, hence it is given a rating of 1. Another threat is that concentrate
producers depicted a regular pattern of increase in concentrate prices over the past few decades, and that
too sometimes more than what inflation would warrant, thereby making them a very strong participant in
production & distribution framework. The strategy of both brands responds “below averagely” to this
threat, hence it is given a rating of 2. Last but not the least, the strategy of both brands responds
“superiorly” to the threat of changing beverage consumption pattern (hence, given a rating of 3) and
“above averagely” to the threat of declining CSD performance (hence, given a rating of 2).
 (c) TOTAL SCORE

The total weighted score is 2.06, which indicates that strategies of Coke and Pepsi aren’t well designed to
meet the opportunities and defend against threats.