The Competitive Advantages of Coke:
For almost past 125 years Coke manufactured
concentrate and focused on driving demand and customer loyalty by heavily
investing in brand marketing. A lot of hype was created around its secret
recipe and this led to lot of speculation about the ingredients. Coke was the
most recognized and powerful brand in the world in 2010. Vertical Integration
allowed Coke to control 90 % of the total North American volume.
Coke had put in a lot of efforts to build new
networks of bottlers from bottom up whereas the competitors still relied on
state owned bottlers and networks. This allowed Coke to have better control
over its products.
Coke made lot of investments to support the
bottlers within its network. Coke devoted around $5 billion for its bottlers
and resellers to engage in marketing and promotional programs. This allowed
Coke to establish cordial relationships with its bottlers. These bottlers
allowed coke to maintain local touch and help in engaging with customers. Coke
‘s growth was driven by a symbiotic relationship with its bottlers network.
Coke worked upon Consumer Development Agreements
(CDAs) where the bottlers used the funds provided by Coke to secure shelf space
in national retailers and supermarkets thereby benefitting both parties.
On behalf of its bottlers, Coke negotiated with Bottler’s
major suppliers to guarantee low prices and ensure reliable supply for key
ingredients. This indirectly allowed Coke to keep a tab on its costs.
The new 1987 Master Bottler contract gave Coke
the right to determine concentrate prices and other terms of sale for cola
flavored sparkling beverages.
Even when the competitors were moving towards
still beverages, Coke strived to extend its market leadership by heavily
focusing on new packaging and line extension of its sodas.
Coke revitalized its sparkling brands through
new digital media platforms and global campaigns at sports events like World
Cup, giving it an edge over its competitors.
Domination in the Fountain business and a good
grip over the national accounts of McDonalds (leader in terms of volume sales),
Subway and Burger King.
10) Through its Anchor strategy, by creating an
anchor bottler on every continent Coke was able to consolidate its business and
at the same time penetrate new markets.
Original bottler agreement of 1899:
1899 franchise agreement granted the bottlers the right to manufacture and operate in an exclusive territory.
The Bottlers benefitted the most out of the
agreement because of the following reasons:
1) They got
exclusive right to manufacture and operate in a territory.
2) They got
the right to sell their franchise contract to a third party.
concentrate price was fixed, and it could not be renegotiated even if the
prices of ingredients changed. This
allowed for huge savings for bottlers as inflation aspect was ignored. The
bottlers dictated the retail pricing decisions and could carry competitor’s
Coke agreed to these terms because of the
Coke did not have enough money, brains and
resources to enter the bottling business.
Bottling was a capital-intensive business and
Coke did not see any value proposition to justify the investment in bottling
They saw the future growth only in fountain
sales and decided not to invest in the bottling aspect and sold the bottling
The acquisition of bottlers in 1970s made sense due to the following
In 1978 the bottlers agreed to incorporate
inflation in ingredient costs but soon tensions started mounting up between
coke and Franchise bottlers. Many franchises had passed onto third generations
and they were only interested in milking the franchise rather than investing in
new equipment to increase market share and step up advertising during cola
wars. Bottlers did what they wanted, and the US system was not aligned.
Coke bought underperforming bottlers and
injected them with cash to transform the operations and then they resold it to
better performing bottlers.
This was a starting step to acquire two biggest
bottlers in 1985 and they spun off the debt by creating a public owned company
with 49 % stake of Coke.
The following are the challenges faced by Coke prior to CCE
The advent of still beverages demanded
operational changes from both Coke and bottlers’ side. Bottlers started losing
out of profits associated with manufacturing. Bottlers performance was
declining as they were producing only 60-70 % SKUs compared to 85% in 2000.
Existing cold-filled production lines had low capacity utilization rates along
with weak demand for sparkling beverages. Bottlers were not able to raise
product prices to cover the growing costs of raw material, labor and
CCE was debt ridden and it impacted its ability
to invest in business. Plants were running at low utilization rates along with
over capacities in some geographies.
Acquisition of CCE was a rational choice due to the following
Pepsi had already achieved full vertical
integration and it was necessary for Coke
to replicate the same to bring innovative products to the market faster
and react more quickly to changes in the marketplace. CCE now became a European
bottler while Coke controlled most of bottling operations in North America.
Lot of supply chain cost reductions were
expected to take place. Overcapacity would be eliminated as this would have led
to efficient allocation of resources based on geography and growth prospects.
CCE was further brought under the umbrella of
CCR where the company could offer comprehensive and harmonized customer
services. Coke was able to connect the fragmented market into a single unit and
even turn the troubled bottling operations in Philadelphia into a profitable
market. It was able to take over Pepsi’s lead in sparkling drinks and at the
same time allowed expansion to new sales points as bottlers earlier couldn’t
handle chilled distribution.