Welcome back to our course on Protecting Business Innovations via Strategy.
In this session, we're going to talk about an important issue.
Why can't I get Coke at Pizza Hut?
Now that's an interesting issue because it's a way of
Pizza Hut being used to change the game in the cola war between Coke and Pepsi.
Now, as we think about the strategy of Pepsi,
and the strategy of Coke,
in the cola wars,
Pizza Hut was an interesting acquisition by Pepsi.
Pizza Hut is owned by Yum!
Brands which is a subsidiary of Pepsi Co. Pepsi also owns Taco Bell,
and Kentucky Fried Chicken.
So, you can't get a Coke at those either.
They're owned by Pepsi.
And I mean, some people like Pepsi.
I don't understand.
It's not my preference.
I like Coke but that's a matter of personal taste.
But I'm a pretty loyal Coke drinker.
And I do like Coke.
And so, I find it annoying that I can't have choice at some restaurant.
Now, if you think about Coke and Pepsi,
what is interesting is Coke is a very strong brand in the cola industry.
They've done a good job of beating Pepsi in
the cola wars but it wasn't always obvious that would be the case.
They both came out about the same time,
they both actually very similar products,
I will say that I do like Coke more than Pepsi but
I will also acknowledge, they're close.
There's not a lot of difference.
It's a matter of personal taste,
and preference but it's not too bad.
I just really like the taste of coke, and many people do.
So, how did coke win initially over Pepsi in the cola wars?
Well Coke spent a lot of money on marketing.
They had such creative and talented marketing campaigns,
such as inventing Santa Claus in America.
Now St. Nicholas, or Santa Claus had been around a while,
it was an icon, it wasn't something Coke just came up with,
but they invented the red-suited Santa to celebrate Christmas,
the Ho Ho Ho,
and sort of the marketing image of Santa with his red,
and some green, and Santa to celebrate Coke which had a red label on a green bottle.
And Santa drinking Coke to celebrate the holidays.
And this was a marketing campaign,
popularizing Santa Claus by Coke in order to sell their product.
So, that image and the customs around it,
were useful for Coke as part of a high budget marketing campaign for a long time.
In addition, when restaurants started becoming more
popular in America after World War II, Coke was there.
So, when the McDonald's franchises were starting up,
Coke was in there really early with their first franchise saying,
"We'd like to offer you a special deal.
We'll pay you money to sell coke in your restaurant."
So, Coke became sort of bundled with fast food.
They were there very early on.
Pepsi was not nearly as aggressive in getting into the restaurant business.
So, Coke was very early on there.
And that helped get people hooked on the taste of Coca-Cola.
That helped to build that image of Coke along with McDonald's,
along with other restaurants that grew,
so that they reached the point with alliances with restaurants where
Coke had massive numbers of alliances with restaurants,
with Domino's, McDonald's, Burger King,
Wendy's, many, many different fast food restaurants serve Coke.
Now this was a problem for Pepsi because it was getting
people to sort of buy into the Coke flavor,
or preference for the Coke brand.
And so, Pepsi responded,
and they started building alliances with restaurants.
And some of those, they bought.
The center ones, Pizza Hut,
Taco Bell, KFC, Pepsi bought.
But they also reached alliances with Arby's, and IHOP,
and Little Caesars to agree to exclusively sell Pepsi in the restaurant.
Pepsi gave them very attractive pricing in
order to get restaurants all over to the Pepsi camp.
In one restaurant, they were able to convert out
of the Coke world over to the Pepsi world.
Subway used to be an exclusive Coke restaurant.
And then, they moved to exclusively Pepsi.
And Pepsi was able to bring Subway in a creative way.
Not only did they give them a low price on their cola, the Pepsi beverage,
but they also offered them a good deal on snacks,
and so Subway was able to sell Lay's chips along with Pepsi soft drink bundled in with
their sandwiches in an attractive proposition
as a joint venture which Coke couldn't match.
Because Coke is not in the salted snack food business. Pepsi is.
So, Pepsi has built up their brand image,
and fighting against Coca-Cola.
They've also done something aggressive a number of years ago,
Pepsi came out with something called the Pepsi Challenge.
Where they did blind taste tests in supermarkets of Pepsi versus Coke.
And they had a big battle where Pepsi is sweeter than Coke.
And therefore, many people went blind taste test
first time in a store Pepsi versus Coke, they prefer Pepsi.
And so, Pepsi was winning this blind taste test ads.
Coke decided, "Oh, oh, we've got a problem.
We need to reformulate Coke,
and launch a new beverage which is sweeter than Pepsi.
So, that will win in the blind taste tests ad."
They brought out something called New Coke.
New Coke was a disaster.
Consumers said "I hate it. I like Coke.
I don't like Pepsi. I don't want a sweeter than Pepsi beverage.
I didn't switch to Pepsi.
Even though, they had all these blind taste test,
and they said they were better.
I like coke." People would say.
And so, there was a huge negative reaction to New Coke.
And as a response,
the Coca-Cola Corporation responded quickly.
And within three months, relaunched Coca-Cola Classic.
And had new Coke sweeter than Pepsi.
And Coke Classic not as sweet as Pepsi.
Fighting on both ends of the spectrum,
this kind of negated Pepsi's blind taste test challenges,
and gave Coke a dual position on both ends of the sweetness scale,
both ends of the flavor scale against Pepsi.
That was turned out to be a very interesting strategy.
Partly because it helped to re-intrench Coca-Cola as the dominant brand because
most people found they really liked Coke Classic much more than the New Coke.
And eventually, New Coke went away.
You just have Coke today.
We don't have New Coke, or old Coke.
We don't Coke Classic. We just have Coke.
And that's the classic flavor.
The Pepsi taste challenge turns out
that appeal to some people but most people like the classic Coke taste.
Now, Pepsi picked a different way to win.
Instead of going head-to-head with Coke,
just in the beverage business not only did they diversify
into fast foods which helped them to sell more soda,
by owning some restaurants,
and finding alliances with others,
but they also bought the Lay's snack business.
And so, Pepsi Co. owned Frito Lay.
And the snack business worked well with
the beverage business because you can distribute them to many of the same stores,
or sporting outlets, or gyms,
or convenience stores, and so snack food and beverages go well together.
That gives Pepsi some synergies and distribution.
And that's an advantage. And what's the bottom line?
This is a competition that's still ongoing.
Coke won in some ways.
And they spent more on advertising.
Pepsi won in some ways.
They've diversified their business.
And they're doing very well with the Lay's business.
They're doing very well with their restaurants.
And the Pepsi Corporation has higher profits today than Coca-Cola Corporation.
But Coke is more dominant in the beverage business,
and has more loyalty and consumer strength.
It's not clear who's the overall winner in the end.
If you just look at earnings per share,
or profitability overall, Pepsi's doing very well.
But they've had to raise money by selling stocks,
and raise capital to diversify their business.
And so, just being bigger across
a number of businesses may not be better than being very,
very strong in the beverage business which is where Coke's focus is.
Both competing on different basis,
different ways with overlapping marketplaces.
It's an interesting strategy changing the rules,
Pepsi's saying "If we can't beat coke head on head and beverages is alone,
let's combine it with salted snacks."
And there's a nice distribution angle to that,
"And let's buy some restaurants if we can't get restaurants
to convert over to us as easily will be Coke.
Because we're the only beverage that you could buy in Pizza Hut,
Taco Bell, or KFC."
You're not going to find any Coke products
in any of those three companies because they're
owned by Pepsi Co. Thank you very much.
Theodore Henry King CLARKAssociate Professor
