Question

Dave Johnson, Coke’s Financial Director, returned from a meeting with the following comparative financial data, which was carefully verified:

2001 comparative financial information for the Italian market
	Coke	Pepsi	Regional Brands
Domestic soft drink sales (000)	$    22,632	$    25,744	$      158,030
COGS (on soft drinks only)	78%	70%	85%
Average price per equivalent unit (in $)	6	10.5	3.5

He tells you that he is very concerned that Pepsi is achieving both higher average prices and has lower costs. On the other hand, he was relieved to see that regional brands tended to be high-cost producers. Use the above data to perform a quantitative value-based strategy analysis and use your analysis to advise Mr. Johnson on the nature of Coke's competitive advantage, or lack thereof, relative to both Pepsi and Regional Brands.

Answer 1

First we list down the case facts:

	Coke	Pepsi	Regional Brands
Domestic soft drink sales (in $ '000)	22,632	25,744	158,030
COGS (on soft drinks only)	78%	70%	85%
Average price per equivalent unit (in $)	6	11	4
Volume Sold (000)	3,772	2,452	45,151

As per the above information we can infer three main things:

1) Coke has a higher direct cost structure as indicated by the Cost of Goods Sold (COGS) % of revenues as compared to Pepsi but lower direct cost structure compared to regional peers.

2) Coke has lower realised per unit prices as compared to Pepsi and a higher per unit price as compared to regional peers

3) In terms of volumes sold, Coke is selling more than what pepsi sells but lower than regional peers.

Now on the basis of this information we can say that:

This means that as compared to Coke, Pepsi is probably seen as a more premium drink by the customers as they are ready to pay a higher price for Pepsi.

We can also infer that even though Coke's price is only 42.8% lower than Pepsi's price, it is able to sell 53.8% more quantity than Pepsi.

Thus we can suggest that Coke's competetive advantage is its lower cost perceived by the customer and it can work on its supply chain to increase its supply further and capture market share from regional peers in the low cost segment. This can help it in increasing overall sales and also help in lowering overall costs due to economies of scale (higher utilization of fixed assets).