In a recent post, I discussed the dramatic disparities in the market capitalisation of PepsiCo and The Coca-Cola Company, as a result of the different market strategies adopted by the two companies.

A good colleague, Bob Houk, had a different take:

Mark:

First, I’m not sure your premise is correct, at least as far as Pepsi/Coke are concerned.

If the moves into other categories were what caused the market cap change between 1998-2005, then they were a long time coming — the Frito-Lay acquisition took place in the early eighties, I believe (maybe earlier), and Quaker/Gatorade was also long prior to the period mentioned. They were part of an overall broadening of the company that included other moves that worked out less well (e.g., acquisition of several fast-food chains that were later dumped). If this was done with an eye to the changing beverage tastes of the public, then Pepsi was very far-sighted and patient.

Another case of redefining one’s mission in order to grow, though, was the convenience store business. They grew in large part by making themselves into gas stations (it’s hard to remember now that early c-stores did NOT sell gas). When I did some consulting for Circle K (#2 in the US market at the time) in the early eighties, the first thing I learned was that gas was 1/3 their sales (ans beer 1/3 the balance — a scary combination). Southland (7-11), their rival, became the #1 gas retailer in the country.

The change left them vulnerable, though, because the gas companies eventually responded by turning their service bays into c-stores, and over-saturating the market. Circle K and Southland both suffered badly and were later acquired by other companies.

Bob

I think we’re both (largely) in agreement. In my response to Bob, I wrote:

I do not believe that PepsiCo moved into chips or non-cola drinks with “an eye to the changing beverage tastes of the public”. Rather, they (I believe) realised that, after more than a century of head-to-head competition against Coca-Cola, they were probably a tad narrow in their definition of the market they were competing in.

If you harken back, there were times when Coca-Cola sales reps were forbidden to utter the Pepsi brand, and vice versa, such was the intense rivalry between the companies. They could not discuss or reference the other company in their corporate pow-wows or off-sites.

Given the corporate  culture, the rivalry, and the profits inherent in going head-to-head against each other in the ‘Cola Wars’, it would have been very easy for either/both Boards to continue their detente against one another – through product iteration (blueberry cola anyone?), price wars, product portion strategies, channel cannibalisation etc.

But the PepsiCo Board sat back and (I believe) asked itself: “With our resources, our brand position, our consumer + market insight, is this the best we can do? What market do we truly compete in?”.

They answered that question in a manner wholly different to the way Coca-Cola did. As a result, they saw their true market environment as being more than just cola flavoured drinks. They realised the ‘share of wallet’ that they were competing for was more than just fizzy sugar, and they diversified accordingly, and reaped the benefits.

The  move into fast food (Tri-Con) was, I believe, more about buying better distribution for their cola product than furthering their strategy of expanding/deepening their wallet-share.

Now the example you cite re: c-stores is a classic one – companies that develop strategy in a vacuum. Most companies either devise market strategy without considering how their immediate competitors will react (rookie mistake). Nearly all companies devise market strategy without understanding that their business/market is part of a ‘commercial ecosystem’, and as such other companies beyond their traditional competitors will react (ergo gas stations responding to soda sellers).

Personally I wonder whether the Cola Wars need have lasted as long if either company truly understood ‘3rd Horizon strategy’.

This is a topic dear to my heart, so I welcome other/new opinions.