What Can the Cola Wars Teach Us about Brand Loyalty?
Bottom
Line: In mature product categories, the top
companies usually compete fiercely for one another’s customers. But they might
be better off focusing on the fringe consumers who haven’t yet picked a side.
In well-established industries, which are
usually dominated by only a few leading brands that have built up trust and
stability in the minds of many consumers, growth tends to stagnate or even
decline. In these mature sectors, where innovations are incremental at best and
distribution efforts have little room to expand, conventional wisdom suggests
that the only way top companies can grow even slightly is to lure precious
customers away from rivals. Hence the intensity of advertising campaigns
designed to undercut the competition, the use of loyalty programs to keep a
company’s own customers on board, and, most notably, the periodic price-cutting
promotions that strive to persuade people to switch brands.
But in reality, are most of these efforts
wasted? After all, if the prevailing belief about the intensity of competition
in long-developed sectors is true, shouldn’t customers be continually switching
between brands as a result of the latest marketing campaign or price reduction?
To
provide an answer to these questions, the authors of a new study analyzed the cola wars — a cheeky term coined
during the Cold War to describe the long-running struggle between Coca-Cola and
Pepsi for dominance of the soda market. Both firms used marketing tactics to
differentiate themselves — recall, for instance, the “Pepsi Challenge” blind
taste test to see whether consumers liked Pepsi or Coke better, and the iconic
“I’d like to buy the world a Coke” jingle. They also staged periodic price
wars, which led to little shift in market share on either side, but resulted in
a substantial hit to profitability for both companies. Sponsorships have also
been a battleground.
If
advertising becomes less convincing as consumers come to refine their brand
preferences over time, and price wars leave nobody a winner — the U.S. airline
industry, for example, lost US$13 billion in just four years after a
price-slashing craze in the early 1990s — that leaves product development
tweaks as the most likely way to differentiate a mature brand. And in the cola
industry, even slight innovations on one side have been mimicked on the other.
Coke introduced a caffeine-free drink just one year after Pepsi’s version hit
the market in 1982; later that decade, Cherry Coke quickly found itself going
up against Wild Cherry Pepsi; and more recently, Coke Zero and Pepsi Max have
competed for the consumer with a taste for low-calorie sodas.
The authors analyzed a database on consumer
shopping history maintained by the University of Chicago and the Nielsen
Company. The data includes information on more than 1.4 million product bar
codes along with purchase locations and demographics for the more than 62,000
participating households across the United States. Over one year, the authors
tracked sales in terms of volume purchased of both regular and other varieties
of soft drinks, which they chose as a study focus because of the industry’s
level of maturity: Stores typically stock a similar number of Coke and Pepsi
products, and the prices are quite consistent within markets. Although Coke sells
slightly more than Pepsi, the authors found, the two represent almost half of
the soda market share, with no other individual brand even coming close as a
third competitor.
Because
casual soda drinkers generally don’t reflect true loyalty to a particular
brand, the authors focused their analysis on households that purchased a
majority of either Coke or Pepsi soft drinks. They further broke down the data
to focus on heavy-use households — those in the upper half of volume purchased
— because these are the consumers who represent the bulk of loyalty purchases and should matter
most to a mature firm that’s defending its turf or trying to pilfer a rival’s
long-standing customers.
The results showed that even consumers who
were not heavy soda drinkers were remarkably loyal across three levels of the
brand: the overarching Coke or Pepsi umbrella; individual product categories
like regular or diet; and further modifications such as diet lime flavor. At
the umbrella level, Coke retained 94.4 percent of its loyal households from one
quarter to the next; Pepsi kept 91 percent. At the individual product category
level, 90.5 percent of regular Coke and 88.9 percent of regular Pepsi drinkers
remained loyal, and the vast majority of consumers of low-calorie Coke (92.5
percent) and Pepsi (87 percent) also stuck to their preferred brand. Loyalty
rates were even higher at the modified brand level. People drinking
caffeine-free sodas tended to stick with their chosen brand (95.9 percent for
Coke, 94 percent for Pepsi). These preferences hardened even further when the
authors analyzed the subset of heavy-use consumers, whose preferences appear
all but set in stone.
These incredibly high loyalty rates don’t
necessarily mean that old brands shouldn’t keep trying new tricks to win over
consumers, the authors write. By opening the playing field to spin-offs such as
cherry-flavored sodas or unique packaging designs, mature firms force their competitors
to devote resources to fighting on new fronts, while also satisfying customer
demand for new types of products — even if they ultimately prove unsuccessful.
In other words, the cola wars have settled
into something more like a truce, with an implicit agreement that the brands
can coexist. These mature brands have solidified their consumer base —
especially the most die-hard lovers of a particular soda — to the point that
the real competition exists at the periphery, the authors suggest. Rather than spending
advertising dollars on (most likely) futile attempts to snag lifelong
customers, managers of mature brands should consider targeting “fringe”
consumers who may not be beholden to a particular brand, or even a product
category.
As one
former Pepsi executive told researchers for a study in 2009, “We thought of the market as
ours, theirs, and up for grabs.” By rejecting the long-standing assumption that
mature companies should compete for “theirs,” companies can instead focus on
the “up for grabs” group — the relatively narrow slice of consumers who have
yet to choose sides.
Source: “Do
Brands Compete or Coexist? Evidence from the Cola Wars,” by Anthony Koschmann (Emory University) and Jagdish
Sheth (Emory University), Social Science Research Network, May 2016
Matt Palmquist
http://www.strategy-business.com/blog/What-Can-the-Cola-Wars-Teach-Us-about-Brand-Loyalty?gko=e8aae&utm_source=itw&utm_medium=20160830&utm_campaign=resp
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