Should Coca-Cola Raise Its Prices?

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Coca-ColaWhat could be more American than the Cola Wars? Played out in ads and price-chopping contests, Coca-Cola (KO) and PepsiCo (PEP) have been at it for decades. Pepsi's latest offensive: The brand declared summertime as "Pepsi time" with ads released at the end of June showing Santa and Mrs. Claus, the Coca-Cola icons, boogying down at a tropical locale and drinking...what else? Pepsi, because they are "on vacation."

Even as the two brands fight to differentiate themselves by taste, demographic and even season, at least one thing remains pretty much the same between the two: price.

The exact cost of soda varies widely from store to store, and depends greatly on packaging, location and promotions. Take a 12-pack of 12-ounce cans for Coke (144 ounces), which sells for $8.00 on Amazon.com. A similar package of Pepsi is priced at $8.25. Yet a 2-liter bottle of Coke costs $1.79 on online grocer FreshDirect.com, while Pepsi comes 10 cents cheaper at $1.69. For Coke Zero drinkers in the heart of Manhattan, a two-liter bottle at a local grocer costs $2.89.

Prices Edge Up as Ingredient Costs Grow

Both brands enacted modest price increases around the same time last month, and will likely keep their prices relatively similar for the foreseeable future. Both brands cited the rising costs of the commodities used to produce their beverage portfolios, including sugar, corn, oil and aluminum.

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"We achieved 1% to 2% positive retail pricing in the [second] quarter and remain committed to achieving 3% to 4% retail pricing in the second half of the year to help offset higher commodity costs," Coca-Cola said in its earnings press release in mid-July.

PepsiCo also raised prices in July after having announced the coming hikes back in April.

How will those price bumps get passed on to consumers? It is too early to tell, says John Sicher, publisher of Beverage Digest. Price markups could show up in a number of ways and it's hard to decipher where it's happening, he says. It could manifest in a few pennies for special packaging or various other promotional tools and distribution channels.

"The price increases get implemented in careful and complicated ways," Sicher says.

Should Coke Raise Its Prices Even Further?


One pricing strategist argues that Coke, as the market brand leader in North America, should actually move its prices even further north and price itself much higher than Pepsi, which has experienced declining demand. Rafi Mohammed, author of The 1% Windfall and The Art of Pricing, says Coke's brand strength -- along with its success in expanding into products such as Coke Zero, released in 2005 -- is an undertapped opportunity for investors.

In 2010, the Coke brand ranked No. 1 in market share (17%), followed by Diet Coke (9.9%), Pepsi-Cola (9.5%), Mountain Dew (6.8%) and Dr. Pepper (6.3%), according to Beverage Digest.

"There is room to premium price it over Pepsi," Mohammed says. A stronger pricing strategy for the 125-year-old brand would take better advantage of its market position, he says. A premium price may not be appropriate for Coke Classic, he says, but could work for Coke Zero. "It's about capturing the value of a product relative to the customer's next best offer," he says.

Coca-Cola historian Mark Pendergrast disagrees. He is the author of For God, Country & Coca-Cola. The price battle between the two soda titans stretches back to 1950s, when Pepsi -- until then considered something of the underdog beverage -- became a real value challenger for Coke, selling more volume for the same price.

"For many years [Coke] had resisted matching prices," Pendergrast says, "but as the market grew and challenged Coke, [Coca-Cola] realized that they were in real battles."

Since that time the prices have moved in tandem. "Coke is still number one in U.S.," he says. "They need one another and they do move in tandem and it would surprise me if one went out of line. It used to be that people were totally devoted to one, but now [consumers are] not so brand devoted."

Risk of Soda Sticker Shock

The fear is, of course, that soda drinkers would switch allegiances or just stop buying as much of the carbonated stuff. Prices for soft drinks are very sensitive, so any price bump could have a dampening effect on volume, Sicher says. When the two cola makers raised their retail prices in 1999, consumers responded by buying less.

This year, the CEOs of both companies have voiced the need for caution when it comes to pricing. "In the case of beverages, we have to be a lot more careful," Pepsi Chief Executive Indra Nooyi told The Wall Street Journal. "There are alternatives where you can start trading down. You can go from packed beverages to, first, bottle water, then to tap water."

Coca-Cola CEO Muhtar Kent defended its pricing strategy at an investor conference in June: "We are selling moments of pleasure at a sensitive time."

Catherine New is a staff writer for DailyFinance. You can reach her at catherine.new@huffingtonpost.com.

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