ANALYSIS: The cola wars - Pepsi stays hungry in fight for public'sthirst

In the battle of cola powers, Coke had always been a clear-cut

victor over Pepsi. But, as Matthew Arnold reports, the tide is turning

and, in a new report, Pepsi has surpassed its longtime rival.



For a time, it seemed as if the cola wars had gone the way of the

Cold War, with Coca-Cola taking a substantial lead in market share, and

a moribund Pepsi seemingly resigned to playing second fiddle.



But the past year has been cruel to Coke, while Pepsi's marketing

efforts have, by most accounts, picked up steam. According to two major

reputation indexes released earlier in the month, Coke has lost ground

with both consumers and the captains of its corporate peers. Fortune's

ranking of 'America's Most Admired Companies' had Pepsi dethroning Coke

for the lead in the beverage category, while Coke dropped to fourth. At

the same time, the Reputation Institute and Harris Interactive published

the results of their annual Reputation Quotient study, which showed

Coca-Cola falling from the top 10.



'Coke has had a difficult couple of years,' says Gary Hempill, SVP with

Beverage Marketing, an industry research and consulting firm. 'They've

been going through a reorganization with major management changes, a

number of acquisitions have fallen through, and they've had a product

recall.



On the other hand, Pepsi is on a roll. Their growth has been very solid,

both in and out of the US, and their other units have performed quite

well. Plus, they've had some very prominent acquisitions.'



Pepsi beat out Coke to pick up South Beach Beverage Co. last month, and

expects to complete its acquisition of Quaker Oats and its potentially

lucrative Gatorade unit in the next several months, all factors which

would have impressed industry peers voting in the Fortune survey.



'Pepsi went through some difficult times back in the mid-90s,' says John

Fischer, editor and publisher of Beverage Digest, a major industry trade

publication. 'Today, it is a company that has its act together and is

well-managed and agile.'



This success has been relatively recently won. In 1998, Pepsi launched

an overhaul of its logo called 'Project Blue,' replacing the old red and

blue on white design with a new one emphasizing a global motif. It was a

brave stab at Coke, but received a wealth of criticism when it failed to

sufficiently push sales.



By last summer, Pepsi had opted to go back to its roots, reviving its

Pepsi Challenge, a staple of '70s advertising lore in which consumers

are put to a blind taste test comparing Pepsi and Coke. 'It occurred to

us that there were something in the order of 80 million Americans who

weren't even born the last time we issued the challenge,' says Larry

Jabbon-sky, director of PR for the Pepsi Cola Company of North

America.



'It was huge over the summer and into fall.'



Pepsi has always used its position as underdog to best advantage.

Internally this has meant that it has had to work smarter with a far

smaller PR staff.



Coca-Cola boasts a US PR team of 30, with 18 working internal PR and 12

working external, while PepsiCo's drink division keeps a PR team of five

headed by SVP of public affairs Becky Madiera. The company has no agency

of record but instead hires on a project-by-project basis.



Coke goes flat



While Pepsi has reinvented itself, Coke has tripped up. The cola giant

saw its courtship of Orangina quashed by French regulators. Then,

following a summer 1999 contamination scandal in Belgium which cost the

company $400 million and seriously wounded Coke's reputation in

Europe, chairman and CEO M. Douglas Ivester left. His successor, Douglas

Daft, initiated a major reorganization, slashing some 5,000 jobs and

pleasing investors but souring some consumers on the brand. Still

smarting from those debacles, the company recently offered to settle a

discrimination suit by 2,000 African-American workers for $192.5

million.



Daft is trying to regain the strategic initiative for which Coca-Cola

has traditionally been known. He initiated a series of charitable

programs and internal efforts to emphasize its commitment to diversity,

including a $1.5 million contribution to found the Diversity

Leadership Academy of Atlanta and the hiring of a company diversity

officer. Daft stated repeatedly that it was his top priority to ensure

Coke had the world's most diverse workforce.



Appealing to the locals



Asked about Pepsi's ascension, Jabbonsky says it's all a matter of

community relations. 'It's a decidedly simple business,' says Jabbonsky.

'We try to come up with programs that resonate with the primary

customer, which is the bottler. While the Pepsis and Cokes of the world

are huge multinational corporations, our business is really very local

in nature.'



These are words that would ring painfully true in the corridors of

Coca-Cola's Atlanta headquarters. The company's slow response in

Belgium, exacerbated by a corporate structure heavily centered on its US

headquarters, cost it dearly, as did its distant and lackluster

performance in France.



Coke has since decentralized its operations and embraced a new

motto.



'Our business strategy is 'Think local, act local,'' says Ben Deutsch,

director of PR for Coca-Cola. 'Our organization has been redesigned from

the ground up, returning us to a leaner, more decentralized management

structure.'



Suzanne Carter, an assistant professor at Notre Dame who is affiliated

with the Reputation Institute, says Coke found out the hard way how

quickly a local crisis can tarnish a company's brands abroad. 'One of

the things that happened with Coke in Europe is that they failed to

recognize how global their reputation is,' says Carter. 'As a result of

how they reacted in Europe, their US reputation has been affected as

well.'



But can a short-term loss in consumer confidence really impact a brand

as big as Coke? Hempill says not. 'We haven't seen any numbers to

indicate a huge defection of Coke customers,' he says. 'Sales overall

have been a little flat the last couple years, but that's an overall

industry problem, not a Coke problem.'



And while Coca-Cola has lost ground on its reputation, it retains the

advantage in sales over Pepsi, with 44.1% of the US soft drink market,

compared to Pepsi's 31%. In fact, Coke has even managed to extend its

lead over Pepsi in the past years, according to figures by the Beverage

Marketing Corporation.



'I can predict with virtual certainty that their consumer image will

begin to rise again,' says Fischer. 'Its brands are very strong and

deeply intertwined with many aspects of US culture.'



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