/ 11 January 2006

Pepsi now the ‘real thing’

The fizzy drink of choice at PepsiCo on December 12 was more likely to have been champagne than cola. By the end of trading on Wall Street that day, the company’s market capitalisation reached $98,4billion — and the market valued rival Coca-Cola at $97,9billion. For the first time in the history of the two companies, PepsiCo was valued more highly than its old arch-enemy.

It was chiefly a symbolic shift, but what a symbol — and one that has persisted over ensuing days. The ‘real thing” is suddenly second best.

The tussle for supremacy between Coca-Cola and PepsiCo is one of the great rivalries in business. The two firms remain the number one case study for marketing students on how to create a brand mythos around something as humble as brown carbonated water laced with caffeine and vegetable extracts.

They have more recently become case studies for another reason: PepsiCo for its ability to spot consumer trends and adapt its business to a changing climate; Coca-Cola for failing to do the same, perhaps numbed into complacency by its long history as the number one best-selling drink in the world.

In early 2000, Coca-Cola’s market capitalisation was about $128billion, almost three times that of PepsiCo, which was valued at $44billion.

Fizzy drinks sales at both companies are flat in developed markets. The crucial factor in the differing fortunes of the two has been PepsiCo’s diversification away from sugary carbonated drinks and the early realisation that consumers were worrying more and more about obesity and health.

In 1998, the company acquired the fruit juice business Tropicana. Three years later it won an auction for Quaker Oats, paying $14billion and adding the energy drink Gatorade to its portfolio.

Coca-Cola pulled out of the bidding after its independent directors — including the billionaire investor Warren Buffett — expressed concerns about the lofty price. That proved to be a poor decision.

Today, PepsiCo has 81% of the fast-growing sports-drink market in the United States. It has the number one fruit-juice brand in Tropicana and the leading bottled-water brand in the US, Aquafina. In the most recent quarter, sales of PepsiCo’s non-carbonated drinks grew by 24%.

PepsiCo generates about 23% of its worldwide profits from the near-stagnant carbonated drinks sector, while Coca-Cola relies on its fizzy drinks for 85% of profits. PepsiCo owns snack foods, including Walkers Crisps and Doritos, and its diverse range of products, analysts note, is helping it to gain leverage with supermarket chains.

Coca-Cola is playing catch-up. In June, it launched its Minute Maid pure juice range in the United Kingdom. It also introduced Dasani bottled water and energy drink Powerade. Powerade is about one-fifth as big as Gatorade in the US.

When Coca-Cola eventually launched its bottled-water brand in Britain, it met first with derision when the press realised it was distilled tap water and then horror as it was pulled from shelves in a health scare.

PepsiCo shares have risen 14% this year while Coca-Cola’s fell 1,2%.

Coca-Cola’s problems appear to have begun with the death of highly regarded chief executive Roberto Goizueta in 1997. The company subsequently suffered from under-investment, heavy job cuts and management upheaval. In May last year, the company hired its third chief executive since Goizueta’s death, coaxing Irishman Neville Isdell out of retirement.

Isdell’s appointment received a lukewarm reception on Wall Street. At 60 and a company veteran, he was not seen as the new blood or the agent for change that Coca-Cola needed. Shortly after he joined, Isdell was frank about Coca-Cola’s mistakes. He sharply reduced the company’s long-term profit and sales targets, and admitted there were ‘no quick fixes”. The company, he said, had missed consumer trends and had under-performed since 1997. There had been an absence of ‘brand-building iconic advertising”.

He promised an additional $400million for marketing and vowed to address emerging markets such as China and India more energetically. The company has committed more funds to product innovation, gathering key executives from around the world to swap ideas.

He has since shaken up management, including the departure of marketing and retail chiefs, and culled poorly performing brands, including a vanilla variant of Coke and lemon and lime versions of Diet Coke.

The most spectacular disaster was the launch of C2, a low carbo-hydrate version of Coke, which came on to the market as the fad for low-carb diets was beginning to wane.

He appears to have made some progress and analysts have begun to express a cautious optimism. The company has posted improving profits over the past four quarters. Third-quarter earnings were up 37% to $1,28billion, chiefly on the back of double-digit volume growth in developing markets such as China, Russia and Latin America.

At an analysts’ conference this month, Isdell updated Wall Street on plans for 2006. It is planning another round of product launches, led by Coca-Cola Blak, a coffee-flavoured version that will be on the market in France in January and be introduced later to other parts of the world, including the US.

The company has already launched another sugar-free variation on the core brand, Coca-Cola Zero, and another energy drink, Full Throttle.

Other products lined up are a spark-ling version of Dasani and Tab Energy, an energy drink aimed at women. The company expects to make bolt-on acquisitions in faster growing areas of the market. Isdell said 2005 had marked the end of a transitional period for Coca-Cola.

The company plans to offer consumers a none-too-promising new advertising slogan: Welcome to the Coke side of life.

PepsiCo, meanwhile, continues to press its advantage. The company says it is focusing its research and development efforts on healthier products, including Tropicana fruit bars and a carbonated version of the brand.

Last year, it bought Pete and Johnny, a company credited with introducing crushed-fruit smoothies — under the PJ Smoothie brand — to the UK.

In its latest television campaign in the US, the firm has been promoting its range of healthier drinks and snacks — Tropicana, Aquafina water, baked Lay’s crisps and Quaker Granola Bars — presenting them together as the choices for a healthier lifestyle.

It might turn out that 2005 has been a transitional year, but not as Isdell intended. It could be the year that Pepsi-Co left Coca-Cola trailing in its dust. —