Consumers appreciate a good business rivalry. UPS and FedEx. Home Depot and Lowe’s. General Motors and Ford. There have been decades of bad blood between Miller Brewing and Anheuser-Busch.
But the granddaddy of them all — and Atlantans have had a front-row seat for this one — might be the long-running feud between Coca-Cola and PepsiCo. Today, Coca-Cola is winning in the U.S. soft drinks business, but PepsiCo is trying to recapture its mojo.
Even Santa Claus is caught in the middle.
In its best years, PepsiCo’s soft drink division reveled in its image as a risk-taker, with its much-publicized taste tests pushing Coca-Cola Co. into the huge blunder of replacing traditional Coke with “New Coke.”
The No. 2 soft drink company in the U.S. moved fast and seized opportunity. Some of its gaffes even became pop culture events, such as when Michael Jackson’s hair caught fire during the filming of a Pepsi commercial.
But PepsiCo’s soft drinks have lost ground to Coca-Cola’s in recent years, with slipping market share and questions about how the New York company can reverse the fortunes of Pepsi, Diet Pepsi and other big brands.
In the second quarter, its North American soft drink volume fell 5 percent compared to Coca-Cola’s 6 percent soft drink growth. (Without cross-licensed brands such as Dr Pepper, Coca-Cola’s soft drink volume fell one percent in North America.)
The decline of PepsiCo’s soft drinks offset growth in its non-carbonated drinks such as Gatorade. The company’s total volume in North America fell 2 percent in the second quarter. Coca-Cola’s total volume in North America rose 4 percent but would have been flat without Dr Pepper and other brands that Coca-Cola helps distribute.
Last year, Pepsi slipped to No. 3 among U.S. soft drinks, behind Coca-Cola and Diet Coke.
PepsiCo is trying to reverse those trends with ad blitzes and heavy helpings of irreverence. Its summertime TV commercials feature Santa and polar bears — both Coke marketing icons — reaching for Pepsi instead of Coca-Cola.
“We put Pepsi the brand back into consumers’ vernacular, and consumers have been talking about the brand again,” said Massimo d’Amore, chief executive officer of PepsiCo Americas Beverages. “The way I look at it, these ads have been very successful in triggering consumer dialogue.”
To which d’Amore added, “I love cola wars.”
The rivalry
In this continual battle, PepsiCo faces tough work against Coca-Cola, which has plunged resources into its soft drinks business and has the growth in Sprite, Fanta and other soft drinks to show for it.
Through the years, the strength of PepsiCo usually correlates to the misfortune of Coca-Cola, and vice versa.
From the late 1990s to the middle of the last decade, Coca-Cola suffered numerous and serious self-inflicted wounds. It was accused of making children sick in Belgium, and of discriminating against African-Americans. It suffered debilitating infighting and management turnover at its North Avenue headquarters. It cut 5,200 jobs in a panicky round of layoffs.
In other words, Coca-Cola was in much worse shape than PepsiCo is now.
With the rise of Neville Isdell as chief executive in 2004 and of Muhtar Kent in 2008, things stabilized. Coca-Cola is a tougher competitor now.
“The company has been strengthening since then,” said John Sicher, Beverage Digest editor.
Not every issue has been fixed. Coca-Cola Co. relies heavily in the U.S. on growth from borrowed brands such as Dr Pepper. It has no answer for the dominance of PepsiCo’s Mountain Dew, which boasts some of the most devoted fans in the country.
Mountain Dew is the most popular 20-ounce soft drink even in the Coca-Cola redoubt of Atlanta, a fact that PepsiCo touts on local billboards and trucks. PepsiCo proudly trumpeted its success in wooing Atlanta pizza chain Stevi B’s away from Coca-Cola this year, while Coca-Cola points to its massive lead at American soda fountains.
There is little love lost. Both companies discourage their employees from visiting restaurants where the competitor sells beverages. At a recent conference for Wall Street analysts, the chief executives of PepsiCo and Coca-Cola took subtle digs at the competing sports drinks.
Of the two companies, Coca-Cola is arguably getting more credit for shaking things up. It has built one of the world’s largest social media operations with 33.3 million friends on Facebook. It started an in-house division to find and invest in smaller brands such as Honest Tea.
Coke Zero sales have risen by double digit percentages for 21 straight quarters. For good measure, Coca-Cola’s Powerade brand is taking market share from PepsiCo’s Gatorade, which is growing but more slowly than its smaller rival.
“We have one game plan across our unified system and we’re learning every day how to maximize the value and momentum of our leading brands and value-creating customer services,” said Katie Bayne, president of Coca-Cola North America’s sparkling beverages division. “We’re making progress, but we have much more to do.”
PepsiCo’s challenge
The weakness in PepsiCo’s U.S. soft drinks business has drawn attention away from the growth of PepsiCo’s huge snacks business and global beverage portfolio.
“There is little doubt right now that Pepsi’s weak performance in North American beverages is dragging down the results for the entire company,” said J.P. Morgan analyst John Faucher.
PepsiCo has cut its earnings guidance for two straight quarters. In the latest reduction, it blamed a rough economy and higher commodity costs, among other factors.
“[PepsiCo’s] management has taken a step backward,” Goldman Sachs analyst Judy Hong wrote July 25. She predicted it will take PepsiCo three to four quarters of consistent performance to rebuild confidence.
Coca-Cola’s shares rose 23.4 percent in the past year. PepsiCo’s shares fell 1.4 percent in that period.
PepsiCo has failed to invest enough in its beverage brands in the U.S. for the better part of a decade, said Credit Suisse analyst Carlos Laboy, who has followed the Pepsi system for 19 years.
“It can’t just show up with a few new people and flip a switch and make everything better,” Laboy said. “The change ahead for the soft drink unit will be profound.”
There is a lot of change at the top of PepsiCo’s beverage team. Jill Beraud, chief marketing officer at PepsiCo Americas Beverages, left the company this year. PepsiCo lured several executives from outside the beverage industry, including Brad Jakeman from gaming company Activision Blizzard and Lorraine Hansen from Kraft, to help lead its global beverage business. Marketer Simon Lowden is moving into a U.S. role from PepsiCo’s international beverage business.
“We’ve really brought onto the U.S. battlefield the best team we could have,” d’Amore said. “These are businesses that take time to turn around. We have set ourselves up for success but the real numbers will take some time to show up.”
The company is spending 30 percent more on TV advertising for beverages in North America this year. The Pepsi brand has a $60 million partnership with Simon Cowell’s “X Factor” talent show, which is launching this fall on Fox.
For PepsiCo to succeed, it has to reclaim its role as an agile risk-taker, said Gerry Khermouch, Beverage Business Insights editor. For some time now, the larger Coca-Cola has fit that description, he said.
“As No. 2, you’re the one who takes chances,” he said. “You’re less vested in the status quo, so you go out and do wild things and shake things up. In a way, God intended Pepsi to be the company that shakes things up.”
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