Coke takes the wind out of Pepsis sales

Its a funny old world isnt it? Especially where global brands are concerned. Take the eternal duel between Coke and Pepsi as an example.

It’s a funny old world isn’t it? Especially where global brands are concerned. Take the eternal duel between Coke and Pepsi as an example.

Coca-Cola has just produced the kind of third-quarter financial results to make you blink in disbelief. Earnings soared 17%.

That would be a pretty astonishing achievement for a mature company like Coke during one of the seven fat years of Biblical prophecy, but to do it during the seven lean ones – which is where we now are in the economic cycle – is positively breathtaking.

All the more so when we consider the corporate mess that Coca-Cola was in only a few years back. It seemed the corporation was blighted by a series of chief executives called Doug. Doug Ivester hadn’t got a clue how to lead and, even worse, didn’t recognise a major corporate crisis (the Belgian scandal) when it whip lashed him in the face. Eventually, Warren Buffett (major Coke shareholder, 8%) had to have a quiet word, and Ivester left in December 1999. Doug Daft proved more circumspect in his management style, but failed to move the performance needle enough and quit in 2004 as Coke became mired in an unbecoming SEC investigation (the Whitley case). Over here, the Dasani fiasco demonstrated just how unsure Coke’s corporate touch had become. Even when it recognised a problem and tried to deal with it, it made elementary mistakes.

In short, Coca-Cola became a ham-strung titan of a brand blundering from one crisis to another. Brand strength internationally? A magnet for the anti-Americanism springing out of George Bush’s misguided Iraq adventure. Brand focus? Too narrow: hadn’t Coke heard it wasn’t about sickly carbonates any more? As a matter of fact it certainly had, but its response – as the Dasani incident showed – left much to be desired.

How unlike PepsiCo, the blue-eyed wonder boy that seemed to soar from strength to strength.

True, on the surface, PepsiCo wasn’t much more successful than Coke in dealing with the core declining carbonates issue, though it was a lot smarter in identifying and plumping up a fruit juice alternative in its Tropicana brand.

However, its real ace in the hole was strategic breadth. In contrast to Coke, it had long been much more than a soft drinks company, after successfully diversifying into snacks and restaurants. More cunningly than it could have known in 1997, it spun off its restaurants into what became the Yum holding company, while maintaining a long-term contract to supply them with soft drinks. In this way it secured a reliable revenue stream while insulating itself from some of the “junk food” problems that later came to haunt the restaurant group.

Meanwhile, its Frito Lay snacks division proved a valuable counterbalance to stuttering growth in the soft drinks division. In 2001 PepsiCo further bolstered it position by acquiring Quaker Oats. The ostensible prize was Gatorade, prime US contender in the dynamic energy drinks sector, but Quaker’s more healthy cereals and snacks ranges did PepsiCo no harm at all in offsetting the increasingly troubled image of Frito Lay as it wrestled with high salt concentrations and polyunsaturated fats.

In 2005, PepsiCo duly reaped its corporate reward. For the first time in the 112 years of its existence it surpassed Coke’s market value.

Fall from grace
But, oh dear, look at it now. Against a backdrop of lacklustre Q3 earnings, PepsiCo’s new chairman-ceo, Indra Nooyi, has just announced a drastic retrenchment programme.

While details remain hazy, the scale and ambition of PepsiCo’s corporate restructure are startlingly apparent. Some 3,300 jobs are to be cut and 6 plants closed. Money saved will be poured into a $1.3bn three-year overhaul which will see almost no part of PepsiCo’s product range and “brand proposition” left untouched.

Among the main considerations are a rethink of: the Tropicana soft drinks business; the Aquafina water brand; and Gatorade and other energy drinks such as Propel. Where carbonates are concerned, Nooyi is pinning all (well, most at any rate) of her hopes on a breakthrough solution to the sugar problem: the development of a natural low-calorie sweetener that can be used in colas.

The far-reaching nature of this plan can be more readily understood by examining those dismal Q3 results. PepsiCo earnings (6% up overall) were largely sustained by the continuing resilience of Frito Lay. Soft drinks is a disaster area. To give a taster, ‘Beverages’ reported a 4% decline in North America. North American carbonated drinks dropped 3% but, more astonishingly in view of the trend, non-carbonated beverages were down 5% and unflavoured water and Propel saw double-digit decline.

Nooyi’s explanation for this state of affairs is stunningly simple: “There’s a free substitute called tap water… and that’s why you are seeing the beverage category more impacted than the snacks category.”

Compare and contrast this performance with Coke’s. We might be tempted to attribute Coke’s superior growth to the happenstance of its global position. Coke, so this argument runs, is much less exposed to the “deep recessionary” behaviour of the US market than Pepsi because 70% of its revenues are derived internationally. Indeed, it is precisely its presence in developing economies, where the ripples of the credit crunch and American housing bust have yet to lap, which gives it a deceptive and perhaps provisional strength over its rival.

Only last month, for example, Coke paid an eye-watering amount of money to acquire Huiyuan, a Chinese soft drinks company, thereby regaining at a stroke the market leadership in lost to Danone in the early nineties.

Now it’s certainly true that Coke is better positioned than Pepsi in the emerging markets soft drinks business. But this is not a sufficient explanation for its recent success. When, for example, we examine more comparable areas of performance we still find Coke coming out ahead. Where PepsiCo’s beverages sales bombed in North America, Coke’s merely flatlined. Sales of still juices and bottled water were static but, importantly, there was a strong performance from the new Glacéau Vitamin Water drink and Fuze juices and teas, perhaps indicating that Coke is making important progress in offsetting declining carbonate sales, even in the cratered North American market.

Pepsi’s grand recovery plan
Of course, we have yet to see Nooyi’s grand plan in action. Overarching the root-and-branch re-examination of its drinks portfolio there is to be a massive corporate rebranding exercise. Omnicom’s Arnell Group has been brought in to redesign not only many of the brands’ packaging but also the Pepsi globe logo itself.

This last initiative will be quite radical for a venerable brand like Pepsi. The white band in the middle of the logo will now become a kind of rictus. Brand Pepsi will simply “smile”; Diet Pepsi will bear a “grin”; and Pepsi Max will get a “laugh”. Brand experts are puzzled by this profusion of packaging and wonder who will have the last laugh. They point out that there was a major repackaging exercise only last year and that the net result may simply be confusion.

We also have to ask whether the need for such a thorough overhaul is genuine or merely a boardroom smokescreen designed to buy time for what has so far been pretty uninspiring leadership.

I say this because Britvic has just unveiled its annual results, and they are very gratifying. The group’s annual sales rose 29%, causing a lift in the share price this week as rare as a harvest in a snow storm.

The significance of Britvic, a UK quoted company, is not only that Pepsi has a 5% stake in it, but that it is Pepsi’s exclusive UK bottler. So, when we read that Pepsi took a record share of the UK cola market (nearly 24%) after Britvic heavily promoted Pepsi Max, we are left – by implication – with an interesting question. To what extent are PepsiCo’s soft drink problems specifically conditioned by the inadequacy of its present ‘brand proposition,’ and to what extent by the mediocrity of some of its top US management?

Nooyi’s rebrand will be colossally expensive and may not prove popular with shareholders, still less employees frightened for their futures, if it simply turns out to be so much sticking plaster.

Whatever the outcome, the duel between Nooyi and Coke’s new leader Muhtar Kent will be a fascinating one to watch.

Latest from Marketing Week

NOT REGISTERED? IT'S FREE, QUICK AND EASY!

Access Marketing Week’s wealth of insight, analysis and opinion that will help you do your job better.

Register and receive the best content from the only UK title 100% dedicated to serving marketers' needs.

We’ll ask you just a few questions about what you do and where you work. The more we know about our visitors, the better and more relevant content we can provide for them. And, yes, knowing our audience better helps us find commercial partners too. Don't worry, we won't share your information with other parties, unless you give us permission to do so.

Register now

THE BEST CONTENT

Our award winning editorial team (PPA Digital Brand of the Year) ask the big questions about the biggest issues on everything from strategy through to execution to help you navigate the fast moving modern marketing landscape.

THE BIGGEST ISSUES

From the opportunities and challenges of emerging technology to the need for greater effectiveness, from the challenge of measurement to building a marketing team fit for the future, we are your guide.

PERSONAL AND PROFESSIONAL DEVELOPMENT

Information, inspiration and advice from the marketing world and beyond that will help you develop as a marketer and as a leader.

Having problems?

Contact us on +44 (0)20 7292 3711 or email subscriptions@marketingweek.com

If you are looking for our Jobs site, please click here