It’s a Take-No-Prisoners Attitude in Soft Drink Wars

Ralph Rubio was knee-deep in construction rubble when a Pepsi-Cola salesman popped his head into the old Mickey’s Burger stand on Mission Bay Drive in San Diego.

The year was 1983 and Rubio was renovating the small storefront that would house his family’s first Rubio’s Baja Grill. Impressed that the cola company cared enough to send an emissary, Rubio joined the Pepsi Generation, and, within hours, a Pepsi crew was ripping out Mickey’s old Coca-Cola dispensers.

Flash forward 15 years and Rubio’s fast-growing, 48-unit restaurant company again is embroiled in the cola wars. And, within weeks, customers ordering Rubio’s fish tacos will be washing them down with Coca-Cola drinks.

Rubio decided that Coke was the Real Thing after the Atlanta-based company dangled a joint-marketing package that the restaurant chain owner believes will help to speed his company’s planned expansion. “Pepsi was real good to us for 15 years,” Rubio said. “But all things being equal, Coke is the dominant brand, and that can’t but help us.”

Skirmishes like the one fought in recent months at Rubio’s corporate headquarters in San Diego are an increasingly common occurrence as Coke and Pepsi escalate their bitter and long-running war for dominance in the $54-billion domestic soft drink industry.

Coke recently paid $2.25 million to become the exclusive soft drink provider at Georgetown University. Pepsi boasts that its drinks will now be served alongside Coke products on American Airlines flights. And, when Walt Disney Co.’s new cruise ship makes its maiden voyage later this year, Coca-Cola will be the only soft drink provider on board.

Who’s winning cola war skirmishes depends on who’s talking. Pepsi crows about replacing Coke as the exclusive soft drink at Edison International Field. But Coke spokesman Scott Jacobson said the Angels’ home stadium was dropped because Coke’s marketing dollars were better spent “up the road at Disneyland where young consumers, our consumers, spend their time.”

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Top executives at the two firms are openly rivals. PepsiCo Inc. Chairman Craig E. Weatherup told a soft drink industry meeting late in 1997 that Pepsi’s push into the fountain business won’t be “a bloodless fight, nor an easy one.” And Coca-Cola Co. Chairman M. Douglas Ivester in February told Coca-Cola shareholders that he grows teary-eyed while driving past restaurants serving the No. 2 company’s drinks.

Coke, which has 43.9% of the total market compared with Pepsi-Cola’s 30.9% share, wants to build its share to 50%. Weatherup counters that Pepsi intends to become the dominant soft drink company when it comes to fountain and vending machine sales in “office buildings, shopping malls, auto-part stores, music chains--you name it.”

The fighting is escalating at a time when Americans are clamoring for soft drinks. The average consumer now quaffs carbonated beverages 102 times each year, up from 83 occasions earlier in the decade. “No other product even comes close to matching the increased consumption,” said Harry Balzer, vice president of NPD Group, a Chicago-based market research firm.

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But both companies face challenges because bottom lines are being sapped by currency fluctuations abroad and steep price discounting at home. “You can go into a store and come out with one of those 2-liter bottles and pay the same thing you did 10 or 15 years ago,” Coke spokeswoman Polly Howes said. “It’s an incredibly competitive business.”

And, because much of the growth in carbonated beverages is being driven by non-cola drinks like Pepsi’s Surge lemon-lime drink and Coke’s Sprite, both companies must spend heavily to advertise products across their lines.

Pepsi, which is celebrating its 100th anniversary, continues to run close behind Coke in retail stores where more than 60% of soft drinks are purchased. The Somers, N.Y.-based company also is increasingly competitive with Coke in sales from vending machine.

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But Pepsi fizzles in the soda fountain business that Coke dominates with an estimated 65% of overall sales, compared with Pepsi’s 21% share. The poor showing is doubly painful for Pepsi because, in addition to carrying fatter profits than retail sales, the fountain business also gives soft drink companies a high-visibility way to reach new customers.

Coke has forged exclusive contracts with market leaders such as McDonald’s, Burger King and Wendy’s. Pepsi started fighting for market share of the fountain business in 1997 when it sold off its Taco Bell, KFC and Pizza Hut restaurant chains. The move eliminated a common complaint among restaurant operators--that buying Pepsi products was, in effect, subsidizing a competitor.

Pepsi launched an unexpected attack earlier this month when it accused the nation’s largest soft drink company of violating antitrust law in the lucrative business of selling soft drink syrup to restaurants, sports venues and movie theaters. Pepsi’s suit alleges that Coke is illegally trying to monopolize independent distributors by threatening to drop any companies who agree to carry Pepsi products.

“We’re here to challenge the status quo,” said Vince Gennaro, president of Pepsi’s fountain division. “We’re hungry.”

Coke, which has denied any wrongdoing, argues that Pepsi is simply late to the party. “The two companies have taken very different routes to distribution over the past 100 years,” Howes said. “We’ve built our relationships with distributors over a long period of time . . . but Pepsi only in the last several months showed any interest in wanting to use distributors as well.”

Restaurants and sports venues that change colas say they’re driven by the need for better service--as well as joint marketing agreements that the cola companies fund to help sell their syrup.

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Rubio, for example, is betting that his chain’s planned expansion will be speeded along by an affiliation with the nation’s dominant soft drink company. The restaurant owner said he grew disenchanted with Pepsi’s service in recent years: “They seemed to have gotten sidetracked by the restaurants and other issues . . . . Coke just seems hungrier for business like ours.”

Restaurant operators say the cola companies are using promises of discounted pricing, free fountain equipment and snazzy in-store signage to woo new customers. But, as marketing costs skyrocket, soft drink companies are scrutinizing potential partners’ demographics to ensure that costly agreements make sense.

When Coca-Cola reenlisted last week as the official soft drink of the National Football League, it paid an estimated $4 million annual fee--far below the $15 million that it paid during last season, observers said. Coke is the NFL’s official soft drink company, but individual stadiums can strike deals with either Pepsi or Coke.

“The essence of the agreement is that it will encourage and support stronger relationships between our local bottlers and various NFL teams around the country,” Howes said.

Since rejoining the fountain war, Pepsi has announced a string of deals. Besides exclusive rights at Edison International Field in Anaheim, it negotiated rights to the Indianapolis Motor Speedway and several regional movie theater chains in the Midwest. It is installing vending machines at Indianapolis-based Simon DeBartolo Group’s 202 shopping centers.

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Pepsi also convinced the 80-unit Hard Rock Cafe chain to part company with Coke after 27 years. Hard Rock switched “because we found a greater alignment of like demographics with Pepsi than Coke,” said Pete Beaudrault, Hard Rock’s chief operating officer. He declined to discuss specifics of a joint-marketing program that will be funded in part by Pepsi.

Some of the skirmishes being fought are more important for their propaganda value than their immediate bottom-line contribution.

Pepsi still isn’t the drink of choice at Disneyland or Disney World. But Pepsi recently broke Coke’s stronghold at the Magic Kingdom with a contract to supply soft drinks at the new DisneyQuest, Club Disney and ESPN Zone chains. And Coke won a public relations battle in February when a Dairy Queen franchisee in downtown Omaha switched to Coke from Pepsi. The store is a favorite haunt of Berkshire Hathaway Inc. Chairman Warren Buffett--a Coca-Cola board member whose company last year acquired International Dairy Queen.

The Dairy Queen store, located a few blocks from Buffett’s office, made the switch after Buffett needled Coke Chairman Ivester about the ignominy of having to wash down his sundaes with Pepsi.

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King Coke

Coca-Cola has the lion’s share of the $54-billion domestic soft drink market. PepsiCo is second, and Dr Pepper/Seven-Up is third.

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Company 1997 share 1996 share % increase 1996 rank Coca-Cola 43.9% 43.1% +0.8% 1 PepsiCo 30.9 31.0 --0.1 2 Dr Pepper/Seven-Up 14.5 14.7 --0.2 3 Cott 3.2 2.9 +0.3 4 National Beverage 2.0 1.9 +0.1 5 Royal Crown 1.7 1.9 --0.2 6 Monarch 1.3 1.5 --0.2 7 Big Red 0.3 0.3 0 9 Double Cola 0.3 0.3 0 8 Private label/other 1.9 2.4 --0.5 10

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U.S. Soft Drink Distribution Channels

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1991 1996 Supermarkets 32.2% 31.0% Fountain 24.8 27.3 Convenience stores 11.8 11.6 Vending machines 12.3 11.3 Deli, drugstore, etc. 9.0 8.1 Warehouse 6.5 7.7 Restaurants 3.4 3.0

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Source: Beverage Digest, Beverage Marketing Corp.