Contrary to popular belief, the Cola Wars are far from over. Today’s soft drinks market is more competitive than it’s ever been, as demand slows for traditional high-sugar carbonated drinks. More importantly, the Cola Wars are a fantastic lesson in marketing, flavors, and the forces that drive consumers.

Origins of the Cola Wars

The advertising onslaught that we today call “The Cola Wars” hit its peak from the mid-1970s to mid-1980s, but the actual rivalry between Coke and Pepsi goes back to virtually the day that the Pepsi Cola Company was formed, in 1902. 

Colas were originally sweetened, carbonated, caffeinated drinks flavored with spices, citrus oils, and other flavorings, sold and enjoyed at pharmacy soda fountains.

Pharmacies of the day formulated various medications, because there were no restrictions on over the counter drugs, and individual pharmacists developed their own formulas. When the soda fountain was invented in 1888, it was quickly adopted by local pharmacies, as a substitute for famous mineral and spa waters with healing benefits.

In 1920s America, as Prohibition gripped the country, the soda fountain became the most important profit center in a local pharmacy, and pharmacists combined the carbonated water with various syrups and flavorings to offer their customers. Many early colas had various health and medical benefits claims, and most of them contained stimulants. Almost equally important was the social and community role played by the soda fountain when bars and pubs were closed and the country sought more wholesome activities. 

In 1886, American pharmacist John Stith Pemberton developed the first version of the formula that would later be called “Coca-Cola.” In 1888, Pemberton sold the formula to business tycoon and fellow druggist Asa Griggs Candler. In 1892, Candler founded the Coca-Cola Company, and the formula was being sold and distributed throughout the US within just a couple of years.   

Meanwhile, in 1893, pharmacist Caleb Bradham invented his own recipe for a cola. In 1898, he named his formula “Pepsi-Cola”, and the Pepsi-Cola Company was founded in 1902.  

The two companies were locked in direct competition practically from the beginning. At that time, Coca-Cola had wider distribution, bigger brand recognition, and was already being exported to Europe. But Pepsi competed on price, selling their cola more affordably. 

The Pepsi Challenge and New Coke

The 1930s and 1940s were hard times for the Pepsi Cola Company, which was battered by the dramatically fluctuating price of sugar during WWII. The company declared bankruptcy a couple of times, and changed hands a few times. But in 1975 it came roaring back with an unmissable ad campaign that took direct aim at their rival. 

The Pepsi Challenge consisted of blind taste tests of Coke and Pepsi. Time and time again, when the labels were revealed, tasters chose Pepsi over Coke. 

Coca-Cola blundered their response.

In the beginning, Coke PR teams and representatives questioned the data and denied the results. They came across as defensive and worried. It seemed as though, although they still had a massive market advantage, they weren’t confident about the taste of their cola. From the 1950s to 1983, Coca-Cola sales declined from 60% to just 24% of the market share. Pepsi began to outsell Coke in supermarkets, and younger demographics were increasingly choosing Pepsi. Coke was clinging to dominance only in vending machines and restaurant soda fountains.  

In April 1985 Coca-Cola launched “New Coke” as a direct response to the Pepsi Challenge. It was a disaster. The new product seemed to simultaneously verify a decade’s worth of Pepsi advertising (“Coke doesn’t taste as good”), while undermining ten years of their own advertising defending the formula and their flavor. The day after the announcement, Pepsi gave their employees the day off, claiming that they had won the cola wars

The backlash against New Coke was swift and certain. Celebrities, including late-night talk show, hosts Johnny Carson and David Letterman, and even devoted Coke drinker Fidel Castro criticized the change. Southerners, sentimentally attached to Atlanta-based Coke, were upset about the perceived capitulation to New York-based Pepsi. The media picked up the story about why people didn’t like New Coke, and it was the end.

As Coke management travelled to local bottling plants from Monaco to Mexico, their bottlers didn’t want to use the new formula. Twenty bottlers sued Coca-Cola for changing the formula and their pricing agreements. In May of 1985, Pepsi saw a 14% growth in sales, the largest single-month increase in company history.

On July 11, 1985, Coca Cola announced the return to the original formula

Lessons from the Cola Wars

To date, journalists, authors, and analysts continue to examine the cola wars. It’s been the source of marketing inspiration, conspiracy theories, debates, discussion, and academic research. Here are some of the most significant legacies of the cola wars:

  • Advertising innovation. Competition between Coke and Pepsi has spurred generations of trends in advertising, from the first celebrity endorsements to ground-breaking innovations in product photography and art direction. In recent decades, from the Pepsi Challenge to Pepsi Stuff to the 2019 Superbowl, Pepsi has had bolder, more visionary marketing that keeps Coke reacting.
  • The perils of taste testing. The Pepsi Challenge is an object lesson in marketing research and NPD. As Malcolm Gladwell pointed out, customer taste perceptions are influenced by a wide range of factors, including, for example, the colors on a product label. Furthermore, sip tests are often not indicative of long-term product preference: consumers preferred the sweeter taste of Pepsi in a short-term sip-based taste test, but may have different preferences when drinking an entire glass of a beverage, or enjoying it daily at home. 
  • The power of emotion. While cola choice is obviously about flavor, that’s only part of the equation. Coke had been branding itself as “The Real Thing” for decades, and built up a loyal customer base for whom their product was sentimental, nostalgic, and emotional. People in the Southern states felt that it was local, while others had fond memories of family members drinking coke, and others were influenced by past Coke campaigns that had heavily featured nostalgia, like their famous depictions of Santa Claus. In other words, Coke has brand loyalists that many companies can only dream of, and underestimated their voice and their importance.  
  • The value of control. In the aftermath of the New Coke debacle, the Coca-Cola company purchased many of its own largest bottlers and distributors, so they have more direct control over the product life cycle.  

Today’s Soft Drink Market

The Cola Wars continue to today, with both Coke and Pepsi continually developing and launching products intended to directly compete with each other, and still engaging in competitive ad campaigns. 

In fact, these wars are likely to intensify, as the cola market continues to decline. For the past several years, soft drinks have held steady at just 1.7% growth, driven by a finite number of core users whose cola drinking habits and preferences are unlikely to change. More and more consumers are drawn away from cola and into the huge and growing number of non-cola soft drink options. Energy drinks, healthier drinks, eco-friendly packaging, powdered drinks, and other soft drink trends are all eroding the cola market. In the US, carbonated soft drink consumption has been declining since 2016, and has been offset by growth in ready-to-drink coffees and teas, especially cold brew coffee. In the UK, consumers are turning from cola to a huge range of waters, including flavored water, alkaline water, electrolyte water, and more. In Australia, kombucha is the hot trend, while Japan is exploring a huge range of transparent foods and beverages. 

And Who Won the Cola Wars? 

Despite decades of headlines claiming one company or the other “won the battle but lost the war”, the truth is that both Coke and Pepsi are near equivalent as of this writing, depending on how you measure it. 

  • Beverage sales: Coke. In the US, Coke has enjoyed over 41% carbonated soft drink market share over the past 15 years, while Pepsi has declined from 31% to 24%
  • Stock price: Pepsi. The stock price of Coke tends to remain fairly stable decade after decade, with prices from $37-55 over the past five years. While Pepsi is more volatile, their stock hasn’t fallen below $95 since 2016, and hit a recent high of $136 in 2019.
  • Market cap. Tie. In mid 2020, Pepsi had a market cap of $188.6B, while Coke had a market cap of $185.8B. Coke is currently selling many of the bottlers and franchisees it purchased in the late 1980s.
  • Subsidiaries. Tie. Both Coke and Pepsi own a vast array of subsidiary brands. Coke owns 21 brands, and Pepsi owns 22, that each generate over $1B each year. 

The lasting legacy of the Cola Wars is more about marketing and advertising than it ever was about cola or flavor. Generations of product developers, product tasters, advertisers, marketers, and company leaders can still look back and learn valuable lessons that are relevant in today’s hyper-competitive beverage market. 

At Grapefrute we are passionate about FMCG products and support our clients with the maintenance, optimisation and growth of their organisation. Do you need specialists & leaders for your company? Contact us today.

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