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The cola wars are back: Pepsi pledges to go 'toe-to-toe' with Coke

By Published on .

Scene from new Diet Pepsi TV Commercial, 'The Right One'
Scene from new Diet Pepsi TV Commercial, 'The Right One' Credit: PepsiCo

The cola wars are getting serious again.

PepsiCo on Thursday conceded that its marketing spending was not adequately keeping pace with Coca-Cola. Its executives pledged to pump more money into its struggling soda business after its North American beverage unit delivered its third straight quarter of disappointing results.

The unit, which includes brands like Pepsi-Cola, Mtn Dew and Gatorade, has been a constant sore spot for the company, vastly under performing other divisions. In the first quarter revenue fell 2 percent, compared with a companywide 2 percent gain that was powered by strong growth in international markets and consistent performance from its Frito-Lay snacks unit. The North American beverage setback came despite PepsiCo spending big money on two Super Bowl ads in the period, one for brand Pepsi and another one for Mtn Dew.

But on Thursday's earnings call CEO Indra Nooyi said that PepsiCo was still not spending enough on its cola business. She suggested that Pepsi was not keeping pace with competitors, alluding to Coca-Cola without specifically naming the company.

"Despte moderately increasing our media on trademark Pepsi over the past three years, our share of voice has fallen dramatically relative to our key competitor, who has substantially stepped up their media spending on colas over the past two years," she said. "We'll go toe-to-toe and increase our spending in colas in particular." Losing share to its competitor is "not our cup of tea," she added.

The move heralds a throwback to the days when Pepsi vs. Coke was among the most hotly contested brand battles across all U.S. industries. The cola wars lost some relevance in recent years as both companies sought to diversify their beverage businesses to account for changing health demands of consumers. But even as colas fade in popularity among some consumers, they are still a hugely important business for both companies. Coke and Pepsi are now coming to grips with that reality.

Coca-Cola has spent considerable resources in recent months rebranding Diet Coke and Coke Zero, which is now called Coca-Cola Zero Sugar. The work has seemingly paid off. Diet Coke in the first quarter grew North American volumes for the first time since the fourth quarter of 2010, Coke reported on Tuesday. Coca-Cola Zero Sugar volume growth surged by double digits. Across all soft drink brands, Coca-Cola reported 3 percent growth for North America.

PepsiCo is pinning its hopes on its new "Pepsi Generations" campaign that is narrated by Jimmy Fallon and celebrates the brand's place in pop culture. It began with a nostalgia-laden Super Bowl ad that included flashbacks to the brand's brushes with pop culture glory, ranging from the DeLorean time machine that one-time Pepsi endorser Michael J. Fox used in the classic 1980s film franchise to quick clips of pop stars like Michael Jackson and Britney Spears. The brand followed that with a Diet Pepsi spot under the same campaign. The ad, called "The Right One," includes a flashback to a classic 1990s-era spot when Ray Charles sang "You got the right one baby" for Diet Pepsi.

The campaign attempts to spin the brand forward to the modern age by suggesting it has persevered through multiple generations. But the approach begs the question: Is Pepsi, long associated with the here and now and hottest stars, leaning a bit too much into its past? (Before the switch, one recent tagline was was "Live for Now.")

Time will tell. But so far, the Super Bowl ad did not appear to move the needle much. Indeed, beverage volumes fell in the first quarter despite media spending that executives characterized as being "up significantly" in the period, including a double-digit hike across big brands. The spending included a Super Bowl ad starring Morgan Freeman for a new Mtn Dew line extension called Mtn Dew Ice. Brand Pepsi, meanwhile, has a new ad featuring New York Yankees star Aaron Judge that debuted in time for the baseball season.

On the earnings call, one analyst asked why PepsiCo's beverage business has yet to respond to the company's media spending surge. PepsiCo Chief Financial Officer Hugh Johnston responded that advertising takes a longer time to take hold when compared with other marketing moves like adding new distribution or tweaking prices.

"There is a building effect over the course of several quarters," he said. "I think you actually did see some responsiveness, and Dew and even Pepsi improved a bit. But it's going to take a few quarters for the Pepsi business to fully respond to the increased advertising in the marketplace."

Nooyi was more blunt: "We've got three quarters of performance miss, and we are going to fix it, period."

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