Fracas hits the fountain

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The nation's two largest soft-drink companies are trying to put the fizz back in fountain sales.

To do so, Coca-Cola Co. and PepsiCo are shifting the rules of engagement over pouring rights in restaurants and at retail. Once fought over pricing and syrup, exclusivity incentives and complex financing deals, the battle has now shifted to more marketing-oriented initiatives ranging from packaging and flavors to a soft-drink dispenser that plays music.

For both companies, the initiatives are "a huge value-add for the sales force for pouring rights," said Robert Goldin, exec-VP at restaurant consultant Technomic. "They have to be clever on their promotional programs."

On the flavor front, Pepsi is adding a mix-in called Flavor Splash. The single-serve, bottle-shaped packets with cherry, berry and citrus flavorings are currently being tested at Taco Bell and 7-Eleven outlets. The mix-ins offer consumers an interactive experience and new flavor options without the need for additional equipment, said Vince Gennaro, president of Pepsi's Fountain Beverage division. Packaging carries a teaser line challenging consumers to customize their drinks: "Pour in a little or a lot. Only you know the perfect mix."

Fountain accounts will have the option to sell, give away or bundle the packs in trade-up deals. The fruity mix-ins were such a hot item at last week's National Restaurant Association convention, the company quickly ran short of its supply. The company expects to know the results of the 8-week test within 60 days, Mr. Gennaro said.


Brand equity is the added-value proposition for No. 1 Coca-Cola Co., which is testing a new plastic cup in the famous Coca-Cola contour shape. The 20-ounce cups will be available in clear or green plastic with a spill-resistant lid to reduce "catastrophic failures" in the car, according to Mitchell B. Rose, marketing director-channel marketing for Coca-Cola North America Marketing. The tests, for both everyday and promotional use, are being conducted at five quick-service chains, including Krystal Co.

The new cups were designed with portability in mind -- better to service the fast-growing takeout business at quick-service chains. Off-premise consumption represents about 65% of the $87 billion in total sales at the quick-service chains measured by Technomic.

An outgrowth of the phenomenal popularity of Coca-Cola's plastic contour container and this year's reintroduction of the 8-ounce contour glass bottle, the cups provide an additional way to reinforce the Coca-Cola brand.

"You don't have to be a rocket scientist to realize the leverageable power in proprietary packaging," a spokesman for Coca-Cola said. The new cups add a collectible appeal as well as functionality -- and, Coca-Cola believes, a way to one-up Pepsi-Cola Co.'s Twist 'n Go containers introduced last year.


"[The new package] further differentiates us in the fountain channel," the Coca-Cola spokesman said. "We expect it to be a real growth driver for customers and us as well."

Pepsi's 32-ounce Twist 'n Go cups were rolled out in Subway restaurants in fall '99 and currently are in about 30 chains. The cups satisfy a previously unmet consumer need for convenience and portability, said Mr. Gennaro, with a domed, twist-on lid that prevents spills and more closely replicates the experience of drinking from a bottle.

More important as a selling point to restaurant chains, the cups sell more large-size soft drinks. In tests, the cups increased beverage purchases from 1.5% to 4.5%, and sales of combo meals jumped 6% to 8%

"We have an objective to give restaurant customers more chances to sell beverages with food purchases," Mr. Gennaro said. When given the option to trade up to the larger-size -- and more expensive -- plastic cups, consumers chose the cups between 30% and 60% of the time.

That could be a big attraction for restaurants. According to NPD Group, fast-food consumers order drinks with their meal about 53% of the time when they eat in the restaurant. That drops to 42% at the drive-through and 27% for carryout.

While Coca-Cola dominates fountain sales with a 65% market share, Pepsi began aggressive steps to delve deeper into fountain sales in 1997. It spun off Tricon Global Restaurants and began buying back rights from bottlers to sell syrup to national accounts. The rivalry intensified in 1998, as PepsiCo waged an antitrust battle against Coca-Cola over pouring rights. Pepsi's lawsuit maintained that Coca-Cola controlled the vast majority of the fountain market, and that it began enforcing exclusivity clauses only after Pepsi stated its intentions to build the channel.

Subway, Dairy Queen, 7-Eleven and Wendy's International maintain independent pouring positions, serving both Coca-Cola and Pepsi cola products. McDonald's Corp., Burger King Corp. and Domino's Pizza serve Coca-Cola products exclusively, while Tricon serves only Pepsi products.


The competitive intensity in the fountain business has increased, said William Pecoriello, a beverage analyst for Sanford C. Bernstein & Co.

"The fountain channel became much more focused during the initial fountain wars from Tricon spinning off from Pepsi," he said. Since that time, "Pepsi became more active in bidding for [pouring rights]." One of the most hotly contended contracts was for BK, which Coca-Cola won last year.

Getting a fountain account is very important for volume, brand presence and visibility, said John Sicher, editor and publisher of Beverage Digest.

"A ton of consumers visit restaurants every day, and in most cases only see Coke or Pepsi brands," he said. "For both Coke and Pepsi, having the consumer see and drink their own brands is very important."

And the quality of those drinks is also paramount. To resolve the age-old problem of fountain drinks tasting different from the bottled product, Pepsi introduced its Intellicarb fountain system at the NRA show.


"Carbonation is an attribute that affects the consumer's perception of taste," Mr. Gennaro said. The industry has been able to improve water quality, removing chlorine and other taste-killers, but carbonation levels remained a problem. Pepsi discovered that if the water feeding into the fountain system isn't cooled, carbon dioxide dissipated, thus making the soda taste flatter. "It's the last remaining quality issue" in fountain service, he added.

For its part, Coca-Cola is testing at convenience stores an interactive fountain system called "audiovalve" that plays music when the dispensing valve is pressed. The system targets teens and provides a sense of fun for the mundane serving experience.

While a mainstay for pizza chains, the addition of bottles and cans in the drive-through line also is becoming a new profit center for many fast-feeders. Not only does the option increase customer choice, it can also increase beverage orders and profits, said Carl Baca, director-channel marketing for Coca-Cola North America.

"In recent years, supermarkets have done well with bundling meals with drinks," he said, a break from past tradition. "Now supermarkets have fountain and fast-food has take-out packages."

The most compelling reason for [offering] bottles and cans in restaurants "is the very high margins they bring," Mr. Pecoriello said. The fountain channel has been a low-margin business for bottlers, and increasing fountain sales from take-out is a growing part of the restaurant industry, he added.

Trading up to larger sizes is another benefit of the new packages and is "a game [fountain marketers] have been playing for years," Mr. Pecoriello said, noting that increasing the size of cups exponentially increases volume sales and profitability.

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