Pepsi, Coke still at war, but on different fronts

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PepsiCo roundly defeated Coca-Cola Co. in this year's non-cola wars. Now the Pepsi challenge is to swallow its prized new brands. But the bigger question is how much Coke will do beyond shoring up its brands in the slow-growth soda business.

In the fight over Americans' gullets, PepsiCo and Coca-Cola are taking different tacks, with Pepsi looking to grow through acquisitions in the hardy non-carbonated category, while its rival struggles to revive its flagship, make a successful foray into alternative beverages, and cope with massive layoffs and resignations.

Observers, however, note that just because PepsiCo purchased companies Coca-Cola wanted does not relegate the No. 1 soft-drink company to permanent also-ran status.

One big question is how well PepsiCo can absorb Quaker Oats Co., whose purchase it announced last week.

"Initially it seems to fit [because of brands], but can they manage it? Will Gatorade be squandered with purchases like SoBe? They didn't screw up Tropicana, but can they do it again?" an industry veteran said.

As PepsiCo was finalizing its $13.4 billion Quaker and Gatorade purchase on Dec. 1, Coca-Cola was announcing a plan to get Coke Classic back on track with a global alliance with Interpublic Group of Cos., a 50-year partner.

Insiders say PepsiCo's renegade mentality, vs. Coca-Cola's tradition, keeps Coca-Cola tops among colas but secondary in sports drinks, coffees, waters, teas, juices as well as juice-like drinks-thanks to PepsiCo's $370 million October purchase of South Beach Beverage Co.

"Coke can be successful overall even if it goes through a period of no fun in its U.S. soft-drink business, which is what it's going through now," ING Baring analyst Manny Goldman said. "Pepsi is having more fun than you can imagine."

Sanford C. Bernstein & Co. analyst Bill Pecoriello said PepsiCo got a leg up on Coca-Cola by realizing early that Americans would be motivated by carbonated price increases, demographic shifts, improved availability of alternative beverages and a focus on perceived healthier alternatives.

Now that Coca-Cola has caught on, onlookers say, the company must hurry to develop products that appeal to Americans' taste for something fresh. Coca-Cola is negotiating to buy Planet Java and has launched KMX energy drink and is looking into fountain coffees, other contemporary beverages and regional soft drinks in an effort to connect with consumers on a micro level. It's moving to expand its Minute Maid juice franchise (see accompanying article).

"Gatorade and SoBe [were hits]," Mr. Pecoriello said. "Coke is at a disadvantage, and it has to innovate on the non-carb side and get the marketing right on the carbonated side."

PepsiCo's purchase of Gatorade will give it a 38% market share among non-carbonated drinks, compared with Coca-Cola's 25%, according to Merrill Lynch. According to Beverage Digest, Pepsi leads in bottled waters with Aquafina at 11% share, compared with Coca-Cola's 5% with Dasani. With Lipton, PepsiCo has a 40% share in teas vs. Coca-Cola's 27% with Nestea. PepsiCo's Tropicana leads in refrigerated juices, though Minute Maid has a strong presence in various juice segments.

Coca-Cola's only lead is in carbonated soft drinks, which grew less than 1% last year-far behind the rest of the category. In the first nine months of this year, Coca-Cola's top carbonated brands sported 36% share, compared with PepsiCo's 34%, according to Information Resources Inc.

"They still have the biggest business in the United States by far," one observer said. "They've got twice the market share of Pepsi globally."

Onlookers say Interpublic's half-century relationship with Coca-Cola could lend experience absent from Atlanta in the wake of layoffs and resignations of seasoned execs. But even more than that, they say IPG and its agencies around the world can help Coca-Cola devise a consistent global strategy-such as family, sports or music-that can be tailored locally.

"Coke's most successful days were `think local/act local.' It was assumed. You didn't have to say it," according to Mr. Goldman, who said Coke has been slow to come out of its advertising `funk' [led recently by unpopular, edgy ads from Cliff Freeman & Partners, New York] while Pepsi has benefited from the Joy of Cola, by BBDO Worldwide, New York.

The Quaker purchase adds to analysts' bullish sentiments about Pepsi over Coke, although they say they are not overly concerned about Atlanta's long-term health.

"It's not necessarily in trouble, but Gatorade and SoBe [were hits]," Mr. Pecoriello said. "Coke is at a disadvantage, and it has to innovate on the non-carb side and get the marketing right on the carbonated side."

PepsiCo. derives about 65% of its earnings from snack foods now, compared with 35% for soft drinks and juice. That 2:1 ratio will change little once PepsiCo. absorbs Quaker, according ING Baring's analyst Mr. Goldman.

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