How Pepsi went from Coke's greatest rival to an also-ran in the Cola wars

When Diet Coke surpassed Pepsi to become the No.2 soda in America, it was as if the Cola Wars had finally declared a winner: Coca-Cola.Some may argue that the Cola Wars were over long ago. Fortune Magazine thought that Coke won the war back in 1996. And in some respects it was right. 

PepsiCo may have brought in 38 per cent more revenue in 2011 than Coca Cola. But its archrival sold $28 billion worth of soda while PepsiCo only sold $12 billion. 

This is the result of PepsiCo diversifying its business and increasingly relying on the other brands it owns — Frito Lay, Quaker, Tropicana — to keep the company’s revenue up.

Unfortunately, it also has to do with the astronomical number of gaffes Pepsi has made in the past few years, particularly in its brand management and the way it has branded its flagship product.

The Cola Wars heated up in 1975 with the Pepsi Challenge, a blind taste test.

Even though Pepsi and Coca-Cola had been competing for market share since the birth of Pepsi-Cola in 1899, the Pepsi Challenge marked a turning point in the Cola War. The blind taste test found that more people liked the taste of Pepsi than Coke.

In response to the test, Coca Cola would reformulate its cola and launch New Coke, which was an utter disaster. Pepsi sales would benefit from the New Coke mishap for some time, But then Pepsi started making mistakes of its own.

Starting in the 1980s, Pepsi had a number of controversies surrounding their pop star endorsers.

  • The first international pop star to become a spokesperson for Pepsi was Michael Jackson. While filming an ad in 1984, a pyrotechnics stunt went wrong and badly burnt Jackson. The accident would leave Jackson addicted to painkillers for the rest of his life.
  • In 1987, David Bowie and Tina Turner sang a duet of 'Modern Love' for a Pepsi ad. The same year, Bowie was accused of sexual assault and the company dropped the ad immediately.
  • Madonna was named the new Pepsi spokeswoman in 1989. However, her video for 'Like a Prayer,' a song that was used in a Pepsi commercial, was deemed blasphemous and brought accusations of anti-Catholicism against the company.
  • In August 2002, Pepsi pulled a national 30-second ad featuring Ludacris from the air after Fox's Bill O'Reilly called for a boycott of the soft drink company for using an 'immoral rapper' as a spokesperson. When Pepsi began running ads with the Osbournes instead, Russell Simmons said it was racially insensitive. In the end, Pepsi was asked to make an annual contribution of $1 million to the Ludacris Foundation for three years as amends.

In the 1990s, people found syringes in cans in more than 20 states.

Pepsi and Diet Pepsi had a scare in 1993 when consumers in more than 20 states found syringes in the brand's soda cans. The reports, which quickly hit national news, created a panic among consumers.

But it wasn't Pepsi's fault. Authorities eventually found video of a woman in Colorado who had been inserting syringes into cans.

Yet even after her arrest, reports of syringes continued to roll in. In the end, there were more than 50 tampering claims filed and more than a dozen arrests made for filing false reports.

In 1996, Pepsi had officially lost the Cola War.

In October 1996, the cover of Fortune read, 'How Coke Is Kicking Pepsi's Can.' As Pepsi's profits trailed Coca Cola's by 47 per cent, the magazine declared that the brand had officially lost the war.

Coke's then-CEO, Roberto Goizueta, dismissed his rival in the article, saying 'As they've become less relevant, I don't need to look at them very much anymore.'

While PepsiCo would make a comeback in the next 15 years, mostly due to its massive snack business, Fortune was right: Pepsi the drink was in decline.

In the earl 2000s, America became aware of its growing obesity issue and cut back on the soda.

According to Ad Age, soda sales declined every year from 2004 to 2011.

As Americans counted their calories, Pepsi's bottled water and still beverages sales rose.

When PepsiCo CEO Indra Nooyi took the reigns in 2006, she was aware of this trend and decided to grow the company's healthy food business.

Nooyi set a goal to expand its 'good-for-you' food divisions. In 2010, those products -- Quaker Oats, Tropicana, and the Frito Lay Natural line -- contributed $10 billion to annual revenue, according to CNN Money. Her goal was to have these products account for $30 billion in revenue by 2020.

But as we reported earlier this year, investors said the CEO is too focused on this goal, when it should have been focused on battling Coke. Despite the recent health trend, none of the brand's products are as high-profile as Pepsi itself.

Pepsi's 2009 logo redesign was dogged by political distractions.

Pepsi paid Arnell Group an outrageous $1 million for this logo, which isn't drastically different from its predecessor.

The logo also made headlines for resembling that of newly elected President Obama. Coupled with Pepsi's new slogans -- 'Yes You Can' and 'Choose Change' -- the company was criticised for copying Obama's award-winning campaign and aligning itself with it at the same time.

In a response to these allegations, Pepsi Brands chief Frank Cooper seemed to insinuate that Pepsi may have inspired Obama's campaign.

And in an unprecedented move, Pepsi pulled out of the Super Bowl in 2010, handing Coke a win by default.

For the first time in 23 years, Pepsi did not participate in the Super Bowl in 2010. Instead, it invested the $20 million it would have used for ads in the Pepsi Refresh Project. The project gave away grants ranging from $5,000 to $250,000 to community programs and local schools.

Pepsi said the project was an exercise in brand building, but any marketing investment should have an impact on sales. This was not a sales-driving program. In the same year, Pepsi's sales declined by 6 per cent (a sharper decline than the 4.3 per cent decline of sodas overall).

Worse, Pepsi let Coke have the Super Bowl all to itself.

Jim Tierney, chief investment officer at W.P. Stewart, told the Wall Street Journal it was mistake to stay out of the Super Bowl. 'You just can't go dark on brands and expect them to hold their value,'' she said.

Next year, Pepsi was back in the game. Unfortunately, it made a racial coding error.

At the same time, the new Diet Pepsi skinny can caused an uproar at New York Fashion Week.

In February 2011, Diet Pepsi introduced a 'skinny' can that that the company described as a 'sassier' version of the traditional can. Pepsi said the can was made in 'celebration of beautiful, confident women'.

Of course, equating 'skinny' with 'beautiful' didn't go over so well with consumers or the National Eating Disorders Association, which took offence at the can and the company's 'thoughtless and irresponsible' comments.

The next month -- March 2011 -- Pepsi fell from the No.2 spot.

Ever since, Coca-Cola has reigned supreme with Classic in the No.1 sales spot and Diet Coke as No.2.

According to MSNBC, Diet Coke sold 927 million cases in 2010, compared to Pepsi's 892 million. Of course, this pales in comparison to the 1.6 billion cases of regular Coke that were sold int he same year.

Diet Coke's rise reflects the growing trend toward diet drinks. Today there are four diet drinks among the top 10 drinks (versions of Coke, Pepsi, Mountain Dew, and Dr. Pepper) whereas there were only two on the list 10 years ago.

In July 2011, Pepsi's anti-Coke advertising ended up helping the rival brand.

Coca-Cola had a market share of 41.9 per cent to Pepsi's 29.9 per cent in 2011. So Pepsi decided to have a little fun with Coke. The brand's 'Summer time is Pepsi time' campaign pokes fun at its competitor's two long time mascots, Santa and the polar bears.

But even while it is making fun of the competition, Coke products are featured more than Pepsi products in the commercials.

2012: The company is sued for race discrimination.

Pepsi Beverage Co. ruled out job applicants who had arrest, but not conviction records. The practice ultimately led to more than 300 black applicants not getting jobs.

Since it is illegal to deny employment because of a criminal record -- if it's irrelevant to the job or excludes a certain group -- the brand agreed to pay a $3.1 million settlement.

The next month, the PepsiCo announced major layoffs.

In February 2012, PepsiCo announced it was cutting 8,700 jobs, or about 3 per cent of its workforce.

In an ill-timed move, it also announced that it would increase its marketing budget by $600 million, and that Massimo d'Amore, former CEO of the Global Beverage Group, was retiring.

D'Amore was in charge of the Pepsi brand during its redesign, and as it fell behind Diet Coke in sales. Yet, despite the brands failures, he got $2 million in 'transition payments' upon retirement.

A few days later, employees let us know how bad the turnover was at PepsiCo.

A few days later we reported -- with the help of some Pepsi employees -- that least 26 senior managers had bailed on the company 2008. The list included three CEOS and numerous VPs, CMOs, and brand managers who had left, some only months or less than a year after starting.

And while layoffs were happening, PepsiCo also cut 401(k) benefits.

In January, PepsiCo started cutting 401(k) benefits for some employees, while also reducing the funds it put toward 'pension and retiree medical plan contributions,' by $1.4 billion.

The same day news of the 401(k) cuts broke, CEO Nooyi told Wall Street PepsiCo would cut 100 of its ad agencies.

The problem was that no one had told any of the ad agencies in question that anyone was getting fired at all.

As Ad Age described the situation:

'But while PepsiCo knows the fate of its partners, it didn't plan to begin notifying agencies of their status until this week. That prompted widespread panic in adland as agencies scrambled to call brand managers. Some were told not to worry, but several others were in the dark.'

Later in the month, PepsiCo announced that it would devote more of its marketing budget towards the snack business.

PepsiCo's snack business -- aka Frito Lay -- kept the company healthy while the flagship soda business was in decline.

But instead of investing more money into Pepsi, the company decided to devote more marketing dollars to Frito Lay, increasing its budget 35 per cent.

Pepsi's marketing budget was almost halved from 2005 to 2010, as Nooyi tried to grow the healthy foods and snack businesses.

In March, Pepsi's trademark 1980s slogan was re-appropriated by an oatmeal company.

'Choice of a New Generation' was Pepsi's slogan from 1984 to 1991. But having let the trademark expire in 2006, a former-Pepsi employee took the slogan and trademarked it for his new employer, mum Better Oats.

Letting a part of its brand's history be recycled like that was a rookie move on Pepsi's part. Either the trademark renewal slipped through the cracks in the constant manager shuffling, or Pepsi just gave up.

In March the brand changed its recipe so it wouldn't have to put cancer warnings on its can.

Both Coke and Pepsi changed the way that they made the caramel colouring used in their sodas after a California law mandated that drinks containing a certain level of carcinogens have a warning label.

May: Pepsi spends $5 million navel-gazing.

Tasked with creating a new global campaign, chief creative officer Brad Jakeman spent nine months and $5 million dollars to figure out what exactly sets his brand apart from its competitor. His final conclusion was that 'Coke is timeless. Pepsi is timely.' Coke represents permanent happiness while Pepsi is all about excitement.

Did he really need to spend $5 million to figure that out?

You don't need a consultancy to tell you that Coke has used the polar bear and Santa mascots for decades. The product is named 'Classic.' Everything about the brand is traditional.

Pepsi, one the other hand, has changed its spokespeople numerous times and it often relies on pop stars and music to fuel its campaigns. Pepsi has always emphasised its youth.

Look at its slogans from the past 50 years:

  • 1961--1964: 'Now It's Pepsi for Those Who Think Young'
  • 1969--1975: 'You've Got a Lot to Live, and Pepsi's Got a Lot to Give'
  • 1981--1983: 'Pepsi's Got Your Taste For Life'
  • 1984--1991: 'Pepsi. The Choice of a New Generation'
  • 1992--1993: 'Be Young, Have Fun, Drink Pepsi'
  • 1993--1994: 'Right Now'
  • 1997--1998: 'Generation Next'
  • 1999--2000: 'For Those Who Think Young'

The first ad features a couple who figures out that time stops when you drink Pepsi. This allows them to live in the 'now'. And like most Pepsi commercials since the 1980s, it features a pop star. In this case, Nicki Minaj makes her Pepsi debut.

As the new campaign launched, Pepsi reshuffled its management once again.

Pepsi has a nasty habit of shuffling its managers between different departments and brands. It is a habit that has hurt Pepsi's sales.

PepsiCo's Q1 2012 results showed a 2.5 per cent decline in drink sales and a 4 per cent decline specifically in soda sales. It is impossible to support a brand when no one stays long enough on the business to build knowledge or get the hang of running it.

Then the company announced it would resurrect Michael Jackson to promote the drink.

Pepsi struck a deal with Jackson's estate to use his image on a limited release of Pepsi cans.

This isn't the first time that Jackson has promoted the soda. He signed a $5 million deal with the company in 1984. The same year, while filming an ad, Jackson was horribly burned in a pyrotechnic stunt.

The burns from the accident would lead Jackson to take painkillers, which he would become addicted to. He eventually died from an overdose injection of propofol.

Is this really the story Pepsi wants to tell?

Pepsi's not the only beverage to lose its No. 2 slot ...

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