THE GREAT COLA WARS
COKE VERSUS PEPSI
Soft drinks-that is, nonalcoholic beverages-trace their ancestry back to the mineral springs of Europe. In the nineteenth century, numerous mineral waters were sold in the United States. Druggists often flavored mineral water with various extracts, serving homemade brews of root beer or ginger ale to please the patrons of their soda fountains. By the late nineteenth century, the owners of a few such beverages were attempting to distribute them beyond their local trading areas. However, the difficulties in obtaining broad, regional distribution were considerable. Bottling technology was in its infancy, so most soft drinks were sold at the soda fountain. And there was little reason for fountain proprietors to pay for the use of someone else's drink when they could mix their own with such ease.
We call this Phase I of the soft drink industry. Few beverages were widely available. No brand had real pull. Barriers to competitive entry were low.
Coca-Cola was invented in 1886, and by the turn of the century it was making progress in achieving national distribution and brand pulling power. Coca-Cola's owners wanted to make it the industry standard. Further, they wanted everyone to drink it anytime, as their advertisements stressed. To achieve this goal, they launched a coordinated advertising and sales force drive so well executed that it created one of the most powerful brands in the history of marketing.
This was Phase II of the soft drink industry. Coca-Cola was the national brand, the dominant force, the emblem of American consumption. In the nineteenth century no barriers to entry could be built in soft drinks, but by the early 1930s Coca-Cola was being referred to in the trade press as a national monopoly. Other brands tried to compete. When, the trade press asked, would the country see the next Coca-Cola? Industry analysts were puzzled about the nature of Coca-Cola's competitive muscle.
In the 1930s, Pepsi-Cola, a brand that was invented in the 1890s but that had experienced two bankruptcies, emerged as a challenger to Coca-Cola. Pepsi's entry strategy was based on price. Coca-Cola was aimed at a mass market, but by the time of the Great Depression Coke's pricing strategy left room for a cola offering dramatically lower prices. Pepsi's strategy achieved impressive success in part because the company had a solid base of distribution through a large chain of confectionary stores.
In my view, the "twelve full ounces" era of Pepsi-Cola from 1931 through 1949 can be seen as another Phase II strategy. Pepsi did not make any clams of product superiority, nor did its advertising campaign suggest that it was best suited for a certain kind of person or occasion. Rather, Pepsi's appeal was strictly price oriented, a defining characteristic of Phase II competition.
Pepsi's strategy, however, was founded not on any cost advantage in production or distribution but on Coca-Cola's price umbrella. That price umbrella disappeared with postwar inflation. By the late 1940s, Pepsi had to raise its prices; and it lost its customers in the process. The company's very survival was in question. A new strategy was essential. Pepsi inaugurated that strategy in the 1950s, by appealing to customers on the basis of who they were rather than what the product was. This was a fundamental change, a bold step into the Phase III world of demographic and psychographic segmentation. Market segmentation strategies now dominate the industry, which is why supermarket shelves are so crowded with line extensions. The world of the universal cola-the one brand perfect for anyone, anytime, anywhere-is now gone.
COCA-COLA AS PRODUCT
Coca-Cola was invented in Atlanta on 8 May 1886 by John Styth Pemberton, a 53-year-old druggist. Pemberton had moved from his hometown of Columbus, Georgia, to Atlanta in 1869, where he became known as much for his soda fountain concoctions as for his medicinal preparations. During his seventeen years in Atlanta, Pemberton had been employed at, or part owner of, nine different pharmaceutical firms. He was, according to Coca-Cola historian Pat Watters, "a druggist of the old school, thoroughly versed in the manufacturing part of the business and ... constantly experimenting with new preparations," such as Pemberton's Extract of Styllinger and Globe Flower Cough Syrup.
During the mid-1880s, Pemberton devoted most of his attention to his "French Wine of Coca," touted as an "Ideal nerve tonic and stimulant." The stimulation was provided by extract of coca leaf. Pemberton was determined to produce a nonalcoholic nostrum-thus a "soft" as opposed to a "hard" drink-so he eliminated the wine. Alcohol caused fatigue and upset the stomach; Pemberton was looking for an elixir to do the reverse. He added the extract of cola nut, knowledge of which had been brought to the South by slaves. It was said to be invigorating, to cure hangovers, and to have the properties of an aphrodisiac. The result of all this experimentation was a bitter-tasting liquid.
Pemberton continued his efforts until May of 1886, when he and his colleagues were convinced that they had it right. One problem remained, the new-born product was anonymous. Recalled Frank M. Robinson, one of Pemberton's partners, "It had no name in the beginning. . .I just took Coca-Cola as a name, similar to other advertising names, thinking that the two Cs would look well [sic] in advertising." Robinson's modesty belies the importance of the name be chose. Coca-Cola stands today as the second most widely understood term in the world, after okay.
Having decided that they at last had a product worth taking to market, Pemberton and his colleagues marched over in the warm spring weather to the drugstore of Dr. Joseph Jacobs. There they encountered Willis Venable, who was leasing the fountain from Jacobs. As Watters recounts the story:
After mutual greeting and some small talk, Dr. Pemberton placed the jug of syrup on the counter and explained what he had done. Meanwhile, they were joined by Dr. Jacobs who bad been working at his desk in the back of the store. Pemberton suggested to Venable that he mix some ice and plain water with the syrup in the proportion of one ounce of syrup to five ounces of water. He made three drinks and placed them on the counter. The three of them stood smacking their lips and nodding their heads in approval. However, on the second go-around, by accident, Venable put carbonated water into the glasses instead of plain water.
After tasting the contents of the second glass, the three men became excited, all talking at once. Their delight and pleasure was obvious on discover- ing what a delicious drink was produced by the combination of carbonated water with Dr. Pemberton's syrup.
Interest in the medicinal properties of effervescent mineral waters dates back many centuries, but the first commercial manufacture of artificial seltzer water was undertaken only in 1783. Paul, Schweppe, and Gosse founded their mineral water business in Geneva six years later. Jacob Schweppe moved to Bristol, England, where he and three English partners founded Schweppe and Company in 1798.
In the United States, soda water was being dispensed on draught and in bottles by 1807. The U.S. Pharmacopeia listed soda water among its medicated waters in 1820, and the Journal of Health reported in 1830 that flavored syrups were being added to soda water. In 1831, patents were issued for counter fountain machinery; and by the end of the decade, soda water flavored with fruit syrup was being sold at apothecary shops. Soon thereafter, root beer was on the market.
The census began tracking the bottled soda water industry in 1849. Other noteworthy developments in the industry from the mid- nineteenth century to the invention of Coca-Cola in 1886 include the first soft drink trademark registration in 1871 (for "Lemon's Superior Spar- -Ginger Ale"); the manufacture of root beer by Charles E. Hires in Philadelphia in 1876; the founding of the Cliquot Club Company for the manufacture of ginger ale and other beverages in Milles, Massachusetts, in 1881; the bottling of White Rock mineral waters in Waukesha, Wisconsin, in 1883 the purchase of space in national magazines by Hires; and the founding in 1885 of the Moxie Nerve Food Company in Boston. Also in 1885, the Dr Pepper flavor (though not yet named as such) was invented in Waco, Texas.
From this brief survey we can see that the epiphany in Atlanta in 1886 did not yield a distinctive or original product. Carbonated water flavored with syrups of various kinds had been around for years, in bottled form as well as at the druggist's fountain. Such soft drinks had always been thought to have curative properties of various kinds-note, for example, the Moxie "Nerve Food" Company. Coca-Cola had been predated by what would in the twentieth century become major national brands; and one of these, Hires, had already begun national advertising. Moreover, Pemberton and his friends had entered a rapidly growing market. Total cases of soft drinks shipped increased by more than 175 percent in the 1880s. It is tempting to ascribe this growth to temperance sentiment, especially in the South; and indeed, by 1905 Coca-Cola was being advertised as "The Great National Temperance Drink." Yet even though case shipments increased from 113 to 182 million (or 61 percent) during the Prohibition decade of the 1920s, they skyrocketed to 322 million (a leap of 77 percent) during the Depression years of the 1930s, despite the repeal of Prohibition in 1933.
The soft drink market has responded to all outside influences by growing, making it one of the great dream markets in the history of consumer products in the United States. Shipments of 4.6 billion cases with a wholesale value surpassing $22 billion in 1984 represent increases by orders of magnitude from 1889. In 1984, the typical American consumed an average of 469 12-ounce containers of soft drink, up more than 7,000 percent from the 1889 figure of 6.6 containers.
What, then, was distinctive about Coca-Cola? Flavor chemists abroad had been experimenting with cola drinks for a decade, and Pemberton, as well as others, had long been familiar with coca. But according to J. C. Louis and Harvey Z. Yazijian in The Cola Wars, "Pemberton's decision to blend the two was boldly original, for it brought together two of the most massive stimulants known to preindustrial cultures."
Much has been said of the "magic formula" for the syrup, especially about the ingredient known as Merchandise 7X. Charles Howard Can- dler, son of Asa Griggs Candler (who bought the company from Pemberton), and himself a Coca-Cola executive, wrote in 1950 that for some years the syrup was made only by Asa Candler and his partner Frank Robinson. The formula was later transmitted to a few trusted employees, but only "by word of mouth." "One of the proudest moments of my life," the younger Candler recalled,
came when my father, shortly after the turn of the century, initiated me into the mysteries of the secret flavoring formula, inducting me as it were, into the "Holy of Holies." No written memorandum was permitted, No written formulae were shown. Containers of ingredients, from which the labels had been removed, were identified only by sight, smell, and remembering where each was put on the shelf.... To be safe, father stood by me several times to insure the integrity of the batches and to satisfy himself that his youthful son had learned his lesson and could be depended upon.
The Coca-Cola Company received an object lesson in the magic of the formula as late as 1985. On April 22 of that year, in what proved to be the most flamboyant miscalculation in the company's ninety-nine years, management announced that it was changing the product's original formula. The result was a blizzard of protest so intense that within three months the original formula was brought back. Said one trade journalist, "The company didn't fathom the depth of the emotional commitment to Coke," and a Coke bottler observed that "some consumers were mad. It was almost a psychological thing."
The Coca-Cola formula, of course, produced the taste, about which devotees have waxed rhapsodic-the "sweet-and-bitter taste of first love," in the words of one. The drive to crack the secret code dates back at least to the turn of the century, when the Druggists Circular and Chemical Gazette ran an advertisement offering five dollars for the "Secret Coca-Cola flavor formula." A number of years ago, Coca-Cola's vice- president for quality control explained that outsiders trying to discover the product's makeup would face an "extraordinarily difficult, if not down- right impossible," task. Even chemists trained in the use of techniques like infrared spectrum analysis could not easily break down mixture of citrus oils into its component parts.
Those who are not commercial chemists and who do not know the precise ingredients of the formula are not in a position to evaluate how mystifying it is. However, one must be skeptical about the role that the Coca-Cola formula played in the product's success. How really different was this product from other colas in taste? Further, does it not seem likely that Coca-Cola in the early years varied as much from region to region, perhaps even from fountain to fountain, as it did from similar soft drink products? According to a 1931 Fortune magazine story, Coke syrup contained up to 99 percent sugar and water, and the drink itself was made up of one part syrup to five parts carbonated water. Therefore, the ratio in each glass of Coca-Cola was 599 parts sugar and water to one part essential components.
The constitution of water varies throughout the country, thus affecting taste. And when Coca-Cola is served at the soda fountain, the server also affects the mix.
These thoughts suggest that the attention paid to the secret formula of Coca-Cola has not been without hyperbole through the years. Alfred Steele, who spent ten years at Coca-Cola before becoming president of Pepsi in 1950, noted, "Their chemists know what's in our product, and our chemists know what's in theirs. Hell, I know both formulas." Roger Enrico, president of Pepsi-Cola at this writing, planned in 1985 to bring out the original Coca-Cola formula after Coke took it off the market. He has written that "It didn't take us long to crack the Merchandise 7X code.
One therefore doubts that the inherent chemical and physical composition of Coca-Cola-the core product-can be given the principal or even a significant share of the credit for the company's great success. Coca-Cola had to create its market. If the drink had remained in the hands of John Styth Pemberton, it would have gone the way of his Extract of Styllinger and Globe Flower Cough Syrup.
But Coke did not stay in Pemberton's hand
COCA-COLA AS SYSTEM
Pemberton sold his two-thirds interest in Coca-Cola in 1887 for $283.29, of which $76 was for advertising paraphernalia. Asa G. Candler acquired some company stock in 1888 and complete ownership by 1891. Born in Villa Rica, Georgia, in 1851, Candler moved to Atlanta in 1873, where one of the first places he applied for work was the Pemberton- Pulliam Drug Company (there was no opening). He was already a prosperous businessman when he bought the Coca-Cola Company for $2,300. In 1916, be gave almost all of his stock to his sons, who in turn sold it to a consortium of banks headed by Atlanta businessman Ernest Woodruff in 1919. The price was $25 million, two-fifths of it in cash, and it was the biggest business deal in the South up to that time.
Coca-Cola was able to grow as it did because of its success in gaining national distribution. The obstacles to this achievement were considerable. The product sold for only a nickel, and its ingredients were bulky and heavy. Further, a beverage such as this was a convenience good par excellence. Coca-Cola may have been selling syrup, but the consumer was buying the quenching of thirst. It is a rare consumer who will save his or her thirst for twenty or thirty minutes in order to find a Coca-Cola or any other specific soft drink. Since a thirst unquenched by Coca-Cola was a sale lost forever, Coke had to be everywhere, or, in the words of a company executive in the 1930s, "within arm's-length of desire."
What were the means by which Coke's ubiquity was achieved? Five factors stand out: the vision and entrepreneurship of Candler and of his successor, Robert Winship Woodruff; the company's aggressive sales force; the system of franchised bottlers; the advertising program; and the legal right to defend the trademark together with the wit and resources to carry out the defense.
ENTREPRENEURSHIP
Asa Griggs Candler was profoundly devoted to the Methodist Church. He was baptized in June 1869, at the age of 17, and "from that day on," according to his son, the Christian religion became the central purpose of Asa G. Candler's life. His ambition for success and his keen competitive instinct led him to take pleasure in the conduct of his business affairs, it is true. But at no time was the accumulation of wealth an end in itself to him. . . .He had a profound reverence for his Creator, an abiding faith in the revealed word, a complete reliance on the Blood of the Cross, and an unbounded love for his fellow man.
Candler's commitment to religion carried a number of implications for his entrepreneurship. First, he saw a close relationship between faith and business achievement. "Religion in the soul," he said, "raises the productive forces of any life to its highest power. It quickens intellectual facilities, arouses industry and inspires inventiveness. This fact explains why the Christian nations of the world are the richest nations on earth."
Candler believed in Coca-Cola with a fervor rarely matched by the executive of today's diversified firm. In his later years, he said that Coca- Cola's success might appear like "a wonderful romance, but if people knew the good qualities of Coca-Cola as I know them, it would be necessary for us to lock the doors of our factories and have a guard with a shotgun" to control the people who wished to buy it. Candler lavished on Coca-Cola a marketing effort that was not provided for his other products, such as Botanic Blood Balm or Dr. Biggers' Huckleberry Cordial ("The Great Southern Remedy for all Bowel Troubles & Children Teething"). "My experience," he said, "is that the public does not value one's wares higher than [the proprietor himself] does." Candler's commitment to Methodism also meant that the thought of doing business in far-flung places was not alien to him. He was involved in nationwide religious work as well as international missionary efforts.
Candler was also an ardent Southerner. The Civil War had been a disaster for his family. Wrote his son:
The fact of the war and its crushing impact on his family represents a climactic point in my father's life. It carried two of his brothers into uniform and off to far away battlefields. It reduced the standard of living of his father's home from that of near affluence to one of base subsistence. It resulted in financial ruin and loss of everything but the land, almost completely denuded of any- thing animate or inanimate which might have been of service to marauding bands from both armies. It meant the death-knell of Father's hopes and those of my grandfather for a medical career for him. More than that, it meant that he had . . . almost no formal education beyond the elementary grades.
Despite his Confederate sympathies, Candler readily adopted a national point of view for Coca-Cola. As early as 1892, he made arrangements for its sale in New England and soon thereafter for its manufacture in Chicago and Philadelphia. Coca-Cola was advertised in national magazines by 1904. In 1909, Candler sent a dirigible plastered with Coca-Cola advertising over Washington, D.C.
Unlike his top sales and advertising executives, Candler was apparently neither an inspirational speaker nor a glad-hander. Ross Treseder, an early Coca-Cola salesman, recalled that Candler only came to the sales meetings I attended to greet everybody in the kindest southern hospitable manner. I can remember very vividly his coming to the last day of the sales meeting when it was about to close and all of us would be packing our bags and catching our trains returning to our territories. In his rather high-pitched voice he wanted to wish us a "God Speed" and in closing his remarks he asked all of us to rise and join him in singing "Onward Christian Soldiers."
Judging from his early annual reports, Candler appears to have been a frank and straightforward person with more than a hint of combativeness. These reports, unmediated by the hand of public relations and reflecting Candler's basic honesty, are a pleasure to read today. One typical selection from 1908 follows:
When I wrote my first annual report, December 2, 1892, 1 thought all presidents of industrial corporations made reports in full detail to stockholders. Since then I have learned much. I now know that such reports are not often given stockholders. I believe they are entitled to know exact conditions and how well or bad their investments are being managed. And so we will have this report.
Perhaps Candler's most outstanding attribute as an executive was his superior management of the problem of commitment and flexibility. He had the ability to change when his judgment told him change was called for. Although Candler was originally attracted to Coca-Cola because it cured his headaches, for example, he was astute enough to observe that customers prized it more as a beverage than as a medication. He was able to learn from his customers and to reposition the product.
THE SALES FORCE
The sales force was of critical importance in achieving national distribution for Coca-Cola. Coca-Cola under Candler relied heavily on a personal, face-to-face selling approach. Although there are other ways to reach the customer-such as mass-media or direct-mall advertising- personal selling has the advantages of high impact on the customer and flexibility. The salesperson can tailor the message to the individual customer, answering questions and responding to objections. At Coca-Cola, management worked to maximize sales force performance in such subtle exchanges. "Sales demonstrations can be staged," explained a Coca-Cola vice-president at a 1923 bottler convention, "one salesman taking the part of a merchant and the other taking the part of a salesman. Questions can be asked, ideas can be brought out, and a general discussion of territories can be gone into."
This customization of the selling message sharply differentiates inter- personal from mass communication. Mass-media advertisement is the lowest common denominator appeal, designed to speak to as many potential customers as possible. This reach is achieved, however, by sacrificing knowledge and awareness of individual needs. Although prior to the broadcasting era advertising was often referred to as "salesmanship in print," the absence of a two-way selling exchange marks advertising as fundamentally different from personal selling.
Shrewd salespersons not only talk but listen. They can bring market intelligence back to the regional office. The Coca-Cola Company was relentless in its desire for market information. "Know thy customers," proclaimed vice-president and director of sales Harrison Jones in a speech, to the bottlers:
Know them intimately. Know them well. Have a daily tab on them, and this is where your duplicate card that you keep in the home office fits in. If a record of purchases is kept tabulated at all times, daily, in your office, you yourself or your sales manager, has constantly at hand a record of what every customer is doing and above all, a record of what he is not doing. It is the pulse of your business, and the only way to feel the pulse of your entire business at one time. It enables you to intelligently analyze and to describe and to prescribe remedies.
Coca-Cola also wanted its sales force to be everywhere. In the view of its executives, every conceivable outlet should carry the product. The Coca-Cola sales force sold not only to soda fountains, where the syrup was mixed with carbonated water on site, but also to bottlers, independent entrepreneurs under contract to Coca-Cola who marketed the beverage in bottled form to retailers. By 1928, the chief executive officer of Coca- Cola, Robert Woodruff, was convinced that the most intensive fountain distribution possible had been achieved: "We can count on our fingers the soda fountains in the United States that do not serve Coca-Cola." For the bottlers, on the other hand, total distribution was a goal that could never be achieved: "How many people can handle Bottled Coca-Cola?" Harrison Jones asked the bottlers in 1923. Here was his answer:
Bakers Grocers
Bowling alleys Shoe-shine parlors
Cafes Homes
Cigar stands Hospitals
Clubs Hotels
Colleges-schools Ice cream parlors
Confectioners Markets
Construction jobs Manicure parlors
Dairy depots Military organizations
Dancing academies Parks
Delicatessens Places of amusement
5¢ & 10¢ stores Police stations
Filling stations Pool rooms
Fire engine houses Railroad offices
Fish, game, poultry, meats Restaurants
Fraternal orders Tea rooms
Fruit stands Telegraph offices
Garages Telephone offices
General merchandisers Wiener stands
Jones told the bottlers that their success would be based on their ability "to make it impossible for the consumer to escape Coca-Cola." William C. D'Arcy, who owned the advertising agency that handled the Coca-Cola account (and who had been set up in business by Asa Candler and Samuel Candler Dobbs in 1904), echoed Jones in the same year: "Gentlemen, there is no place within reach, by steps, elevator, ladder, or derrick, where Coca-Cola can be sold, but what should be reached by a Coca-Cola salesman, or that salesman should be fired."
Intensive distribution was more than a strategy at Coca-Cola. It was an obsession. Coca-Cola executives felt that accounts could not be visited too often. "The trade like to be cultivated," advised Samuel Candler Dobbs, "they must be cultivated. . . . See your trade, know your trade, like your trade, and they will like you." Said Harrison Jones:
Repetition cuts through. A drop of water will wear through a rock. Continual chewing will enable you to digest your food. If you keep hitting the nail on the head it will drive up. Salesmen should keep calling unremittingly on their prospects.
And from William D'Arcy:
No matter how many times you have talked to a dealer about Coca-Cola, there is always something new to say. Repetition convinces a man. A merchant buys so many different things that a persistent salesman wins an opening where a casual order-taker never makes an impression.
The names of some early salesmen-Charles H. Candler, Asa G. Candler, Jr., Ezekiel Candler, Samuel Candler Dobbs-show that where possible the company made use of Asa Candler's immediate and extended family for sales help (as it did for legal services as well). But a great many more people were needed to achieve the scope and frequency of coverage that Coca-Cola managers envisioned. The seasonal nature of the selling effort during the first fifteen or more years of the company's existence provided a staffing opportunity. Soda fountains were closed during the winter, and the sales force was on the road from four to eight months a year outside the South. Recalled Charles H. Candler:
Probably the most effective salesmen we had were cotton buyers who were not actively engaged in their ordinary avocation during the summer months and were consequently available for what might be termed part-time employment by an institution like the Coca-Cola Company, which felt that it was necessary to put forth intensive efforts only during the summer months. These were men usually of robust health, affable personality and hard workers.
Charles Howard Candler joined Coca-Cola's sales force in 1899, when the company had fifteen salespersons on the road at peak season. He has given us a glimpse of how the company approached the task of sales-force training:
A man employed as a salesman was brought to Atlanta, and after several weeks during the late winter or very early spring was informed and instructed, as opportunity afforded the time, concerning the policies of the Company, its problems and its plans by my father, Mr. Robinson and Sam Dobbs. If he was not already sold on Coca-Cola, he was thoroughly acquainted with its merit, and was afforded the opportunity of watching its manufacture, particular attention being called to the quality of ingredients used; the profit to be derived by a retailer in dispensing Coca-Cola was demonstrated to him; the various pieces of advertising material were displayed to him and he was taught how best to use them. He was also informed respecting a selling plan to both wholesalers and retailers, known as the rebate contract plan, and impressed with our preference that, as far as possible, all sales be made through jobbers. His attention was called to any customers on his proposed route who were not in good credit standing, and specific instructions were given him as to how these customers might be best approached and handled.
An important part of the training process was the sales force convention in Atlanta. The first convention took place in 1905, with twenty-nine people in attendance. Management addressed the salespeople on sales strategy, advertising strategy, and the mission of the company. These meetings were designed to increase the flow of information from the home office about retailer lists, advertising strategy and material, and expenses and from the sales force about customer performance, sales and advertising productivity, and expenses. Equally important, the salespeople had the opportunity to meet and learn from one another. Moreover, the location of these conventions in Atlanta, where Coca- Cola sales were phenomenal, did not fall to make an impression on the ambitious salesperson. Recalled Treseder of his first convention in 1914:
My first trip to Atlanta was also my first journey to the deep South. I had heard so much about the great popularity of Coca-Cola and of the big volume fountains were selling. Although Coca-Cola was nationally known and available in the Western States that I covered, the sales of Coca-Cola at fountains were " peanuts" as compared to the deep South.... There was a fountain in the Candler building on Peachtree Street very close to my hotel which was dispensing approximately a barrel of Coca-Cola syrup a day, meaning several thousand glasses of Coca-Cola a day. lt was unbelievable to me....To me, one of the greatest impressions I gathered from the other salesmen was the potential possibilities of Coca-Cola in my western territory.
The enthusiasm of such meetings was infectious and enduring. Six decades later, Treseder recalled that on the completion of his first meeting, "I felt like a new man."
The decision to focus all its efforts on one product greatly eased Coca- Cola's sales management problems. The sales force was deployed geo- graphically, and by the 1920s it was organized into a system of regions and districts that other soft drink companies have since copied and still use today. Coca-Cola's traveling sales force dealt solely with soda fountain operators; its mission until 1928 can be stated succinctly: open more accounts.
In the early or mid-1890s (Asa Candler was unclear on the date), the company "undertook to interest certain prominent dispensers in large places all over the country giving to each one who sold a certain amount of Coca-Cola, stock in the company." By the 1900s, the traveling sales force no longer had that particular incentive to offer a prospective customer. They did, however, have premiums to offer to the new account, such as cash drawers, eight-day clocks (i.e., clocks that run for eight days on one winding so that they only need to be wound once a week), and dispensing urns.
Under another promotional plan, a salesperson sold a 5-gallon keg of syrup to a fountain operator for the regular price of $8.75. Then the salesperson mailed to at least 100 names on a list provided by the fountain operator a complimentary ticket entitling the recipient to a free glass of Coca-Cola at the fountain specified. The fountain operator sent the tickets off to Atlanta and received $5 from the company in return. This promotion provides a glimpse of the economics of the Coca-Cola business for the retailer. One gallon of syrup produced 100 glasses of Coca-Cola, which retailed at the fountain for 5 cents each, so a 5-gallon keg costing $8.75 should produce $25 in revenue for the retailer, or a 65 percent gross margin. The plan had a number of inviting aspects from the trade's perspective. First, it reduced the risk involved in getting acquainted with the new product. Second, the plan pulled consumers into the retailer's establishment, thus demonstrating Coca-Cola's power to generate traffic.
From the company's point of view, the promotion gave the salespeople something to talk about to the new accounts in order to overcome the natural skepticism about a new product. One story recounted the trials of a salesman who tried to sell a 50-gallon barrel of syrup to a fountain proprietor who had never heard of Coca-Cola. The proprietor simply laughed at him. The salesman tried again with a 1O-gallon barrel, with no result. Finally: "Well how about buying a one-gallon jug? Anybody can sell a gallon of Coca-Cola." Came the reply: "Well, mister, you ain't done it yet." The promotion gave the salesperson the chance to cut price on a one-time-only basis and also to distance the price cut by a number of steps-distribution and redemption of ticket-from the purchase of the Coca-Cola syrup itself. "One of the cardinal principles of the house, which was very thoroughly drilled into all salesmen," wrote Charles H. Candler, "was a positive stand that our card prices must be maintained."
The sales force left the Atlanta conventions armed with lists of towns, their populations, and rosters of prospective customers doing a fountain business therein, including druggists, confectioners, grocers, and restaurateurs. Credit ratings (from Dun's) and purchases the previous year, broken down by month, accompanied the names of these merchants. The sales force visited retailers. The retailers, however, did not purchase direct from the company, but rather from wholesalers.
The salespeople rode into their assigned towns like well-equipped shock troops, heavily armed with quantities of advertising material as well as complimentary tickets and circulars, which they carried with them in a large trunk. They attempted to sell not only syrup, but also glasses with the Coca-Cola trademark and, for a time, Coca-Cola chewing gum and cigars. The gum and cigars met with little success, but the glasses sold better, despite some resistance caused by the trademark. The over- whelming effort, however, was to sell the syrup, to show customers how best to serve it, to reacquaint them with the company's selling plan, to hang advertising signs wherever possible, and to negotiate with the local bill poster. All this selling, promoting, and educating had to be done quickly, since the typical salesperson seldom remained in a town longer than twenty-four hours.
A good deal of the information that we would like to have about sales force management at Coca-Cola has, unfortunately, not survived. We do not know, for instance, how the company established compensation, evaluated productivity, or managed career paths. Indeed, we do not even know how many salespeople the company fielded, except for occasional years. Statistics have survived on jobbers and fountains handling the product. The rate of increase in accounts slowed during the 1920s. From 1919 to 1924 the total number of soda fountains served increased by more than twenty thousand, or 30 percent. From 1924 to 1929, total fountain outlets grew by about one-third that number.
Robert Woodruff observed not long after he became CEO of the Coca-Cola Company in 1923 that a new sales approach was needed. The object was no longer to gain national distribution. That job had been done. The new goal was to ensure that Coca-Cola stayed on top. The more intensive development of business through existing retailers should there- fore replace opening new accounts as the company's primary objective. He explained:
It requires a higher order of merchandising to maintain volume than to gain new volume. Many salesmen offering slow-moving goods are on the job. Every retailer is continually the object of much strong selling. As a result a peculiar condition constantly threatens the successful product. The retailer may drift into a habit of pushing the various products which obviously need pushing with the thought that an article like Coca-Cola pushes itself.
Woodruff felt that a reorganized sales department was needed to implement this new philosophy. The previous sales structure had provided inadequate supervision for the field force of a nationally distributed product. In the old system, as Fortune described it, there was "hardly anything except large stretches of geography" between the salesperson and the home office in Atlanta. With the new approach, control and monitoring would be increased. In place of the former system, in which one sales department with headquarters in Atlanta supervised all selling activities in the United States and Canada, Coca-Cola adopted a decentralized structure. Two subsidiary sales corporations, wholly owned by the parent, were set up for the United States and Canada. The United States was divided into five sales divisions, which were then subdivided into a total of sixteen (increased to twenty by 1929) district offices. The divisions were to be the new focus of attention. Meetings were to be held and agendas set at that level rather than in Atlanta. Woodruff hoped that greater regional autonomy would lead to intensified contact with retail outlets.
In 1927, Woodruff carried out another dramatic change in the sales approach, which he presented in a particularly striking fashion. He called the sales force to Atlanta and announced that the sales department had been abolished and along with it their jobs. At the same time, he told them to attend a meeting the following day concerning their future with the Coca-Cola Company. After what must have been an anxious night for these people, Woodruff announced that the company was creating a service department in which each of them was being offered a job.
The old plans and old formulas for selling no longer applied in the late 1920s, Woodruff asserted, because they were based on the strategy of increasing distribution. Now, however, distribution had been secured. Almost every fountain in the nation had standing orders for the syrup and served it as a matter of course. A salesperson could perhaps push an extra unit of product on the retailers and might even get an order more quickly than otherwise, but the approach of a salesman, whose object it is to sell [the retailer] more of something he already has and which he will buy anyway when he needs it, is likely to be somewhat tiresome to him and to impress him as a rather useless procedure. He continues as a customer of the company; he may even give the salesman an order then and there. But his feeling toward the salesman, and even toward the Coca-Cola Company itself, is one having within it the elements of resistance. He feels, some way or other, that his interests and ours are somewhat divergent; that we are trying to force on him more of our goods than he really needs or wants at any one time.
Thus, the focus of the Coca-Cola sales effort would shift from selling merchandise to dealers to helping dealers sell merchandise for themselves. The members of the field force were being transformed from salespeople to teachers:
The serviceman is schooled in the fine points of refrigeration, carbonation and sanitation. He is in no sense a repair man or plumber. But he is able quickly to look over the mechanics of a fountain and point out any faults. The result . . .is a high quality of drink ....
Not only the mechanics of serving the product but also such concerns as the optimal arrangement of dealer help advertising now fell within the purview of the new "serviceman."
In changing the focus of Coca-Cola's selling effort, Woodruff was acting on the adage that "The time to make a change is when you don't have to," rather on the one that holds, "If it ain't broke, don't fix it." The company set sales records every year from 1925 through 1930. No one would have faulted it in 1927 for maintaining the sales system that had achieved successive records in 1925 and 1926. But Woodruff anticipated the need for change.
THE BOTTLER NETWORK
The Coca-Cola Company began its corporate history as a manufacturer of a syrup sold to soda fountains located predominantly in drugstores. The fountain proprietors mixed the syrup with carbonated water at the point of sale and sold it to the customer. When bottling of Coca-Cola began is unclear. Some evidence suggests that bottling occurred as early as 1887 in Atlanta, but if so, the original venture was not long-lived.
The company usually cites Joseph A. Biedenharn as the first Coca-Cola bottler. Biedenharn, who operated a family-owned wholesale and retail confectionary business, certainly agreed with this view. In a profile pub- lished in the Coca-Cola Bottler in 1959, he stated:
I know it is a fact that I am the first bottler of Coca-Cola in the world because when I began there wasn't anybody bottling at that time. The soda water bottlers didn't want to bother with it besides, they said, the price for Coca- Cola was too high. They were merely content to make soda water.
Biedenharn first became interested in Coca-Cola in 1890, when Samuel Candler Dobbs, then a Coca-Cola traveling salesman, "placed a five- gallon keg of Coca-Cola syrup on the counter of Joe's store and explained what it was." Biedenharn sold a lot of syrup in the succeeding years and felt he could greatly increase business by "bringing the product to the customer. I wanted to bring Coca-Cola to the country people outside the limits of the fountain."
Bledenharn's bottling operations began in 1894. "I did not say anything to Mr. Candler about it," Biedenharn recalled, "but I did ship to him the first two-dozen case of Coca-Cola I bottled. Mr. Candler immediately wrote back that it was fine." Thus originated one of the Coca-Cola family bottling dynasties. Biedenharn had six brothers, all of whom, with their children, went into Coca-Cola bottling.
The subject of bottling was again raised with the company in the summer of 1899, when two lawyers from Chattanooga, Benjamin Franklin, Thomas and Joseph Brown Whitehead, tried to interest Candler in the potential of this form of distribution. The idea of bottling came to Thomas while he was serving as a clerk for the military in Cuba during the Spanish-American War. Pioa Fria, a carbonated pineapple drink in bottles, was well received there. Thomas approached Whitehead about the idea, and Whitehead was receptive. He liked to go to baseball games, and he was annoyed that he could not enjoy his favorite drink at the park. If it were bottled, Coca-Cola would be far more accessible to consumers than if it were permanently exiled to soda fountains. Despite the enthusiasm of Thomas and Whitehead, and despite whatever success the Biedenharn operations may have experienced by that time, Candler apparently was not impressed by the idea of bottling.
The reasons for Candler's point of view are not known precisely; perhaps, having been a druggist all his life, he naturally thought in terms of the rest, refreshment, and camaraderie of the soda fountain. Or perhaps he was concerned about safety and purity. The technology of bottling carbonated beverages was still at an early stage. Not infrequently, bottles exploded. The bottle seal most commonly used was the Hutchinson stop- per-a cork attached to the inside of the bottle with a wire. This contraption was not effective in keeping the beverage fresh much longer than ten days. Crown Cork and Seal had been marketing the bottle cap since 1892, but the new device did not gain complete acceptance for a number of years.
Despite his reservations, Candler granted Whitehead and Thomas a franchise to bottle and sell Coca-Cola everywhere in the United States except in New England, Mississippi, and Texas, where prior distribution arrangements (such as the one with Biedenharn) had already been made. The contract provided that Thomas and Whitehead would bottle soft drink made from syrup provided by Coca-Cola, and Coca-Cola granted them sole use of the trademark on their bottles and furnished labels and advertising matter. This franchise cost Thomas and Whitehead a grand total of one dollar-which was never actually collected. "If you boys fall in the undertaking," historian Watters quotes Candler as having said, "don't come back to cry on my shoulder, because I have very little confidence in this bottling business."
Soon thereafter, Thomas and Whitehead parted company; and White- head, realizing that he did not have the $5,000 he needed to set up his own bottling operations, brought in another Chattanooga businessman, John Thomas Lupton. These two firms (Thomas's and Whitehead and Lupton's) set up four more so-called parent bottlers. The primary activity of the parent bottlers soon ceased to be the bottling of Coca-Cola and became instead the franchising of a whole network of bottlers to whom they wholesaled Coca-Cola syrup. It was estimated in 1960 that three- fourths of the fortunes made in Chattanooga derived from Coca-Cola or related businesses, such as the production of bottles, crates, and coolers.
The decision to franchise bottling thus established a second kind of Coca-Cola fortune (the first being the syrup fortunes). A Fortune article described the system in 1931:
The Coca-Cola company supplies parent bottlers with syrup at $1.35 ... a gallon. Now let us suppose that a bottler puts up 500,000 gallons a year (which is about the production of the New Orleans bottler). This amount of syrup makes about 2,167,000 cases of Coca-Cola, with twenty-four bottles to a case. The retailer pays eighty cents a case, so the bottler receives $1,730,000 on a syrup investment of $675,000. He must, of course, buy his carbonic gas and maintain his bottling plant, but (provided he gets back his empty bottles to refill) he makes on his business a very fine profit. Indeed, his franchise to bottle Coca-Cola is a privilege upon which he can borrow money at the bank, and which he can sell at from $7 to $12 per gallon bottled per year. In other words, our New Orleans bottler has a franchise worth (at a $ 10 a gallon median figure) some $5,000,000; and a franchise which any New Orleans bank would accept as good collateral.
Had Candler not franchised bottling, those profit dollars would have found their way to the bottom line of his company's income statement. Moreover, company ownership of the bottling operations would have greatly enhanced the freedom to price and would have facilitated the process of working out coordinated marketing programs. But such considerations were for a distant future. In 1899, the bottling of Coca-Cola did not seem nearly as important or as lucrative as it was to become.
Further, the bottlers did essential work in market development their success can be attributed at least in part to Coca-Cola's perpetual licenses. Commitment to the business was heightened by the bottlers' right to sell their franchises if Coca-Cola approved the purchaser or to bequeath them to their children. By 1960, a number of franchises spanned four generations.
Despite his entrepreneurial abilities, Candler failed to foresee the impact of Coca-Cola in bottles. Yet he might not have done better had he foreseen it. Although there has been a marked trend recently at Coca-Cola and in the industry generally toward the purchase of bottlers by the syrup or concentrate manufacturers, it is not clear that Coca- Cola could have expanded so quickly had it tried to do all the work itself.
Perhaps the franchised bottler system was the best method for Coca- Cola to achieve the intensive nationwide distribution essential to its success. One suspects, however, that Candler might not have allowed the two-tiered franchise system to develop had he appreciated the importance of the bottle. In fact, this system has been terminated, and Coca-Cola now owns all the parent bottlers and sells syrup directly to the bottler network. Also, Candler might have been more concerned about payment for the franchise. Coca-Cola literally gave away an element of its distribution system that it has cost the company many millions to buy back. Yet another change might have been in the duration of the franchises. "Perpetuity" is a long time. In 1920, a year after the Woodruff interests took control of the company, they tried to rewrite the bottler contracts to make them terminable at the wish of either party. When the bottlers heard about the plan, they countered by refusing to agree to an increase in the price of syrup. The issue wound up in the courts, which eventually decided that Coca-Cola could pass along higher costs of raw materials to its bottlers in return for agreeing that the bottler contracts were indeed "perpetually perpetual."
The tensions of this distribution system are worth considering. Coca- Cola and its bottlers had one basic goal in common, the sale of Coca-Cola. But for the company, profit resulted from the drink's sale in the glass as well as in the bottle; for the bottler, sales and profits came only from bottled sales. Thus the company to an extent competed against its own distribution system. Many Coca-Cola bottlers believed, in the words of the president of the Coca-Cola Bottlers Association in 1923, that the company was their strongest competitor, and in some cases there was actual antagonism. The Coca-Cola Company's salesmen would try to convince customers of the bottlers that it was more advantageous to handle the fountain product, and the bottler would try to convince customers of the Coca-Cola Company that it was better to handle Coca-Cola in bottles.
On the other hand, the bottlers could (and many did) bottle other carbonated beverages-such as soda water--that were not directly competitive with Coca-Cola, though the company discouraged the practice. Speaking for the company, advertising man William D'Arcy estimated that in the early 1920s, one-third of bottler output consisted of drinks other than Coca-Cola:
Now, some fellow starts a company out of his imagination. He wants to get into the soft drink business. He thinks it is profitable. The first customer he thinks of is the Coca-Cola bottler. . . .
You know your trade. You understand your credits. You have the plant and you have the trucks to make deliveries. This gazebo waltzes up to the Coca- Cola bottler because the Coca-Cola bottler is a national figure; he is part of one of the best organizations in the country; his credit is good; his customers know him and have confidence in him. This salesman says: "I'll give you a cheaper price per gallon. I'll put twelve salesmen on your trucks and send them out with your salesmen and keep them at it for a week. For one week, mind you, when there are fifty-two weeks in the year. I will send them into your merchant's store whom you give credit and sell this merchant merchandise that won't turn over."
You wouldn't let a burglar walk into your home and take what he wants! Why it happen so often that this fellow walks in and walks away with the results of your investment, with your good will? I tell you it is not right- from your standpoint or from Coca-Cola's standpoint-for they are one and the same.
In the management of its bottling network, Coca-Cola tried to convince the bottlers that their interests and the company's were indeed one and the same. To that end, company executives made presentations to the bottlers designed to show that sales by the glass and by the bottle could and did increase together, that one did not take share of a stagnant market from the other. The company also expended considerable effort in schooling the bottlers in how to motivate and manage their own sales forces and how best to utilize the company's national advertising efforts. In 1923, sales vice-president Harrison Jones said that "inevitably the progress of Coca-Cola from now forward will more largely depend on you men, the bottlers, than on any other one branch of the Coca-Cola fam- ily." He was right. Since the fountain outlets were becoming saturated, the effort to make Coca-Cola available everywhere would have to focus on the bottle.
Indeed, Jones was more right than he could have known. In 1922 or 1923, the six-bottle carton was first developed. This device proved an important wedge into grocery outlets and into the homes of consumers. If a consumer bought six bottles at a time, the number of times during the course of a year that she or her family made a decision concerning what beverage to buy decreased, and the opportunities for a competitive brand to penetrate Coca-Cola's market were reduced. And with Coca- Cola always in the home of the consumer, consumption was bound to increase. Meanwhile, new coolers were being developed for retail sale of the product, and electric home refrigeration was just around the corner. In 1928, Coca-Cola sales in bottles surpassed fountain sales for the first time.
THE ADVERTISING PROGRAM
"The trade of advertising is now so near to perfection," Dr. Johnson wrote in 1759, "that it is not easy to propose any improvement." Most consumer product marketers in 1900 (and doubtless most today as well) would have taken issue with the good doctor on this point. We are so accustomed today to branded product manufacturers spending heavily on advertising that it takes some effort to realize that such expenditures were new in the 1880s, 1890s, and early 1900s. To be sure, advertising itself is almost as old as communication, but the expenditure of hundreds of thousands and soon millions of dollars on advertising in sustained campaigns year after year by large corporations is a development of the twentieth century.
The corporate advertising manager at the turn of the century could have proposed numerous improvements in the advertising trade as he knew it, Dr. Johnson to the contrary notwithstanding. Perhaps the first would have been better information. The advertising manager would have asked the same six questions that today's managers ask (questions that are still rarely answered to the advertiser's satisfaction):
1 . What is it precisely that I should be trying to do with my advertising? Is it designed actually to sell the product? Or rather is my real goal simply to make consumers aware of the product so that when they see it the salesperson will be able to close the deal at the point of purchase?
2. To whom should I advertise? Whom should I be trying to reach?
3. What should I say to the target market and how should I say it?
4. Where should I place my advertisements to achieve maximum impact?
5. How much money should I spend?
6. How should I measure the extent to which my advertising is working?
Coca-Cola was advertising incarnate. Remember that Frank Robinson chose "Coca-Cola as a name, similar to other advertising names, thinking that the two C's would look well in advertising." Everyone knew from the beginning that advertising would play a big role in this product's future. Coca-Cola advertising was designed not only to sell the product to the end consumer, but also to defend Coke against the many charges that it contained dangerous amounts of cocaine, alcohol, or caffeine.
Coca-Cola advertising was also aimed specifically at the trade, to convince druggists that the company would treat them fairly and well. The company's commitment to consumer advertising was very early used as a talking point in advertising to the retailer. Coca-Cola told the drug trade in 1913 that it would spend over $1 million that year in advertising. The company used consumer advertising to excite the bottlers about their sales prospects, as this passage from Harrison Jones's speech to a bottlers' convention demonstrates:
Thank God for a Board of Directors and heads of a business that came 100 per cent clean and said, "You need the ammunition, and here she is," and they gave us a million dollars more than we have ever had in this world for sales and advertising. [Applause.] And they could have kept it for profits-but they didn't do it; they gave it to us, and, believe me, with your help and God's help we are going to get them in 1923. [Applause.]
The basic goal of Coca-Cola advertising was to make customers think of Coca-Cola when thirsty and to assure them that the beverage would satisfy their thirst better than any other. But how did Coca-Cola define the customer? At whom was its advertising primarily aimed? An observer today would expect to find in the marketing of a product such as Coca-Cola a market segmentation scheme designed to discover the desires of groups of potential customers and to speak as directly as possible to them. Modern market segmentation is, however, something for which the researcher will seek in vain during the early history of this company. Here, for example, is an advertisement that appeared in a national magazine in 1905:
Coca-Cola Is a Delightful, Palatable, Healthful Beverage. It Relieves Fatigue and Is Indispensable for Business and Professional Men Students, Wheelmen and Athletes. Relieves Mental and Physical Exhaustion and, Is the Favorite Drink for Ladies When Thirsty, Weary, Despondent.
This advertisement covers a lot of ground, and it is not atypical. Each time a Coca-Cola executive began a statement suggesting a modern segmentation scheme (e.g., "To formulate a proper selling plan, one must analyze the class of people whom he is desirous of reaching"), another statement followed, suggesting that the segment comprised everyone (e.g., "in other words, our advertising must be an appeal to each class of people"). Coca-Cola was looking for thirsty throats. If you had one, no matter who you were, where you were, or what season of the year it was, you were the market.
Coca-Cola spent freely to reach its market. It was ready, as Harrison Jones said, to put into advertising money that could have been profit dollars. From the beginning, Coca-Cola looked on advertising as a long- term investment. In 1892, Asa Candler had noted in his annual report that "We have done very considerable advertising in territory which has not as yet yielded any returns." But even during those years in which Candler "would be grateful if we could only claim solvency," he was willing to wait. "We have reason to believe that it [the advertising that had not yet yielded results] will show good returns during the ensuing year." Coca-Cola advertising expenditures increased rapidly from 1892 to 1929. Although other companies matched Coca-Cola's advertising expenditures I 1930. In 1892, by 1901, Coca-Cola's outlays topped $100,000. This sum probably placed the company among the top thirty advertising spenders. And all this money was being devoted to a single product. By 1912, the year that the Advertising Club of America declared Coca-Cola to be the best-advertised product in the United States, advertising expenditures had increased to almost $1.2 million, a figure greater than total sales in 1904.
What did all this money buy? The data are startling. Five million litho- graph signs! Where were all these signs hung? Were five million more signs put up the following year, Coca-Cola was doing its part to see to it (to borrow Harrison Jones's phrase) that it was impossible for the consumer to escape Coca-Cola.
TRADEMARK DEFENSE
The problem of "bogus substitutes," "unscrupulous pirates," "miserable little substitutes, little mushroom beverages that rise up at every morning's milestone and wither before the day is done," and "contemptible, white- livered hounds," as company organs variously described them in the 1890s, had plagued the Coca-Cola Company from the beginning. Retailers, bottlers, and manufacturers all over the nation tried to cash in on Coca-Cola's reputation and consumer recognition in a bewildering variety of ways.
The most common problem was caused by companies that tried to convince the customer that their product was essentially the same as Coca-Cola and a court-in the suit that inevitably followed-that their product was essentially different. Here is a partial list of brand names
Taka-Kola Afri-Cola
Chero-Kola Star Coke
Espo-Cola Co Kola
John D. Fletcher's Genuine Coca and Cola Coke-Ola
Takola Kos-Kola
Klu-Ko Kola Cafa Cola
Crescent Coca Cola Sola Cola
A.D.S. Ext. of Coca and Cola Carbo-Cola
Caro-Cola Celro-Zola
Coke Celery-Cola
Koke Okla-Cola
Some of these brands suggested by their very names the segmentation strategies contemplated by their producers. Thus Afri-Cola was aimed at the African-American market while Klu-Ko Kola apparently targeted the bigot market. In 1926, a business journalist reported that there had been more than seven thousand cases of trademark infringement against Coca- Cola.
Protecting the trademark was a multifaceted activity. It included prose- cuting those who adopted names such as those in the preceding list. It also meant navigating the treacherous course between the charge that the name Coca-Cola was merely descriptive-a generic phrase not worthy of capitalization that any producer could use to describe his wares-and the charge that the name was deceptive, depriving the company of the right to be protected.
The most important date in the long history of Coca-Cola's defense of its trademark was 6 December 1920, the date of the victory over the Koke Company of America in the Supreme Court. Coca-Cola had sued Koke for trademark infringement and won in Federal District Court only to see the decision reversed in the Ninth Circuit Court of Appeals. Harold Hirsch, the firm's general counsel and a law partner of Asa Candler's brother, litigated Coca-Cola's case before the Supreme Court. Writing for the majority was Oliver Wendell Holmes, Jr.:
Since 1900 the sales have increased at a very great rate corresponding to a like increase in advertising. The name now characterizes a beverage to be had at almost any soda fountain. It means a single thing coming from a single source, and well known to the community. It hardly would be too much to say that the drink characterizes the name as much as the name the drink. In other words Coca-Cola probably means to most persons the plaintiff's familiar prod- uct to be had everywhere rather than a compound of particular substances. . . . We see no reason to doubt that, as we have said, it has acquired a secondary meaning in which perhaps the product is more emphasized than the producer but to which the producer is entitled.
In the view of the Supreme Court and of millions of consumers as well, Coca-Cola had, by 1920, succeeded in establishing its brand. The process of decommodification had been completed.
Even if Coca-Cola meant more to the consumer than "a compound of particular substances," the company still had to employ chemical tests to determine whether the beverage being sold at a soda fountain was Coca- Cola or a substitute. Protection of the trademark also included ensuring that suppliers, such as fountain operators, did not substitute a brand that was more profitable for them to serve when the consumer asked for Coca-Cola. Given the number of soda fountains in the United States, this problem presented a detection challenge. To discover which fountains may have been cheating, the company hired teams of investigators to order Coca-Cola where substituting was suspected.
Yet another aspect of trademark protection concerned how and where the name Coca-Cola was used. "It's amazing how few books there are that don't mention Coca-Cola," an executive once commented. The company encouraged employees to read widely and to flag possible trademark violations in the process. Was the spelling correct? Were the words capitalized? This was not mindless worry. Should the company not take care in this area, the chances were increased that it would lose its pro- tected trademark.
COCA-COLA AS A CONCEPT: ROBERT WOODRUFF
Gradually beginning about 1914, Asa Candler started to lose interest in Coca-Cola. Advertising manager Frank M. Robinson retired that year, thus terminating an enduring and happy partnership. New federal taxes and rules limiting executives' latitude in managing the assets of their firms left Candler feeling constrained. As his son put it, "He could no longer conduct his business in the way he believed it should be conducted to assure its best progress and to realize its potential greatness." A major, ongoing irritant was the litigation both to preserve the company's trade- mark and to defend it against federal prosecution instigated by the Food and Drug Administration concerning its use of caffeine. Yet another factor was Candler's election to the mayoralty of Atlanta in 1916. On Christmas of that year, just before taking office, Candler divided among his wife and five children almost all of his Coca-Cola stock. The death of Candler's wife in February 1919 plunged him into a depression from which he apparently never fully recovered. He spent much of the decade that remained of his life in a state of painful confusion. He was informed only after the fact of the sale of the company in September 1919 to a consortium of entrepreneurs headed by his neighbor, Atlanta financier Ernest Woodruff.
Woodruff, described by Fortune as "gruff, much feared. . . , relentless," was a deal maker. "He originally made money . . . by assembling small companies into big ones, capitalizing the whole at greater than the sum of the parts, and taking a generous cut on the deal." The price for Coca-Cola was $25 million, $10 million in cash and the rest in preferred stock. Woodruff proceeded to issue a half million shares of new common stock, which he and his associates bought up for $5 a share. By the end of World War II, each share was worth $900 (adjusting for splits) and had generated $475 in dividends.
The company's onward march was not without detours. Indeed, Coca- Cola's performance soon after World War I gave those associated with it deep cause for concern. Samuel Candler Dobbs, the new president, made a major purchase of sugar at $.28 a pound in 1920. The price soon collapsed to $.07, and eventually to under $.02. These fluctuations almost bankrupted Woodruff and his partners, who had to borrow over $20 million to stay in business. Also in 1920, a dispute arose with the bottlers that lasted eighteen months because the company wanted both to raise the price of syrup and to change the terms of the bottler franchise. The bottlers claimed fraud and bad faith on the part of the company, and they took their complaints to court.
Meanwhile, unit and dollar sales were softening ominously. For what must have been the only time in the company's history, a complaint was published in an Annual Report (from 1921) about the "attitude of many bottlers who allowed themselves to become discouraged and get into a state of lethargy insofar as pushing the sale of Coca-Cola was concerned."
If we recall Frederic William Maitland's dictum that things now in the past were once in the future-if we remember, in other words, that in 1923, when Ernest Woodruff with the support of the Coca-Cola board of directors prevailed upon his son, 33-year-old Robert W. Woodruff, to leave his vice-presidency at White Motors in Cleveland to become Coca- Cola's CEO, no one knew what Coca-Cola was to become so soon there- after-we realize that during these crisis years the game appeared to be over. A Fortune article later recalled that: "It seemed then that Coca-Cola had perhaps reached its peak. Weak from losses on sugar and having suffered drops in gallonage sales for three successive years, Coca-Cola looked indeed as if it might at last have reached senescence." So intense was the crisis that a decade and a half afterward-long after Coca-Cola had made millions of dollars for her own family and many others-Ernest Woodruff's wife, Emily Winship Woodruff, could still say, "I never wanted Ernest to buy that company and I've been sorry ever since that he did."
Robert W. Woodruff was not cast in the Horatio Alger mold. In the words of W. C. Bradley, chairman of Coca-Cola's board in the 1920s and a heavy investor in the company, "Bob's grandfather made a lot of money and kept it, Bob's father made a lot of money and kept it, Bob has made a lot more than either of them and kept it. A wonderful family. "
Robert Woodruff was born in Columbus, Georgia, on 6 December 1889. In the six-plus decades from his accession to Coca-Cola's presidency in 1923 to his death in 1985 at the age of 95, Woodruff was the company's chief executive, Èminence grise, icon-he was the company's great man.
Despite his family's wealth, the younger Woodruff did not enjoy an easy road to success. His relationship with his father appears to have been a difficult one. Ernest Woodruff "constantly needled" him and "with one hand [would give] him many advantages, such as a 10,000-mile trip in the private rail car of his railroad friend C. A. Wickersham, but with the other [would take away his] cash allowance." Woodruff attended but did not graduate from Emory University in Atlanta. His father refused to honor his college debts, and to pay them off he got a lob as a laborer in a foundry. From there he went to the General Fire Extinguisher Company, where he soon became a salesman.
Selling turned out to be Woodruff's special talent. He was tall, dark-haired, dark-eyed, quiet, and self-assured. He was not the shake- hands-with-my-friend drummer who expects to be discounted, but the rare and more valuable salesman who can act naturally and make a person feel at-ease before he gets to the matter at hand.
By one acquaintance, he was described as "a retirin' showman." Another remarked: "His personality is so gratifyin' men actually like to be out- smarted by him."
Woodruff's next move was to one of his father's combinations, Atlantic Ice and Coal. While there, in the early 1910s, he bought a fleet of White Motor trucks to replace horse-drawn wagons. His father was upset by the expense of the transaction, but Walter White, president of the trucking concern, was sufficiently impressed by Woodruff's negotiating skill to hire him. Woodruff was thus vice-president and general manager of White Motors when he was summoned back to Atlanta to do something about Coca-Cola.
One of the things that Woodruff did not do was change the product. The unchanging nature of the core product and the consistency of advertising appeals used to sell it are among the most remarkable aspects of Coca-Cola history. Coca-Cola experienced major changes in distribution and packaging from 1886 to the Depression, but the product did not change. Its advertising was also basically consistent. The 1925 slogan "Six Million a Day" is not that different from the one used in 1917, "Three Million a Day." As late as the 1950s, the company was proclaiming on television that "Fifty million times a day, at home, at work, or on the way, there's nothing like a Coca-Cola, nothing like a Coke."
Coca-Cola is distinctive in the constellation of consumer products. All major consumer durables sold between 1886 and 1929 experienced substantial changes in their core product, and these changes have continued through the twentieth century. Automobiles, radios, cameras, phonographs, and the host of electrical products whose introduction was just over the horizon in 1929-such as televisions, air conditioners, and dishwashers-underwent dramatic changes in the course of any given decade. Indeed, some of these products, driven by both technological and market considerations, changed every year. Yet, as a Fortune article commented in 1945, "Unlike the auto or refrigerator or electrical-goods maker, Bob [Woodruff] would be properly horrified at changing his." Such rapid change was not confined to the world of technology-intensive hard goods. Any products with a high fashion content, including apparel and such semi-durables as luggage and furniture, were in a constant state of flux. Even food products were changing, especially with the creation and development of quick freezing during the Depression and World War II.
Although Coca-Cola was remarkable in its unchanging core product, it was not unique. Other consumer products, such as some soaps and detergents, remained essentially the same for years. Yet it is worth noting that most of these were manufactured by companies that were constantly changing their overall product offering. Hence, though a bar of Ivory soap may have remained unaltered between 1886 and 1929, Proctor & Gamble as a company did not. It marketed an increasing variety of soaps, and foodstuffs as well.
Coca-Cola also experimented with product diversification at the turn of the century, trying to sell Coca-Cola Chewing Gum and Coca-Cola Cigars. Management, however, decided to stick with what it knew best and to stay away from other markets. Through the 1960s, well into the era of the multiproduct firm, Coca-Cola consistently opted not to exploit its superb distribution system and advertising economies to market other convenience goods.
The company's ability to succeed with a single, unchanging product in the tumultuous world of twentieth-century consumer marketing leads to speculation about the true nature of Coca-Cola. It was, of course, a beverage; I but, as we have argued, its core nature was not special. It was also a service, but the quick quenching of thirst could be provided by many other products.
Roberto Goizueta, CEO of Coca-Cola from 1981 to this writing, said in 1988:
There is not another company in the world like the Coca-Cola company, not one. I'm not saying we're better, I'm not saying we're worse. I am saying that there is none other like it. If proof is needed, all you have to do is go back again to the summer of 1985 [the time of the abortive formula change]. It was then that we learned that if the shareholders think they own this company, they are kidding themselves. The reality is that the American consumer owns Coca-Cola.
How did Coca-Cola achieve this unique status? Robert Woodruff's answer was, "We've always tried to be decent in our advertising. We've tried to practice what I guess they call the soft sell. ... We've tried to do with our advertising what we always try to do inside and outside the company-to be liked." Coke was your friend, your good friend; always there when you needed it. Not only was Coke your friend-I when you drank it, you became friends with other Coke drinkers. And they were the right kind of people-well-dressed, well-off, happy.
There was also a luxurious aspect to Coca-Cola. It was a mystical, dark compound of magical ingredients with indeterminate powers. But the miracle of the product was that Coca-Cola made this luxury available to everybody for only 5 cents. Americans like equality; but they have always tried to achieve it by leveling up, not by giving anything up. A luxury, yes . . . but a democratic luxury.
Thus a key aspect of Coca-Cola's competitive advantage lay with neither the product nor the service but with the concept that had found its way into the hearts and minds of American consumers. Woodruff under- stood this better than anyone, as his direction of the company during World War II was to illustrate. Soon after the attack on Pearl Harbor, during which four Coca-Cola coolers were shot up at Hickham Field, Woodruff announced that Coca-Cola would be available to all members of the armed forces, wherever they might be stationed. In the process, he managed with remarkable success to identify this product with America and Americanism. Consider the following passage from a letter written by an American private in Burma during World War II to his aunt:
To my mind, I am in this damn mess as much to help keep the custom of drinking Cokes as I am to help preserve the million other benefits our country blesses its citizens with.... May we all toast victory soon with a Coke-if flavored with a little rum, I am sure no one will object.
Could such a letter have been written about any other product?
Robert Woodruff succeeded with Coca-Cola so well in part because he understood the cultural resonance the product had achieved. After his arrival in 1923, he guided the company back to solid ground. Coca-Cola was a mature product in a mature product category by 1930. It was over forty years old. We have already seen how, in the soda fountain segment, where both the trade and its patrons were thoroughly familiar with Coca-Cola, Woodruff redefined the role of the sales force. In this case, he emphasized what he described as "the pull of better merchandising" rather than "the push of sales pressure." On the other hand, in those markets where growth potential existed, the company moved for- ward in the spirit of what might be called vigorous conservatism. Potential sales of Coca-Cola in bottles were virtually without bounds, and the company worked creatively with its bottlers to help them develop this business. Important innovations during the 1920s included new coolers for vending the bottle, the six-bottle carton, and increased penetration-of grocery stores.
Expansion abroad was also of great importance. Foreign operations can be traced to the nineteenth century, but it was only under Woodruff that systematic expansion was undertaken. He was, as he explained, taking a long-term view of the company's well-being:
The opening of foreign markets is a costly undertaking and during the early years of development promises to parallel our domestic experiences with regard to the protection of our trade-mark and the development of consumer acceptance with the manifold problems involved. Successful prosecution of these undertakings will require time, courage, and patience, as well as large expenditures.
But Woodruff felt it worthwhile to develop the foreign business as op- posed "to adopting a policy that might result in increased net earnings for the immediate future at the expense of the Company's later and continued growth."
By 1929, Coca-Cola was on sale in seventy-six countries, more than twice the number only three years previously. Export sales grew 118 percent in 1927, 82 percent in 1928, and 32 percent in 1929. Perhaps the most encouraging news was from Canada, where sales increased 20 percent in 1926, 35 percent in 1927, and 33 percent in both 1928 and 1929. In the words of a securities analyst in 1930:
The increase in Canadian business has been phenomenal. Entirely under company management, the product has been distributed in a foreign country within the course of a few years only, to a point where it has attained a per capita consumption in the large cities of Montreal, Toronto and Winnipeg, which is in excess of the average for the United States where Coca-Cola has been sold for over forty-three years.
If the largest Coca-Cola bottling plant in the world in 1928 was in New Orleans, the second largest, with an annual output of almost forty million bottles, was in Montreal. The company saw such statistics as proof that, as the 1928 Annual Report stated, "Contrary to a generally prevalent belief, our experience in marketing Coca-Cola indicates that climatic, geographical, and racial factors exercise relatively small influence upon our sales over a reasonable period of time."
By the early 1930s, Wall Street analysts had come to appreciate the remarkable performance of the Coca-Cola Company. Here are some of the points that seemed to make the deepest impression:
Sales and profits had increased steadily since 1923. Both had, by 1929, set records in five consecutive years. Profit after taxes in 1929 was equivalent (after dividends on class A stock) to $10.25 a share on the outstanding one million no-par common shares. Earnings could have been considered higher because $2.2 million was deducted for contingent and miscellaneous operating reserves. Had this been added back, earnings per share would have been about $12.50. Income and expenses had been managed with skill, system, and predict-
ability. Almost $40 million in sales and over $12 million in profits (with conservative accounting) were generated in 1929 with an investment in property, plant, and equipment of only $6.3 million. Gross sales equaled 6.2 times the value of this investment. Earnings (with the special reserves discussed above added back) equaled 2.4 times total plant investment. The company's current ratio was 17.7 to 1. As one analyst explained, a holder of Coca-Cola common "possesses an advantage over stockholders in most companies having large tangible as- sets, for he does not have to wait his turn at the end of a long line of senior security horders, because neither the Coca-Cola Co. nor its subsidiaries have any funded debt." There was no labor problem because there were very few laborers. Barron's reported in 1932, "Manufacture is simple, and the Atlanta plant, which makes approximately 7,000,000 gallons of syrup annually, employs only about 75 laborers, chiefly unskilled, many of them making containers." In the approaching era of labor strife, Coca-Cola was in the virtually unique position among manufacturers of being able to hire almost a complete new labor force in a day. Coca-Cola's low price of 5 cents put it within reach of nearly every consumer, and repeat purchases occurred quickly because the product could be consumed rapidly. It therefore was not greatly affected by general economic declines.
The company was uniquely important to the trade through which it sold its product. Barron's noted, "Evidently, of every 100 persons entering a drugstore, 61 patronize the soda fountain, and of these, at least 22 buy Coca-Cola. These startling figures ... impress [the retailer] with the public preference for Coca-Cola, and discourage his active pushing of any competitive drink."
Management had a proven track record. "The success which this company has attained is a remarkable tribute to its management. It shows that it has been progressive and efficient."
As for competition, all agreed that there simply was no other product in Coca-Cola's class. Eleven hundred trademarked soft drinks were said to have come and gone since the 1880s, while Coca-Cola flourished. Coca-Cola was viewed by trade analysts as "virtually a monopoly." The ubiquity of Coca-Cola, both as a product and in advertising, they believed, "created an asset in the trade name 'Coca-Cola' of very great value. This is an asset which could not readily be duplicated."
In July of 1924, Robert Woodruff asserted that the fundamental reason for Coca-Cola's unique position in the commercial world lies in the fact that Coca-Cola was placed on the market at 5 cents at a time when the nickel was adequate to pay for ingredients of the highest quality, despite an infinitesimal volume. Thus it was possible to establish the highest standards of purity, and this fact coupled with sound principles in merchandising has enabled Coca-Cola to survive hundreds of carbonated beverages. . . .This feat could not be duplicated today without enormous capital.
By 1929, sales of the Coca-Cola Company and its subsidiaries were $39.3 million. The company's total assets were $55.1 million (counting the $21.9 million carried on the books for "formulae, trade-mark, and goodwill"). The company was among the 175 largest in the United States in assets and among the 125 largest in sales.
The Coca-Cola Company manufactured one product-syrup for the beverage that gave the firm its name. In 1929, this syrup was produced at 13 plants in the United States, Canada, and Cuba. It was warehoused at 38 sites, from which it was distributed to 105,000 fountain retailers by 2,200 jobbers and to some 600,000 bottle retailers by 1,250 bottlers. The company sales force operated out of 5 regional offices, 20 district head- quarters, and 150 sales territories in the United States. Company "service- men" traveled 2.2 million miles to call on retailers in 1929. If ever a manufacturer's brand had achieved national distribution, Coke was it indeed. This small-ticket item with such an unfavorable ratio of value to weight and bulk was available in more than 700,000 different locations in the United States, Canada, and Cuba. And Coca-Cola's empire stretched beyond the seas, where the drink was available in more than seventy countries. Coke may well have been the most conveniently available product in the world during the 1920s.
In its product category, Coca-Cola was in a class by itself. In a 1920 consumer survey conducted under the auspices of the New York University Bureau of Business Research, it was mentioned by more of the 1,024 college students polled than any other soft drink brand, and by more than four times as many as the runner-up. Coca-Cola achieved this recognition level not only by a ubiquitous physical presence but also by a massive advertising campaign.
Coca-Cola ranked 55 in a list of advertisers purchasing space in a selection of thirty nonfarm and nontechnical nationally circulated magazines in 1929. The company spent $515,750 to buy advertising space in those publications that year; the leader, Procter & Gamble, spent $3.6 million (with sales of $202 million). Numerous companies ranking above Coca-Cola at that time, including Procter & Gamble, Colgate- Palmolive-Peet, General Foods, and others, spread their advertising over many products. Coca-Cola's total budget was devoted to just one product. Moreover, a list including only thirty magazines hardly does justice to the full advertising presence of Coca-Cola. The company customarily spent four to five times more on signs, point-of-purchase displays, and various other promotional devices than on advertisements in the print media. These signs, displays, and other paraphernalia do not constitute national advertising in the same sense that a magazine campaign does. Yet they were everywhere. As early as 1895, the company's Annual Report claimed, Coca-Cola was "sold and drunk in every state and territory in the United States." But even on the basis of national magazine advertising considered alone, the company was in a class by itself when compared to its direct competitors.
All this effort was not without results at the consumer level. The company sold nearly 27 million gallons of syrup in 1929, which translates into an annual consumption of 27 bottles and glasses per person in the United States-an all-time high.
By the time of the Depression, the first-mover advantages cited by Woodruff seemed more formidable than ever. The distribution system was running smoothly. The company was hurt by the Depression, but only briefly. By 1935, when Coca-Cola was the highest priced industrial listed on the New York Stock Exchange, profits were well over $15 million. The company had proven that it could cope not only with the Depression but also with the repeal of Prohibition, which some had thought was going to deal Coca-Cola a major setback.
How could one compete with a product and a company like this?
THE COMPETITOR
In 1931, when Coca-Cola was the envy of the world of soft drinks and one of the most worry-free profit machines in the history of business in the United States, Pepsi-Cola was declared bankrupt for the second time its history. In 1987, PepsiCo, Inc., with sales of over $11 billion, ranked 29 in Fortune's list of the nation's 500 largest corporations. One analyst asserted in 1986 that PepsiCo "has emerged as perhaps the single best consumer products company that exists today." Coca-Cola's sales in 1987 were $7.7 billion, which placed it 54 in the Fortune 500.
Both companies were diversified by the mid-1980s. About 70 percent of Coca-Cola's sales and almost 85 percent of its profits, however, were still derived from soft drinks, with the remainder coming from the food and entertainment divisions. The variety of soft drinks available from the company had increased dramatically since the 1930s, when Coca-Cola was available either at the fountain or in the famed 6 1/2-ounce, hobble- skirted bottle. By 1985, the consumer could purchase Coca-Cola, Caffeine-Free Coke, Coca-Cola Classic, Diet Coke, Caffeine-Free Diet Coke, Cherry Coke, Sprite, Diet Sprite, Tab, Caffeine-Free Tab, Mello Yello, Fanta, Fresca, Mr. Pibb, and others in a great range of sizes, in cans or bottles, and in different kinds of vending machines as well as through the restaurant and fast-food trade. The distinction between fruit juice and soft drinks was broken down with the introduction of such products as Minute Maid Orange Soda, in response to Pepsi-Cola's Slice.
Thirty-nine percent of PepsiCo's 1985 income and 31 percent of its profits were derived from soft drinks. It too had a wide variety of soft drinks: Pepsi-Cola, Diet Pepsi, Mountain Dew, Slice, and others in a truly bewildering variety of packages and with or without various ingredients, such as caffeine. PepsiCo's soft drink offering accounted for 27 percent of the sales of the $39 billion domestic retail soft drink business in 1985, up from 21 percent a decade earlier. During the same years, Coca-Cola's share had increased from 33 to 39 percent. Thus, Pepsi's dream of reaching and surpassing Coca-Cola in the soft drink business has yet to be achieved.
Nevertheless, Pepsi's success has been remarkable. Coca-Cola had been a virtual monopoly in the nationally distributed cola business when Pepsi- Cola was bankrupt. But by 1985, Pepsi-Cola bad succeeded, where thou- sands of other soft drink producers had failed, in giving Coca-Cola all the competition it could handle. Indeed, Pepsi-Cola in 1985 had the largest sales of any individual soft drink brand in the United States. The monopoly was now a duopoly. How had this happened?
Pepsi-Cola: The Early Years
Like Coca-Cola, Pepsi-Cola was invented by a southern druggist. Caleb D. Bradham was born in Chinquapin, North Carolina, in 1867. Brad- ham's lifelong ambition was to practice medicine; but after his second year of medical school his father's business failed, and he was forced to find work. For two years he taught school in New Bern, North Carolina, but his dream of practicing medicine lived on; and when the chance came for him to buy the local drugstore, he did so.
Bradham's two years of medical education qualified him to become a pharmacist. In addition to preparing prescriptions, he also liked to mix the various nonalcoholic beverages that he sold at his soda fountain. From making drinks according to directions found in pharmaceutical publications, Bradham soon moved on to creating entirely new mixtures. Some- time during the 1890s, he began offering a mixture that his friends labeled "Brad's Drink" in his honor. By 1898, Bradham was calling it "Pepsi- Cola" in recognition of his belief that the drink could relieve dyspepsia (upset stomach) and the pain of peptic ulcers. Believing that the drink had promise as a business proposition, Bradham hired a manager to run his drugstore, filed for registration of the trademark with the U.S. Patent Office in 1902, and set about to make his soft drink company grow.
Grow it did. Operating out of the back room of his drugstore, Bradham mixed and sold 2,000 gallons of Pepsi-Cola in the first three months after the formation of the Pepsi-Cola Company at the end of 1902. Total sales for 1903 came to 7,968 gallons, all of which were sold to soda fountain operators. Bradham managed advertising as well as production and sales. The first known advertisement for Pepsi-Cola appeared in the February 25, 1903, issue of the New Bern Daily Journal. The tiny notice read:
Pepsi-Cola
At Soda Fountains
Exhilarating, Invigorating
Aids Digestion
Pepsi-Cola's advertising budget in 1903 totaled $1,888.78. That same year., Coca-Cola spent over $200,000 in advertising and sold over 880,000 gallons of syrup.
Although dwarfed by Coca-Cola, Pepsi-Cola grew quickly. In 1904, Bradham moved out of the quarters he had been renting since leaving the back room of his drugstore and bought Bishop Factory in New Bern for $5,000. He equipped this factory with machinery not only for manufactur- ing syrup but for bottling it as well. Unlike Asa Candler, Bradham early saw the potential of bottling. In addition to his own bottling works, he began to franchise other entrepreneurs to bottle his syrup. The network grew speedily: 40 bottlers in 1907; more than twice that many the follow- ing year; and by 1910, 280 bottlers operating in twenty-four states.
The scale of the operation also increased rapidly. A new building was completed in 1908-one so grand that it was featured on postcards of New Bern-and motorized trucks began to replace mule-drawn delivery wagons. The following year a New York advertising agency was hired to professionalize the company's advertising, but "the material they turned out still smacked of the Gay Nineties."
Sales skyrocketed, passing the 100,000-gallon mark in 1907, only five years after Bradham set up the business. Bradham, the once penniless schoolteacher, was by 1915 the president and general manager of a company with assets surpassing $1 million. He was active and popular, even mentioned in the press as a gubernatorial candidate for North Carolina. A touching photograph has survived of an exceptionally handsome Caleb Bradham at the age of 46, trim and proud in the uniform of captain in the North Carolina Naval Militia, with his young son seated at his feet.
In 1920, however, disaster struck the Pepsi-Cola Company as a result of fluctuations in the price of sugar following World War I-the same price movements that disrupted even the far better established Coca-Cola Company and led to a change of ownership. With price controls lifted, sugar prices soared to over $.25 per pound, two and a half times what the industry could accept and still keep its retail prices at $.05 per unit. Like Samuel Candler Dobbs at Coca-Cola, Bradham bought heavily at these ruinous prices, only to see Pepsi lose over $150,000 as a result of price declines in 1921. Bradham tried desperately to find the working capital needed for a comeback. He obtained a mortgage from an insurance company, and he sold off real estate and various other assets. He finally surrendered control of the firm to the Wall Street investment house of R. C. Megargel and Company. By January 1922, with Pepsi-Cola's balance sheet showing current assets of $53,008 and current liabilities of $249,536, Bradham was out of the soft drink business forever. He re- turned to his drugstore in New Bern for a time but soon sold out. A series of other disasters overtook him during the next decade, and he died in obscurity in February 1934, at the age of 67.
By July 1923, Roy C. Megargel had acquired the business, trademark, and goodwill of the Pepsi-Cola Company from its previous creditors for $35,000. Megargel closed the North Carolina operation; and from 1923 to 1931, Pepsi-Cola concentrate was manufactured and shipped from Richmond, Virginia. But apparently not very much was shipped-or at least not enough to turn Pepsi-Cola into a force to be reckoned with. Megargel was a financier in a company that needed a marketer. Although he took an interest in the company and apparently invested substantially in it, his efforts were met by a wall of massive public indifference. The company continually lost money, and it could not survive the Depression. Thus, on 8 June 1931, Pepsi-Cola was bankrupt for a second time.
The lack of evidence forces us to leave unanswered the question of why Pepsi-Cola grew as quickly as it did early in the century. The product must have tasted good. Bradham did not sell 100,000 gallons in 1907 solely to friends who liked to gather at his New Bern drugstore. Distributed in half the states in the Union by World War I, Pepsi in its early years-though still only a fraction the size of Coca-Cola-could be termed with only slight exaggeration "a nationally important entity in the soft-drink field."
If Pepsi-Cola seemed to have been making an impression in the 191Os, it was thoroughly engulfed in a miasma of consumer apathy following World War I. The company lost money even during the decade of Prohibition, which was supposed to be beneficial for soft drinks. Pepsi- Cola was not even mentioned in the study of brands conducted at New York University in 1920, and it appears in no compendia of advertising expenditures.
In the 1920s, Pepsi-Cola simply was not in the traffic. There was no indication that Pepsi rather than, say, Canada Dry Ginger Ale would become the long-awaited "second Coca-Cola." Canada Dry's sales in 1928 were more than $12.5 million, over one-third those of Coca-Cola. Its ginger ale was distributed only east of the Mississippi at this time, but management had ambitions to open further territories around the nation and to increase its business internationally as well. In 1928, Canada Dry showed total assets of $7.6 million. When Pepsi-Cola was bought out of bankruptcy for the second time in 1931, the price was either $10,500 or $12,000 (depending on which source one chooses to believe). The company was worth only a third of its previous bankrupt value eight years
earlier. THE ROAD TO "TWELVE FULL OUNCES"
In 1931, the Pepsi-Cola Company was purchased by Charles G. Guth in a complex financial transaction worked out in association with, and at the instigation of, Roy Megargel. Guth was born in the mid-1870s and apparently had spent most of his life prior to the Depression as a fairly successful entrepreneur in the soft drink and confectionary industries. He joined Loft, Inc., a chain of confectionary stores, in 1929; and the following year he became president.
Loft's performance had been mediocre for years. In 192l, its net after- tax profits were $0.73 million, and in 1925 its sales had reached $8.2 million. In 1928, on the threshold of what was to prove a decade of management tumult, sales were only $7.3 million, and net profit after taxes had dropped to $0.19 million. One year later sales dropped again, by almost $30,000, and Loft lost over $150,000. On 1 April 1929, a new management team took control of the company and found itself, as they reported, "confronted with financial and operating conditions of a most unsatisfactory nature requiring the immediate development of ways and means for placing the finances of the Company on a sound basis and for increasing sales to such a volume that the business would again be placed on a profitable basis." The new managers raised money in the capital markets, closed stores, and developed new manufacturing processes for the candies Loft sold.
Whether or not this program would have proven successful we will never know, for Guth took over the company in a proxy fight on 18 March 1930. Pepsi executive Milward W. Martin's later description of the organizational arrangements Guth instituted at that time speaks volumes about the new CEO. Guth's board members were all handpicked, and at least one was required to tender a signed resignation in advance. Guth's salary was fixed at $25,000 plus 1 percent of increased sales, with no requirement for increased profits. He had the power to name the salaries of all other officers and employees and to change them without notice. He delegated as little authority as possible, dealing directly with everyone from board members to clerks.
Guth had every intention of using his new power to enrich himself. He had much need of enrichment. He was almost continuously in financial difficulty during the first half of the 1930s. Banks were calling in his loans; he was borrowing on his insurance; he was substituting Loft for the banks as his creditor. Though he did not have much money, Guth did have Loft. And even though it was not doing very well, Loft did have assets of over $13 million in 1931. The company's sales that year exceeded $14 million, although profits came to only $0.37 million (one remembers the terms of Guth's employ).
The Delaware Court of Chancery, before which the question of the ownership of Pepsi-Cola was litigated in 1938, described Loft in 1931 as a "substantial company." It operated 115 stores in major cities in the Middle Atlantic states; and its subsidiaries, the Happiness and Mirror chains, operated approximately 85 additional stores. These stores sold candy, ice cream, soft drinks, and light lunches. Loft also had a large manufacturing plant across the river from Manhattan in Long Island City that turned out many of the products sold in the stores and did a wholesale business with other retailers as well.
The Pepsi-Cola Company had first come to Guth's attention in 1928, when Megargel tried, unsuccessfully, to interest him in it. As chief executive of Loft in 1931, Guth renewed his interest in Pepsi from a different perspective, as a memorandum that he wrote to one of his vice-presidents attests: "Mr. Robertson: Why are we paying the full price for coca-cola? Can you handle this, or would you suggest our buying Pebsaco [Pepsi- Cola] at about $1.00 per gallon? C.G.G."
Guth felt that Loft had a right to a discount on Coca-Cola. In 1929, 1930, and the first eight and a half months of 1931, Loft was moving an annualized average of 31,584 gallons of Coca-Cola syrup, or more than 1 percent of Coca-Cola's sales. Robertson replied: "We are not paying quite full price for Coca-Cola, We pay $1.38 instead of $1.50, but we pay too much. I am investigating as to pepsi-cola. V.O.R." Although Robertson was correct in saying that Loft received a discount, his numbers were incorrect. Loft was paying $1.48 for the syrup, the standard whole- sale price of which for the big buyer was $1.60. (As the volume purchased declined, the per-gallon price of Coca-Cola rose as high as $2.00.) Guth's point remained, however. If Loft kept its retail fountain prices constant, purchased Pepsi instead of Coke, and suffered no decline in sales as a result, a substantial additional sum would fall to the bottom line. The week after Guth's memorandum to Robertson, Pepsi-Cola was declared bankrupt. Megargel quickly contacted Guth to suggest that the two combine to buy Pepsi out of bankruptcy. Guth agreed, using $7,000 of Loft's money as part of the $12,000 purchase price. Having expressed a mild interest in Pepsi syrup, Guth suddenly found himself owning the entire company.
Saying that Guth owned the whole company was, however, not saying much. Pepsi in 1931 was, in the words of the Delaware Chancery Court, "a corporation which in point of actual fact was a mere shell of a corporation with practically nothing in the way of assets except a formula and trademark and the franchise as a corporation to engage in the work of erecting a business thereon." The company, furthermore, "completely acked any executive force of its own to direct its affairs." As if all this were not enough, when Guth finally sampled a drink compounded from the formula he had purchased, he declared it "unsatisfactory." Pepsi, however, did have an asset in Guth-an owner who was the chief executive of another company whose resources he was happy to exploit for Pepsi's benefit. Loft supplied Pepsi with personnel from common laborers to skilled workers to white-collar employees to executive talent. Loft's laboratory was at Pepsi's disposal. Indeed, it was in Loft's laboratory that a Loft's chemist, Richard Ritchie, experimented with the formula with the view of producing a drink which would have a competitive resemblance to Coca-Cola. Ritchie spent about two or three weeks . . . trying out different changes in the formula. When he thought he had a result which was satisfactory, he notified Guth who said it was about right.
Pepsi also had in Loft a customer. From 1931 through 1933, Loft purchased $50,300 worth of Pepsi syrup, almost half of Pepsi's sales. The results at the fountain were predictable. Coca-Cola was well known, whereas Pepsi was not. Precisely how much Loft lost by selling Pepsi instead of Coke is not known, but one account estimates that the soft drink volume of Loft slipped from an annual average of over 31,000 gallons to 21,000 gallons. The complainants against Guth in the 1938 Delaware Chancery Court case calculated that from 1931 to 1935, Loft's total loss in profits came to $322,631. As late as 1933, Loft's Pepsi-Cola experiment was considered a "complete failure." Pepsi-Cola, in the judgment of the Delaware Chancery Court in 1938, "was in a condition of undoubted insolvency"; it was " confessedly an un-adjudicated bankrupt." Guth made an unsuccessful attempt to sell the company to Coca-Cola that year.
Sometime late in 1933, however, Guth made a product policy decision that reversed the failing company's fortunes decisively. He decided to price 12-ounce bottles to the trade in such a way that they could be retailed at the same price as the standard 6- or 7-ounce bottle. The Pepsi customer would thus receive twice as much product for the same price as the Coke customer-and this in the middle of the Depression.
Although Pepsi was primarily a fountain product when Guth bought it, soon thereafter he began bottling operations, both company-owned and franchised. By 1932, he was experimenting with a 12-ounce bottle for 10 cents, but "the sales volume was so totally unimpressive as to be discouraging." Perhaps a 6-ounce bottle for 3 cents compared to the competition's 5-cent bottle was the answer, an idea that was considered but rejected. Finally, out of a series of conferences in late 1933, the concept emerged, apparently inspired by the presence of the bottle itself, of selling the 12-ounce bottle for 5 cents. Bottles were to be sold to candy jobbers for 50 cents per 24-bottle case. The jobbers were to resell them to their retailers for 75 cents per case, and the retail price was to be 5 cents per bottle or $1.20 per case. Credit for the idea and for the pricing structure must go primarily to the chief Loft candy salesman, Frank Burns.
The product took off. By 30 June 1934, Pepsi-Cola had, in the words of the Delaware Chancery Court, "turned the corner." Guth was not the type to hesitate when there was money to be made, and so he moved with vigor to ensure that Pepsi would not be merely a local brand. Enfranchising bottlers as quickly as possible was the key, because Pepsi did not have access to the capital necessary to develop a fully company-owned bottling operation. Fortunately, there were enough bot- tiers looking for additional brands to carry to make rapid franchising possible.
One of the first to be called, in November 1933, was Joseph LaPides, whom Guth had known through previous business dealings in Baltimore. LaPides did not at first believe that a 12-ounce bottle could be retailed profitably for a nickel. Guth persisted and promised to cover any losses LaPides might incur. By April 1934, LaPides was selling a thousand cases of Pepsi-Cola in one day. Soon thereafter he became a Pepsi represent- ative, with responsibility for enfranchising bottlers in one of four huge territories. Territorial representatives received a royalty of 2 cents per case of Pepsi sold in their area. For at least two of those contracts, the remuneration quickly soared above a half million dollars a year.
In 1936, Pepsi posted net after-tax profits of nearly $2.1 million. In 1937, profits reached $3.2 million, and the company had a network of 313 domestic franchised bottlers, five company-owned bottling plants, and the beginnings of a foreign business.
By 1935, Guth was clearly getting bored with Loft, where things con- tinued to deteriorate. Profits were $65,340 in 1933 and $21,280 in 1934; the following year the company lost $229,551. In October 1935, Guth tried to lower wages and salaries in an economy move. In response, angry employees surrounded his office, and Guth was able to leave only with the assistance of a police escort. Guth asked himself why, owning 91 percent of the Pepsi-Cola Company (now worth a fortune), he needed this kind of aggravation. He couldn't come up with an answer, so he resigned from Loft to devote himself full-time to Pepsi.
Guth departed from Loft under a complicated agreement that he hoped would soon allow him to oust his successor, James W. Carkner, and to replace him with an executive to whom he could give orders. Carkner declined to play the assigned role. He knew that the only chance for Loft to reverse its deteriorating position and for him to survive professionally was to obtain financing for Loft, to keep Guth's influence and appointees out of the company, and, most important, to obtain control for Loft of Guth's 237,500 shares of Pepsi-Cola stock.
Although the chances of achieving even one of these goals seemed very slim in November 1935, Carkner achieved all three. The developments leading to this result are complex, but we can focus here on those elements most important to our story. Carkner contracted with two New York law firms to develop Loft's case for Guth's Pepsi stock in return for $10,000 to cover expenses and a contingency fee of one-quarter of everything recovered. Financing came from the Marine Midland Trust Company and also from a Wall Street investment firm, the Phoenix Securities Corporation. With Phoenix came the remarkable Walter S. Mack, Jr., who was to serve as Pepsi-Cola's CEO for more than a decade.
But before we proceed to Walter Mack's years at Pepsi's helm, we should first analyze Pepsi-Cola's transformation. How did Pepsi move from un-adjudicated bankruptcy to a valuable prize, able to command the time and effort of talented lawyers and the capital of banks on the chance that they might obtain a share of it?
The first piece of the Pepsi puzzle is Charles G. Guth himself. Pepsi did not simply survive and grow by itself in response to the needs of an impersonal market. It was envisioned and energized by Guth. It was Guth's refusal to do business on Coca-Cola's terms in the first place that saved Pepsi from the dustbin of business history. Negotiation expert Chester Karrass has written about people who are "simply less willing to be dominated than others and would rather do without than be exploited" even if an agreement is in their best interest. Judging from how Pepsi-Cola performed for Loft from 1931 at least through 1933 (and probably well beyond-remember that it was Pepsi in bottles that took off, not Pepsi at the fountain), both Loft and Coca-Cola would have been better off if Loft had purchased Coke at the asking price. It was a so-called win-win situation. Yet Guth did not give Coke what was best for both of them because he refused to be dominated by an unyielding negotiating opponent. Moreover, Guth had the fundamental insight that Pepsi would never succeed as a me-too product. Coke was simply too strong. A dramatic gesture was needed, and what more dramatic gesture could there be than offering twice the product for the same price? That idea had originated with Frank Burns, not Guth; but Guth saw its value.
Indeed, the supposedly impregnable wall of the "brand beyond competition" was breached with remarkable ease. The battering ram was neither a magical taste nor a mystical advertising appeal; it was value, an especially attractive attribute in the middle of the Depression.
Guth immediately recognized that once a hole was poked in the enemy's battlements, he had to move quickly to consolidate Pepsi's position. He, like Candler long before him, had a nationwide vision. He was determined to make his brand grow, even at the price of royalty agreements that in hindsight appear overgenerous. Guth had been around long enough in the confection and soft drink industries to know some of the young, aggressive, bold distributors-like Joseph LaPides. Guth also moved to develop a system that would bring active distributors into his camp in areas where he did not know them personally.
Quick expansion was important. Competing on price-unlike, for example, pouring a fortune into an advertising campaign- was a strategy that Coke did not want to copy. As market leader, it did not want to educate the public to expect twice as much for the same price. New entrants could copy the Pepsi strategy because they had nothing to lose. That was why it was important for Pepsi to expand aggressively.
Another key to Pepsi's success was Loft or, more precisely, Guth's willingness to exploit Loft for Pepsi's benefit. He not only used Loft's property and executive personnel, but he also viewed Loft as a captive market of considerable size for Pepsi. Pepsi at this time was more a retailer's than a manufacturer's brand. And it was probably also helpful that Loft was so prominent in New York City, where a large market could be reached without the daunting problems of transporting soft drinks over long distances.
The final key to the rise of Pepsi, ironically enough, was Coca-Cola. The leader was so profitable-its price umbrella was so high-that a competitor could afford to sell twice as much cola for the same price and still make a considerable profit. Further, Coca-Cola was already confronting a problem that would bedevil it in later years. The company's extensive distribution system had developed incrementally over many years, and the net- work was composed of firms that operated with varying degrees of efficiency. Coca-Cola wanted to protect all the players, including the inefficient, and thus its system was becoming inflexible.
The company was, moreover, attempting to maintain prices during the greatest depression in American history. Prices of so many commodities dropped so sharply that the cola market was being invaded by intertype competition. Decreases in citrus and milk prices, for example, were leading to greater sales of orange juice, orange drinks, and milk shakes. Soda fountains were changing as well; they were turning into luncheonettes. A survey of luncheonettes toward the end of the 1930s indicated that many were devoting less display space to Coca-Cola and were instead using that space to advertise their own dally food specials.
Coca-Cola was making some adjustments, such as developing new methods of distribution like the automatic vending machine, which was installed in the territory of the Coca-Cola Bottling Company of New York in 1937. And, of course, it advertised vigorously. Price competition, however, was another matter. Because of its success, because of its profit- ability, and because of its rigidity, Coca-Cola unwittingly helped call Pepsi-Cola into being.
FROM BUCCANEER TO ENTREPRENEUR
Walter Staunton Mack, Jr., who was to succeed Guth as chief executive of Pepsi-Cola in 1939, was born in his parents' brownstone in New York City on 19 October 1895. Mack's father, who was in the woolen business in New York, made a good living, though the family was not wealthy. Mack was raised in New York City, attending Public School 87 and DeWitt Clinton High School. He graduated from Harvard in 1917, and from there took an officer candidate's course at Annapolis, where he graduated third in a class of three hundred. After active duty in World War I, Mack returned to New York. He worked for a time in his father's company, became involved in politics and community affairs, and married a wealthy woman. Toward the end of the 1920s, he took a position with a small investment trust called Chain and General Equities, which in- vested in such chains as Safeway and Kroger.
Mack caught the eye of financier Wallace Groves, who made him chief operating officer of Groves's Phoenix Securities Corporation in 1932 or 1933. Mack told Groves that he "was really only interested in reorganizing and rebuilding companies" rather than in buying and selling securities. Groves said that his interest also lay in that area, which was why he had chosen for his company the name Phoenix, "the legendary bird that grows out of its own ashes."
Mack was visited at Phoenix in 1936 by James W. Carkner. The new CEO of Loft needed money to stave off bankruptcy. Phoenix agreed to provide funds in exchange for options to purchase Loft stock at an attractive price. Loft's situation was becoming critical, as sales continued to drop and losses to mount. But the suit against Guth for control of Pepsi made Loft attractive to a gambling man.
Loft's suit against Guth came to trial in November 1937, and the judge issued his opinion the following September. That opinion was an unmiti- gated victory for the Loft forces. Guth elected to appeal, precipitating a managerial morass in which three directors represented the Guth forces, three the Loft forces, and a seventh served as a disinterested mediator.
Mack, one of the directors, became president, but Guth stayed on in the position of general manager. Here is Mack's description of how that arrangement worked out:
I remember my first day in the office at Pepsi's plant in Long Island City. It was a chilly day in October, but I was far from chilly. The general manager, Mr. Guth, had assigned the president, me, an office which was a cubbyhole directly above the boiler room. I looked around the space, which didn't take very long, there was nothing there. No paper, no pencils, no nothing. I called my secretary and said I wanted some office tools so that I could start working, and she said she was sorry but that Pepsi employees had been instructed by the general manager not to supply us with anything, since there wasn't any- thing in the court order requiring them to give me a pencil. A little later in the day I wanted to go to the men's room but it was locked, and I was told that only Mr. Guth had the key, which he handed out personally to whomever he saw fit. Well, I knew that was hopeless, so I found a little restaurant around the corner and used their john for the next six months.
Mack let neither this rather dispiriting situation nor the constant uproar at directors' meetings bother him; he concentrated instead on "straighten- ing out the company."
Guth was finally forced out of both Pepsi and Loft in 1939, when it was discovered that he had purchased another cola company (Noxie-Cola) and had started spiriting away people in the Pepsi organization to run it. Soon thereafter, the Delaware Chancery Court's decision against him in Loft v. Guth was upheld in the Delaware Supreme Court. Charles Guth thus passed into history, last seen trying to get Guth Cola-a 12-ounce bottle selling for 3 cents-off the ground in Pittsburgh. He did not leave Pepsi empty-handed, however. He took with him an estimated $3 million-an impressive accomplishment in Depression values for someone who had begun the 1930s flirting with bankruptcy.
Guth's departure was an important step forward for Pepsi. In order to get started, the company had needed someone like Guth who could think the unthinkable and who was willing to skirt the edge of propriety, to put the best face on his activities, to make something out of nothing.
But Guth was not the man to make the company grow. He seems to have been in business strictly for himself, with no concept of institution building. He was untrusting and, judging from his actions at Loft and during the period when he was general manager at Pepsi, not always trustworthy. Guth never could have understood what Coca-Cola knew so well-the social role that soft drinks, and especially a cola, play in the United States and abroad. With Walter Mack, on the other hand, Pepsi acquired as its chief executive a more legitimate entrepreneur. Mack had access to high society, he was active politically, and he knew the money men. He was a very persistent individual. He combined a well-developed sense of propriety with the spirit of a street fighter. Walter Mack was precisely what Pepsi needed in 1939.
What was the Pepsi-Cola Company when Mack took it over, and how did it stand in the world of soft drinks? Reliable data on Pepsi sales in the late 1930s are difficult to obtain. However, profit data are available. Although neither Pepsi-Cola nor Coca-Cola reported sales figures publicly in the 1930s and 1940s, they did provide figures for "gross profit on sales," or sales minus cost of goods sold. In 1941, gross profit on sales for Pepsi was just over $26 million. If gross profit on sales bore the same relation to profits during the years 1936 through 1940 as it did in 1941, then we can estimate Pepsi's gross profit on sales for these six years. Pepsi's balance sheet oil 31 July 1939, showed total assets of $13.9 million, of which $4.6 million represented fixed assets and $1.5 million trademarks, formula, and goodwill. One estimate asserted that the combined total investment of Pepsi and its bottlers in 1939 was $20 million.
The company had enfranchised 341 bottlers by 1939, but their morale was low. Many of the bottlers had little confidence in the mercurial Guth, and they had many other problems as well- "lack of funds, lack of facilities, lack of equipment, lack of personnel," in the words of Joseph LaPides. "In those days," LaPides recalled, "many bottlers were 'hungry.' " They wanted to increase their volume, because "they could then give their route salesmen a higher wage for selling more merchandise off the same trucks."
Bottler relations were clearly going to be a key factor in Pepsi's future, and Mack at first excelled in this aspect of the business. By the end of 1940, the company had enfranchised 415 bottlers. That number increased by 54 the following year. "There is scarcely a franchise bottler of Pepsi- Cola in the United States who has not made some improvements in equipment, trucks and manufacturing facilities during the year," observed the Pepsi-Cola Annual Report for 1941. In some instances that investment was made possible by loans from Pepsi.
In our discussion of Pepsi's success during its early years, we asked why people bought the product and found that to be a question without an easy answer. From 1933 until 1946 (when economic forces began to compel Pepsi to abandon the nickel price for a 12-ounce drink), the appeal of Pepsi-Cola is more easily identified. Pepsi attracted the price-conscious consumer. "During the Depression," Pepsi-Cola advertising executive Philip Hinerfeld recalled, " 'Twice as much for a nickel too' meant a hell of a lot.... The availability of the 12-ounce bottle of this good quality cola versus the 6-ounce bottle of Big Red" made Pepsi's success possible.
If a firm is able to supply a product at a cost lower than the competitor, serving the price-conscious segment can be a successful strategy. Some great American industrial fortunes-those of Rockefeller, Carnegie, Ford, and Hartford-were built on this principle. The problem is that price- conscious consumers view the product in question as a commodity. Charles Revson once remarked that "in the factory we make cosmetics. In the store we sell hope." There are limits to what can be charged for chemicals, whereas there is no standard markup on hope. Price buyers are, in the unlovely term of more than one trade, "whores," since money is the only desideratum. Pepsi had proven by 1941 that it could build a profitable business by selling for less than Coca-Cola. But what would happen if the company was no longer able to sell twice as much as the market leader for the same price? To what extent does a consumer prod- ucts company permanently taint itself by basing its appeal on the most prosaic buying motive and perhaps as a result attracting the most prosaic-and least prestigious-consumers?
These were questions with which Coca-Cola-"Big Red"-did not have to concern itself in 1940. If Pepsi-Cola remained a "dynamic speculation," Coca-Cola was adjudged a "solid investment." Coca-Cola was not unscathed by the Depression. Sales volume dropped 21.8 percent from its record high in 1930 to 1933. Profit before taxes and net profit declined 16.2 and 19.8 percent, respectively. Coca-Cola, of course, was not alone. During those years the GNP declined 22percent (28.9 percent from 1929), and the CPI (consumer price index) declined 22.5 percent (24.6 percent from 1929). From 1933 to 1941, however, Coca-Cola's recovery was most impressive. Gross operating profit increased almost threefold. If the company's gross margin in 1941 matched that of 1939 (36 percent), then sales that year were over $133 million, more than four times those in 1933. Analysts remained puzzled "that a company should be able to earn in a year an amount equivalent to three times the total physical assets of the business. Certainly it is most unusual... " This puzzlement notwithstanding, Coca-Cola was one of the darlings of Wall Street. Commented Barron's during the so-called Roosevelt Recession year of 1938: "You could have bought Coca-Cola stock at the top price of 154 1/2 in 1929, carried it through a major depression and the latest business recession, sold it at the low this year and you would have had, including dividends, a profit of approximately 225%."
Coca-Cola had not maintained its great success through magic or blue smoke and mirrors. The company by 1940 boasted a network of 1,084 bottling plants operated by an efficient and well-trained corps of bottlers, many of whom had been involved with the product for over a generation and some of whom had been made millionaires by it. The bottlers serviced almost a million outlets, and Coca-Cola's jobbers sold syrup to a hundred thousand soda fountains.
Universal distribution had always been the keystone of Coca-Cola's strategy of dominance. Supporting that keystone was, among other things, a well-conceived, well-executed, and well-funded advertising program- "mammoth, unflinching," in the words of Barron's. A trade magazine comparison of major corporation advertising expenditures ranked Coca-Cola thirty-ninth in the nation in 1937, but documents in the Coca-Cola Archives indicate that published estimates sharply underestimated Coca-Cola's advertising outlays. My own estimates place Coca-Cola among the top twenty-five national advertisers throughout the Depression.
The company was a leader in utilizing radio, the most potent new development in advertising since the invention of printing. Coca-Cola charted the listenership of the programs on which it advertised as early as 1927, and it was mastering the art of building a total merchandising program around its radio effort by 1931 and perhaps earlier. The fact of Coca-Cola's sponsorship of popular radio programs was featured in other Coca-Cola advertising, as well as in material provided to the servicemen (remember, Coca-Cola no longer had an official sales force) and of course to the bottlers.
Coca-Cola's enormous popularity, its degree of brand recognition, and its widespread presence created an impression of invincibility. It was commonly referred to in trade and financial journals as late as 1937 as a "worldwide monopoly." This putative position was thought to be highly beneficial to its advertising strategy, because almost all of Coke's advertising dollars could be spent on increasing consumption rather than on convincing consumers to drink Coca-Cola rather than competitors.
If the trade press was slow to notice the threat Pepsi posed, Coca-Cola certainly was not. Not long after the introduction of Pepsi-Cola into Loft stores, Coca-Cola brought suit, not for trademark infringement-the reliability of that time-honored attack having been called into question by the loss of the Roxa Kola case in 1930-but for substitution. Coca- Cola's corps of detectives had determined that Loft patrons were still asking for Coca-Cola but were surreptitiously being served Pepsi-Cola instead. Pepsi's expenses for this and other early litigation with Coca-Cola came to more than $28,000, at a time when total annual sales reached only $100,000. The legal fees would have meant the end of the beverage altogether had it not been for the financial backing of Loft. Having lost the substitution case, Coca-Cola began trademark litigation in 1939, which concluded only with Pepsi's final victory in 1942.
Walter Mack has written that Robert W. Woodruff himself offered Mack the presidency of White Motors (Woodruff's former employer) to spirit him away from Pepsi. He was willing to pay Mack five times the $50,000 salary he was then earning. "Thank you very much, Bob," Mack recalls replying, "but I've just started this job and I can't walk out on it now. Money doesn't mean that much to me, but doing the job means a lot."
Coca-Cola's assault on Pepsi, however, was apparently not always as polite as formal courtroom confrontations or executive recruitment luncheons. Recalls Walter Mack:
The people at Coca-Cola...went after us every which way. For instance, they would start rumors that our product was no good and that it was filled with chemicals, which, of course, was completely untrue; but worse than that, they physically got very rough. One of their tactics was to follow our deliveries into one of the big chain grocery stores like A&P. After we had set up our supply of Pepsi in cases and displays, the Coca-Cola truck would arrive, they'd pull our signs down, and they'd stack their cases right around ours so that the customers couldn't even see Pepsi. The Coke franchise in New York was run by a fellow named Jim Murray, and one day I went into one of the stores and watched what they were doing. The next day, I dressed a couple of our boys in A&P uniforms and stationed them in the A&P with cameras. When the Coca-Cola boys came in to do their stuff, we took pictures of them in action and I gathered the evidence together and went down to Mr. Murray's office and told him that unless it stopped immediately he was going to be faced with a lawsuit for tampering with other people's property. Needless to say, that particular harassment tactic was dropped immediately, but Coca-Cola had a bundle of other tricks up their sleeves, which they would pull out regularly over the next few years.
One wishes that a lawsuit had been brought, because it would have made it possible to document this charge and to define the boundaries of competition from Coca-Cola's point of view. It might also have helped us learn what tactics Pepsi was employing in return.
Despite Coca-Cola's efforts, Pepsi-Cola clearly had become a player in the cola game by the close of the 1930s. In 1938, Guth's last full year with the company, Pepsi's gross profit on sales was just over $7 million, about 14 percent of Coca-Cola's. By 1941, Pepsi's gross profit had increased nearly threefold, to over 30 percent of that of Coca-Cola.
The growth of Pepsi can also be observed through the changing share of sales of bottles of various sizes. Sales of 12-ounce bottles throughout the industry increased sharply in only five years, and Pepsi's 12-ounce bottle unquestionably was a major contributor to this trend. By 1939, one bottle of carbonated beverage in four was of the 12-ounce size. Despite this trend, financial analysts still reported in 1940 that "The very active research department of the Coca-Cola Co. has... determined by tests that the average person who buys a drink is completely satisfied with the 6 ounce bottle and in fact does not want more than that at a clip."
In its ability to execute well today precisely what had been done yesterday, Coca-Cola's distribution system was incomparable. Introducing a new bottle size to a varied distribution system of over a thousand independent businesses, however, was not seen as an opportunity to be embraced but rather as a problem to be avoided. Coca-Cola bottlers had millions invested in the 6 1/2-ounce bottle. A new bottle size meant that much of that investment might have to be written off. As a result, Coca-Cola did not introduce king- and family-sized bottles to accompany "our old reliable, the Standard Package" until 1955, by which time it was perceived as copying Pepsi.
Walter Mack viewed Coca-Cola as well entrenched but muscle- bound. It had, in other words, the defects of its virtues. In the situation be faced, Mack believed that his best bet was to "pick the hole in the cheese. In other words, go into areas where they weren't." Mack's advertising budget was reported to have been $600,000 in 1939, when Coca-Cola's was over thirteen times as large. How could Pepsi make an impact in this most advertising-intensive of product categories, given this disparity in resources?
One way was to try skywriting. "A fellow named Sid Pike," Mack later recalled, had an exclusive patent on a little plane that would spell things out with smoke. I made a deal with him that if be could keep the Pepsi name up in the air and legible for three minutes, I'd pay him $50; if it didn't stay, he wouldn't get a thing. Sid started out in Florida, spent about three weeks there, and then moved with the sun to other densely populated areas, spending from two to three weeks in each before going on. Some days it was windy up there and Sid didn't make much money, but most of the time there it was, all over the country, up in the air, the words "Pepsi-Cola" . . . It made a huge impression. Not only had most people never seen skywriting before, but most had never heard of Pepsi-Cola. They made a beautiful team....
Skywriting was a clever idea and is indicative of Mack's creativity. Yet its efficiency obviously was limited, and not only by the vicissitudes of meteorology. Skywriting could provide only announcement; there was no opportunity for selling appeal. Thus skywriting, though it exploited twentieth-century technology, was really a throwback to the early days of advertising.
Pepsi needed to break into radio in a big way. But how, outspent as it was by Coca-Cola by more than ten to one? The answer came in a moment of inspiration-ranking with Guth's adoption of the 12-ounce bottle. The answer was a jingle.
In 1939, "a couple of odd-looking fellows...wearing white shoes, open shirts and no coats" presented themselves at Mack's door, claiming to have the solution to Pepsi's advertising dilemma. They were Bradley Kent and Austin Herbert Croom, and their idea was to set the following verse to the tune of an English song called "Do Ye Ken John Peel."
Pepsi-Cola hits the spot.
Twelve full ounces, that's a lot.
Twice as much for a nickel too.
Pepsi-Cola is the drink for you.
Mack liked the jingle because it was "something different. It was amusing, entertaining and catchy-although at the time I had no idea just how catchy-and it was short...." Apparently the first jingle ever aired in a radio advertisement was "Have You Tried Wheaties?" which General Mills placed on the Jack Armstrong radio program in 1929. But probably no jingle had ever been handled as this one was.
The networks in the late 1930s usually sold advertising air time in five-minute blocks. Mack felt that this was too long and "dismissed radio advertising as a waste of time....I found that when it came time for the commercials, everybody got up and went to the bathroom or started talking and nobody listened." Mack wanted to run the Pepsi jingle without an accompanying sales pitch. Thus he told his agency, Newell Emmett, to "clear away the spinach" and to buy thirty- and sixty-second spots. The system-meaning both the agency and the networks- disagreed with Mack's judgment. The agency claimed that the product needed extensive explanation of all its advantages. For their part, the networks did not want to sell time in such small blocks.
As he did so often when the "system" said no, Mack found a way around it. "I went out to some little radio stations in New Jersey that weren't making much money; I was able to buy my thirty- and sixty- second spots from them, and they were the first to put the jingle on the air." The sales results were apparent in only two weeks. "I heard people humming it," Mack said. "It came echoing back in full force. " By 1941, the jingle had been broadcast almost 300,000 times over almost 470 stations. The following year it was orchestrated and 100,000 copies were distributed. If readers wish to test the extent to which this jingle penetrated the consciousness of the American public, they should ask anyone who was ten years of age or older in 1939 to hum it.
The jingle was effective not merely because it was unaccompanied by a hard sell or because the tune was particularly catchy. lt told a great advertising story, simple and easily understood. When you buy our product, you get more for less. No image, ambience, or nouvelle vague. The jingle worked like magic, which is precisely what Pepsi needed.
The jingle story typifies Mack's approach to business. He found a way to do what he wanted. Examples abound, but there is one that is particularly on point. When the United States entered World War II, Coca- Cola executive Ed Forio became the industry's consultant to the beverage and tobacco section of the War Production Board, presenting Coke with an opportunity to stifle Pepsi quietly through manipulation of the sugar quota. Mack circumvented the sugar quota by building a syrup plant in Monterrey, Mexico, and importing his sugar in syrup form. When Forio tried to put a stop to that, Mack, who was a shrewd political operator in his own right, went to the War Production Board and threatened to go public with the question of how sugar was being rationed. A public airing of an issue like this in wartime would have served neither the government nor Coca-Cola well. This was a round Mack won.
Surveying the whole of Mack's tenure, we can see that Pepsi's most dramatic gains took place in his early years as CEO. In 1939, the first year of Mack's services as CEO, Pepsi's before-tax profit increased almost 50 percent, and the following year it jumped an additional 43 percent. The year 1941 can be considered Pepsi's best during the Mack era. Gross profit on sales topped $26 million, 7.3 percent bigger than in 1949, although substantially lower than in 1942 and 1943. Income before taxes in 1941 was 75 percent higher than in the previous year, 270 percent higher than in 1938, and just under 75 percent higher than in 1949. Net income after taxes was more than 75 percent higher than in 1949. Coca-Cola set successive records in 1947 through 1949, whereas Pepsi showed encouraging signs of growth in 1946 and 1947 but then experienced menacing declines in 1948 and 1949, despite an expanding market for soft drinks generally. What went wrong?
After World War II, Pepsi-Cola found it impossible to maintain concentrate prices at a level commensurate with the retail sale of the 12- ounce bottle for 5 cents. In its 1946 Annual Report, the company noted that the suggested retail price was now 6 cents, "only" a 20 percent increase over prewar prices, "small...compared to the average increase in the price of sugar of 86% over the same period, and compared to the increase in the prices of most sugar-containing products such as candies, jams, jellies, and the like." The company hoped that when sugar rationing was completely removed, prices would decline, and "Pepsi-Cola in the big 12-ounce bottle will be again selling at 5 cents." Meanwhile, Coca- Cola was continuing to sell its "old reliable, the Standard Package" at the old, reliable price of 5 cents. Pepsi-Cola was about to learn a lesson in the problems of trying to act like a price leader when a company has a small market share and no cost advantage.
Late the following year, in an attempt to recapture the 5-cent retail price, Pepsi slashed its concentrate prices below prewar levels. The result was an unprofitable final quarter for 1947; the bottlers, moreover, did not respond as hoped. Half of them continued to sell at a price level commensurate with a 6-cent retail price and half of them at 5 cents.
In 1948, a new slogan-"Twice as Much for a Penny More"-and a new 8-ounce bottle for 5 cents were introduced. Neither was success- ful. By this time, the full impact of the concentrate price cut combined with demoralization among the bottlers led to a drop in gross profit on sales of almost $5 million, or over 16 percent. Income before and after taxes was cut in half.
In its 1948 Annual Report (published in March of 1949), Pepsi-Cola provided the data to illustrate to its stockholders the cost pressure it was facing. "Such things," commented the report, "as magazines, street cars, buses, etc. had long since abandoned the nickel. There was, therefore, no basic reason why the soft drink industry should not also receive a fair price for its products to offset some of its increased costs." Fair or not, consumers simply did not look at the matter the same way the company did.
At the end of the 1940s, Pepsi launched yet another slogan-"More Bounce to the Ounce." This slogan was designed to claim that Pepsi was a bargain not only in volume but in qualitative terms as well, that it had more punch and provided more energy than its competitor. The slogan commanded no credibility among consumers.
Soft drink sales are not, of course, merely a matter of advertising sloganeering. They depend preeminently on a distribution network of independent bottlers. These bottlers, collectively, have a very large investment in plant, machinery, inventory, transportation equipment, and, cru- cially, in a field force that services accounts, opens up new ones, places signs, other advertising material, coolers, vending machines, and other such items, and sees to it that customer inventory is properly maintained. In the Pepsi system, the bottlers were even more important than they were at Coke, because they had responsibility for distribution to fountain operations in addition to managing the bottled beverage. They also had greater production responsibilities because, unlike bottlers in the Coca- Cola system, they supplied the sugar.
By the late 1940s, the bottlers had become "dissatisfied, disillusioned, and confused." They were concerned about the obvious problems in sales and profits. They were wondering why, with things going so badly, the company was indulging in what could be perceived as superfluities, such as college scholarships, the sponsorship of art shows, and other cultural and community activities. The bottlers perceived a basic problem in leadership and organization at headquarters
Walter Mack was described by a journalist in 1950 as a man "who is apt to weary of his philanthropies once they become routine." One feels similarly about his attitude toward the cola business. Forging the bottler network, circumventing the sugar quota, and advertising and publicity- such activities were exciting and, in the case of advertising and publicity, they had a novelty about them that could attract and hold the attention of a restless intellect. Other problems, not so attractive, seem to have been finessed.
Mack later asserted that be wanted to move Pepsi forward by creating a company-owned distribution system and by moving into canning. To achieve this objective, he needed a new board of directors, and he claimed that the bottlers would have supported him in a proxy fight, but that he chose to leave the company rather than create a struggle that would have proven damaging to everyone involved.
The weight of the evidence, however, suggests that Mack had lost the support of key people in the company and among the bottlers. In 1950, the cadre of bottlers had enormous power within the Pepsi-Cola Company, and by then Mack no longer held their confidence. The company had fallen on hard times. New thinking and new action were urgently needed if the situation was to be turned around.
On 23 March 1949, Mack hired Alfred N. Steele as a vice-president. Steele's salary was set at $85,000 per year, with an option on 16,000 shares of Pepsi stock and a seat on the board. Steele said that "When I arrived at Pepsi the other vice presidents figured I had come to liquidate the company." Instead, as a journalist commented, "What Steele liquidated was Mack." In the midst of a losing first quarter, Steele went to the board to demand control of the company. The board made him president and chief executive on 1 March 1950. Mack was elevated to the largely ceremonial board chairmanship, departing from the company soon there- after and bearing a grudge against Steele ever since. Steele then proceeded to make the company over anew.
OUT OF THE KITCHEN AND INTO THE LIVING ROOM
Alfred N. Steele was born in Nashville, Tennessee, in 1901. He graduated from Northwestern University and worked for the Chicago Tribune, Standard Oil of Indiana, and the D'Arcy Advertising Agency before joining Coca-Cola as vice-president for bottle sales. Steele clashed with Woodruff just as he later did with Mack. Aggressive, flamboyant, and domineering, Steele wanted to wield power alone. One colleague said of him, "If he connected he could be magnificent. If he flopped, nothing flopped worse." Steele had the quality, which he shared with so many great American businesspeople, of being utterly undiscouraged by his failures. When he came to bat, he swung for the fences. At Pepsi, Steele hit a grand slam. By 1959, Pepsi case sales had risen by 182 percent from 1950, whereas case sales in the industry and the nation's population were increasing only 48 percent and 17 percent, respectively. More than four hundred bottling plants set production records in 1959. Seventy sold more than one million cases each, compared to thirteen that did so in 1950. Case s sales in December 1959 were greater than those for the traditionally peak summer months of July and August just five years earlier. Twenty-one new bottling plants were opened abroad during the year, bringing the total to two hundred. Pepsi-Cola was now available in eighty countries. Earnings per share had skyrocketed almost 900 percent, from $0.22 in 1950 to $2.17 in 1959, and stockholders' equity had more than doubled from $22.4 to $54.6 mil- lion. Gross profit on sales had increased each year under Steele's leadership. Earnings had declined only once, in 1956, after a costly strike, unusually cool summer temperatures, and international currency problems.
In 1950, Pepsi-Cola's gross profit on sales, income before taxes, and net income after taxes were 20, 4.5, and 4 percent, respectively, of those of Coca-Cola. In 1959, these percentages increased to 57.9, 39.1, and 41.3 percent.
Alfred Steele understood how to bring about the rebirth that Pepsi- Cola once again needed. He took what was best about the company-the best of its executives, its strongest bottlers, and, perhaps most important, the feistiness and creative potential inherent in being the underdog in the industry-and built on it. He also took what was most problematic- including production, product research and quality control, packaging, administrative systems, bottler relations, and advertising and product positioning-and, by using his exceptional abilities and matchless energy (he traveled 100,000 miles a year) as well as the tricks of the trade he had learned at Coca-Cola, brought about major transformations,
Production. In 1949, the Pepsi-Cola Company operated three domes- tic and three overseas syrup and concentrate plants. By 1958, the last full year of Steele's tenure, nine more foreign plants had been constructed and two of the existing operations had been moved to more modern facilities. American operations had also been expanded. Domestic Pepsi plants shipped over 24 million gallons of concentrate, finished syrup, and foun- tain syrup in 1958, compared to 9.5 million gallons in 1949. Foreign plants produced about 1.2 million gallons of regular and export concen- trate compared to about 230,000 gallons in 1949.
Product Research and Quality Control. Steele established Pepsi's re- search department in 1951 and, as a sign of his support for its activities, be held the directors' meeting in its library the following year. By 1958, the company employed twenty scientists investigating new flavors, glass composition and color, and bottle design.
In a 1954 speech, Steele said:
People used to write to us and call us and tell us that Pepsi-Cola was too sweet, that it was too watery, that it was too highly carbonated, that it was not carbonated enough, that it was nondescript. Some even said that it was taste- less. Well, the trouble is that all too often all these things were true.... Pepsi-Cola once varied from place to place. You got a sweet Pepsi in one city, and a tart one in another.
To correct these problems, Steele put seven mobile laboratories into the field by the end of 1951 to assure that Pepsi-Cola became a standardized, truly national product.
Packaging. In the words of Steele:
We inherited cases of all kinds and conditions. Some were so bad that the more you stacked in a store, the less Pepsi-Cola you could hope to sell. They were, at best, an advertisement of our poverty and of our despondence. Today [1954], we have a clean, good-looking case that can be built into a display in a store with a certain expectancy of improvement in sales. We have a case that a man or woman can carry without tearing their clothes, that can go into a kitchen without carrying a hatful of roaches with it.
Under Steele, Pepsi pioneered in introducing bottles of various sizes. In 1949, the product was distributed in 8- and 12-ounce bottles. The 10- ounce bottle came in 1950, followed by the 26-ounce "hostess" bottle in 1955 and, at last in 1956, the 6 1/2-ounce single-drink size that Coca-Cola had been using for so many years. By 1958, all these bottles were manufactured in Pepsi's distinctive swirl style with baked-on labels rather than the pasted-on paper variety.
Administrative Systems. Steele instituted a decentralized administrative system at Pepsi that was designed to maximize company assistance to bottlers and to increase understanding of the various business situations the local bottlers faced. In 1955, the eight existing regions were further organized into four divisions, each headed by a vice-president.
Aware that systems are no better than the people who run them, Steele staffed Pepsi by raiding Coca-Cola of some of its best people. He lured them to Pepsi by the simple expedient of paying them significantly more than Coca-Cola did. Systematic training programs were developed to enable Pepsi to get the most from its employees, and Steele instituted the company's first stock-option program.
Bottler Relations. Steele's own words best express his attitude toward and achievements in bottler relations at Pepsi:
[W]e brought to Pepsi-Cola Company a new point of view, a new idea-that the bottler was not our market, but our partner; that our job was not to sell him something in the hope that he could sell it, but that our true forte was to help him to move more goods at a profit.... Our Creed says that ". . . our Bottler is our customer and our friend. He likes us and we like him. He owns his own business. "Our job with our Bottler is to help him-to help him make Pepsi-Cola the most popular beverage in his community, to help him make money with the aim of building the Pepsi-Cola franchise into a real estate for his family and himself."
In 1950, soon after becoming CEO, Steele told the bottlers that he wanted to take them out of their Fords and put them into Cadillacs. He told them they could save their way into bankruptcy or spend their way to prosperity He presented to them a plan by which the company would attack the market locality by locality, starting where it was already strongest. These twenty-six "push markets" would form the core for further expansion. Steele asked the bottlers to have faith in his policies and programs. He would find the best equipment and make it available to them. He would reconceptualize the advertising and see to it that every cooperative dollar the bottlers invested would be well spent. The bottlers backed him, and Steele came through for them.
In 1954, he told them:
In 1950 and 1951, many of you had franchises for sale. Some were ready to be given away-and didn't even have any takers. Today, there are not many Pepsi-Cola franchises that can be bought, and those few that are offered, because of death or family reasons, are worth as much as ten times what they were in in 1950....
There were many among you in 1950 who told me yourselves that you were afraid of going broke. Today, I am proud to say that there are many among you who are millionaires. You not only own Cadillacs, but you can afford them.
So much of managing a franchise relationship is the creation and maintenance of goodwill. At this, Steele was the master, as even Mack admitted.
Advertising and Product Positioning. Steele's achievements in advertising and product positioning were the greatest and yet the most difficult to understand. Positioning is the determination of a product's raison d'etre-the art of giving the consumer a reason to purchase the product. From the time Guth bought Pepsi-Cola in 1931 until late in 1933, no real effort was made to establish an identity for the product in the consumer's mind. People drank Pepsi because they were in a Loft store for other reasons, and because they wanted a Coke. They asked for Coke and got Pepsi because that was the only cola the store sold, just as patrons of Howard Johnson's used to drink Ho-Jo Cola because it was all they could get. People did not visit Howard Johnson's because they wanted Ho-Jo as opposed to Coke or Pepsi.
From 1933 until 1950, however, Pepsi established a clear consumer image. It was the cola that gave you more. This price appeal was superbly advertised. The company had something to say and said it with great effectiveness. In the late 1940s, Pepsi was forced to abandon its simple price appeal. We asked earlier what would happen if Pepsi were no longer able to sell twice as much for a nickel. The answer is that the company began to fall apart. It tried to bold the price line and failed, alienating bottlers in the process. It tried to maintain the same basic price appeal with modified slogans and failed.
We also asked to what extent a company can permanently taint itself by choosing as a positioning the most prosaic appeal-price-and thereby attracting the least loyal of customers-the price buyer. This was the trap from which Steele had to extricate the Pepsi-Cola Company. His aim was to achieve that most difficult of marketing feats, trading up. We must remember that Pepsi was, in 1950, well known as the bargain cola. It was the brand served to children. People actually bought Pepsi and secretly poured it into Coke bottles in the kitchen before serving it to guests. With the help of his advertising people, Steele determined to move Pepsi out of the kitchen and into the living room.
There is, in business, a phenomenon known as the "monkey law": If you let go of one branch before gripping the other, you will find yourself on the forest floor. With its decision to trade up, Pepsi's former segment of price buyers was let go. That part was all too easy. But how could the company get a grip on the next branch? Why would anybody who could afford to choose buy Pepsi instead of Coke? All of Steele's other initia- tives, impressive as they were, were without purpose unless this question could be answered. Strategic insight was needed to move the company to the next branch.
Steele's first step toward this goal was the reformulation of the product. A new, lighter taste was combined with a calorie-reduced formula. "We actually brought out an early diet cola," observed advertising man Philip Hinerfeld. Since sugar was expensive, the new formula had the added advantage of being cheaper to manufacture. Pepsi formerly had been positioned as similar to, but cheaper than, Coca-Cola. Now it was being marketed as something just as expensive but fundamentally different from Coke, something that some people would prefer. Which people? "The theme of 'Light Refreshment,' " a Pepsi spokesperson remembered, "was beamed directly at the home market's principal purchasing agent, the American woman. "
The new Pepsi was thus differentiated in terms of taste and calories. Another dimension of the company's segmentation strategy is also suggested by the previous quotation. Steele aimed first at the "home market," which meant selling through grocery stores. Efforts were steadily in- creased in the fountain area as the 1950s progressed; but Coca-Cola had always been, and indeed remains, very strong there. Long before Pepsi's modern era, Coca-Cola had been installing equipment with its logo in soda fountains and luncheonettes all over the country. That equipment came with contractual obligations that the distributor put only Coca-Cola in it. Whereas first-mover advantage was considerable in that channel, it was less significant in retail groceries, where the needs of literally thou- sands of different brands competed for limited shelf space. Here, better terms offered by a more flexible Pepsi could result in more prominent retail display, of great importance for a low-ticket impulse item. Also, the consumer had a choice in the grocery store that he or she did not have at the fountain, and Pepsi could combine pull with push to good effect.
Yet another aspect of Pepsi's new positioning dealt with age. In the 1960s, Pepsi used an age-segmentation strategy brilliantly with its creation of the Pepsi Generation campaign. Age was not as clearly emphasized in the 1950s, but there was an implicit message that Pepsi was the beverage of the youthful or, at least, of the young at heart. The "Sociables" jingle clearly contained these elements:
Be Sociable, look smart
Keep up-to-date with Pepsi.
Drink light, refreshing Pepsi
Stay young and fair and debonair,
Be Sociable, have a Pepsi!
This appeal was quite different from the contemporary efforts of Coca- Cola, which consistently portrayed itself as timeless and ageless rather than trendy.
Pepsi's life-style appeal was middle to upper-middle class. The women in the advertisements were young, well-dressed, chic, and definitely New York rather than country. On 10 May 1955, Steele married the actress Joan Crawford, and she was used extensively by the company as a sort of first lady to lend an aspect of elegance to the product.
Steele said that with his regime, Pepsi had "ceased to operate by hunch, by guess, by looking for the miracle, or by some supposed plan put together with spit and string..." He did not hope to revivify the company with a new slogan alone. Rather, he attacked the market with a total program. He targeted specific localities so that he could score gains battle by battle rather than attempting to win the whole war at once. He never could hope to match Coca-Cola's reserves, but he could muster a considerable field force at the point of contact. He had a specific consumer in mind-the young American woman purchasing for her family. He had a specific channel through which to reach her-the grocery store. He changed the product so that she would find it more appealing. He changed the advertising to alert her to this transformation. He inspired the bottlers to spend heavily in support of his programs. And he managed to keep even those bottlers whose territories were not targeted as push markets loyal to the company.
Alfred Steele died of a heart attack at his home on 19 April 1959, just a few days short of his fifty-eighth birthday. In the last decade of his life, Steele transformed himself from a washed-up executive of the second rank, exiled to the Siberia of Coca-Cola with "no mail, no phone calls, no meetings," into an internationally known entrepreneur married to a legendary woman of glamour. He had made extravagant promises to the Pepsi bottlers and had kept them. All his multiplicity of talents had been available to Coca-Cola, where he had held an executive position for five years. But Coca-Cola did not know how to use him and, according to Walter Mack, Woodruff was glad to get rid of him. When Wood- ruff lost Steele, he lost more than Steele alone, because Steele hired some of Woodruff's best executives away.
Steele assured Pepsi a permanent place in the American corporate landscape. The low-price strategy when market share is relatively small and there are no clear cost advantages is precarious, as the company discovered in the late 1940s. Steele made possible competition on a new basis.
AFTERWORD: COLA WAR AND COLA PEACE
The first use of the phrase "Cola War" that I have found is in a 1950 New Yorker essay about Walter Mack. Since then the phrase has often been used to describe the competition between Coca-Cola and Pepsi- Cola. From the beginning, Pepsi cultivated the image of itself as David versus Coca-Cola's Goliath. Coca-Cola, for its part, clung tenaciously to its image as the "brand beyond competition" for many years, hardly acknowledging the existence of Pepsi-Cola, although forced to deal with it as a business reality. The intensity of what might be called Coca-Cola's product focus has been demonstrated on numerous occasions between Steele's time and today. When Coca-Cola decided to bring out a diet cola, the company named it Tab, because it felt that the name Coca-Cola must be reserved for one product and one product only. When Pepsi wanted to bring out a diet drink (which it did two years earlier than Coca-Cola), it called that drink Diet Pepsi. Similarly, when Pepsi came out with a light formula before Coca-Cola, the company again used its brand name. Pepsi periodically changed its formula. At Coca-Cola, the formula was sacred.
Beginning in the mid-1970s, Coca-Cola has swung from the extreme of rigidity in which it seemed to regard itself as akin to a utility, supplying the population with a great-tasting soft drink out of concern for the national welfare, to a competitive actor. Indeed, when the concept of change came to Coca-Cola, it came with a rush and included renegotiated bottler contracts and numerous efforts to leverage brand-name equity, such as the extremely successful Diet Coke in 1982, Caffeine-Free Coke and Caffeine-Free Diet Coke the following year, and Cherry Coke in 1985. Coca-Cola has even franchised its name and logo for use by apparel manufacturers. Having instituted so many changes with such speed and success, the company lost a sense of limits. Its executives came to feel they could do anything, which explains a lot about the formula change in 1985 and how it was handled.
Pepsi for many years and Coke in recent years have accepted the existence of a competitive relationship characterized by the phrase "Cola War." But what does this phrase mean? Roger A. Enrico, president and CEO of the Pepsi-Cola division of PepsiCo, recently described the Cola Wars as follows:
There are no final defeats. The ammunition we fire at one another is often damn silly stuff. But for all that, our battles are very real. Tens of billions of dollars are at stake. And "market share"-the sales performance of a soft drink compared to others in its category. And something intangible, but no less important: pride.... At Pepsi, we like the Cola Wars. We know they're good for business-for all soft drink brands. You see, when the public gets interested in the Pepsi-Coke competition, often Pepsi doesn't win at Coke's expense and Coke doesn't win at Pepsi's. Everybody in the business wins. Consumer interest swells the market. The more fun we provide, the more people buy our products-all our products. The catch is, the Cola Wars must be fun. If it ever looks as if one company is on the ropes-as if it's been dealt such a run of bad fortune that it won't recover-the air will go out of the game faster than the fizz leaves an open can of soda. The warfare must be perceived as a continuing battle without blood. All the interest lies in keeping the public curious: "Okay, Pepsi did that today-what do you think Coke will do tomorrow?"
I would assert that on the national level the relationship between Coke and Pepsi should be characterized-with one important exception-as "Cola Peace" rather than "Cola War." Ever since Pepsi abandoned its "Twice as Much for a Nickel" campaign, these two companies have appealed to the public almost exclusively in terms of psychic benefit. Coca-Cola has tried to associate itself with motherhood, the flag, and "country sunshine." Pepsi has tried to tie itself to feistiness, youthfulness, and California girls. The success that both firms have had in associating products with such images speaks well for the conception and execution of their advertising programs and public relations events.
There has been one instance in the recent past in which Cola Peace really did break out into war. It began when a Pepsi executive named Larry Smith went to Texas to do something about Pepsi's wretched situation there-a 6 percent share compared to 35 percent for Coca-Cola and 25 percent for otherwise lowly Dr Pepper. "This image stuff is great," Smith told the executives in Purchase (the home office at the time) about the Pepsi Generation campaign, "but we're being outsold eight to one. We've got to have a campaign that will move the needle."
The plan that Smith and others devised was even simpler than "Twelve Full Ounces." They conducted taste tests that showed a consistent major- ity preferring Pepsi. The Pepsi Challenge hit the air in Dallas in May 1975, and things began to Happen. Pepsi's share skyrocketed from 6 to 14 percent there, although most of that gain seemed to come not from Coke but from other competitors. Coca-Cola was shocked. For all its millions of dollars invested in research over the years, it had never con- ducted tests against other brands. "It wasn't allowed," explained an executive. For the first time since "Twice as Much," there was a rational basis for selecting one cola over another. Why buy a trademark when Pepsi actually tastes better?
Pepsi made extensive use of the Challenge, which was eventually aired in 90 percent of the American market. Two aspects of the Pepsi Challenge story surprise the critical observer, however. First, neither Coke nor apparently Pepsi had ever conducted competitive taste tests prior to 1975. Both companies had gone through such contortions to demonstrate various psychic benefits that the most elemental competitive weapon at their command-how the product tasted-had been overlooked.
The second surprise is that the Challenge was never embraced by Pepsi with the glee one would have expected. It was used essentially as a local marketing device and was never made the basis of a national advertising blitz. One reason was that Pepsi liked advertising that focused on the consumer rather than on the product. Roger Enrico, the man who discontinued the Challenge altogether, offered another reason:
All during the exceptionally hot and dry summer of 1983, I watched our commercials. "More people prefer the taste of Pepsi to Coke," they said. And as you'd see people taking the Challenge, you'd hear, "They pick Pepsi, time after time after time." Then the music would come on, reminding you once again that now is the time for Pepsi. The hot weather was great for our business; sales surged throughout June and July. But despite the glowing reports I received from our sales team every week, I had an uneasy feeling about the effectiveness of our advertising. They were about as well done as semi-Challenge, semi-imagery commercials ever could be. But they weren't exciting-by trying to sell with both product superiority and imagery, they didn't do much of a job with either. It was clear we weren't going to find the answer here. Nobody could make truly wonderful advertising pulling this heavy a ball-and-chain around.
The real problem with the Challenge was that it was potentially too explosive. What would have happened if Pepsi had gone national in 1976 with a heavy-hitting campaign designed to prove that Pepsi tasted better than Coke? What would have happened to Coke's belief in Merchandise 7X? What would have happened to its fountain business? What would have happened abroad? Coca-Cola might have been forced to give away some of the fat margins it had so lovingly guarded for so long in favor of deep discounts to marketing channel members. The Pepsi Challenge might have put Coca-Cola in the position that Pepsi occupied in the 1940s. Might Coke have to say that it might not taste quite as good but it cost less? Might it have become less appropriate to serve such a brand to guests?
The Pepsi Challenge, if managed differently, might have resulted in a real Cola War, one that was price-based. This, however, is precisely the kind of competition both companies want to avoid. If price competition does take place, it is kept on a local market level. These two firms have not yet figured out how to excise this competition completely from their market, but they clearly prefer brush-fire wars to a full-scale nuclear exchange. These firms prefer Cola Peace to Cola War.
Are there winners and losers in this kind of competition? In its public statements, Pepsi consistently declares that everybody wins in the Cola Wars. In a sense that is not true. If Pepsi did not exist, it is hard to believe that Coca-Cola would not have higher sales and profits than it does today. On the other band, the Pepsi people are correct in pointing to the market development that the peaceful cola warfare has stimulated. And though it is hard to tell this story without making Coke appear as being bested, the Coca-Cola Company has been selling sweetened, carbonated water at handsome profits for a century now. Along with Pepsi, it has kept the leadership of this industry in American hands to an extent that many other manufacturers must envy.
And Coca-Cola still Has the largest share of soft drink sales in the world-a market far larger than anyone a hundred, fifty, or even twenty years ago ever thought it would be.
CONCLUSION
Of all the products discussed in this book, soft drinks are the least essential. Today's world would be no different had they never been invented, as modern soft drink company executives cheerfully and frankly admit. All people must consume liquids to quench their thirst and maintain their health. There is, however, no reason for anyone to pay for Coca-Cola or Pepsi-Cola when they can quench that thirst for nothing with water. Yet in 1988, Americans drank more soft drinks than they did water.
This very aspect of superfluity makes the soft drink business an appropriate place to begin a book on the creation of mass markets. The market did not create these firms. It was the other way around.
In this chapter, we have seen how the soft drink industry evolved from a fragmented, ill-defined collection of small local enterprises to the national monopoly enjoyed by Coca-Cola, to today's duopoly that Coke shares with Pepsi. Our six propositions from chapter 1 can help explain the nature and causes of this progression: (1) profit through volume; (2) entrepreneurial vision; (3) vertical system; (4) first-movers and entry barriers; (5) the competitor's options; and (6) managing change.
PROFIT THROUGH VOLUME AND ENTREPRENEURIAL VISION
Coca-Cola from the 1890s pursued a volume strategy. The firm sought sales all over the country very soon after it passed into Asa Candler's hands. Why?
I believe Candler when he said that he wanted to make the benefits of what he viewed as such a wonderful product available to all his fellow Americans, North and South. The Civil War had destroyed his state and his city. It had injured his very family. But the product he was pushing was designed to be a nationally uniting force. Politics might divide, but all Americans could agree on the benefits of Coca-Cola. Candler wanted to extend these benefits abroad as well. Very much like his brother the Methodist bishop, Candler was a preacher; but he was a secular preacher and Coca-Cola was his gospel.
Now it seems to me that Candler was, to extend the metaphor, worshiping a false god. Coca-Cola's medicinal properties could not have been really exceptional. It is also difficult to believe that it was more refreshing than the scores of similar products on the market. I doubt that Candler would have been able to identify his own beverage in a blind taste test.
But all this is not the point. The point is that Candler really believed his product was something special, and be was able to infuse that belief into his organization. It was not by accident that "Onward Christian Soldiers" concluded sales meetings. Coca-Cola was a company with a mission extending beyond profit.
VERTICAL SYSTEM
Candler was thus essential to colas, but equally essential was his business organization. He built a sales force that had at its core his family. Coca- Cola systematically trained its salespeople. Not only did it invest in them, it invested in advertising to make their job easier.
Coca-Cola depended on the railroad to transport both its salespeople and its syrup to soda fountains all over the country. Shipping the syrup alone and having the druggist mix it with carbonated water was the key to Coca-Cola's logistics. Only the most valuable ingredient had to bear the shipping costs. As bottling technology developed, the bottle, too, became a key to Coca-Cola's ubiquity.
Although Coca-Cola owned some bottling works, most of its bottlers were franchisees. The company was not vertically integrated, but it did captain a vertical system that shepherded the product to the consumer and that kept other products away from that consumer. If fountain opera- tors had Coca-Cola dispensers on their counters, they were supposed to sell only Coca-Cola through them. If bottlers had Coca-Cola franchises, they were prohibited from bottling any other cola.
FIRST-MOVERS AND ENTRY BARRIERS
Thus by the late 1920s, Coca-Cola had both created the Phase II unification era in soft drink history and mastered it. There was nothing inevitable about these developments. Business executives made them happen through the instrument of a well-structured organization. By means of a combined policy of heavy pull through massive advertising and heavy push through a well-trained sales force and through partners in the distribution system who were rewarded with high consumer demand and restricted by contracts from pushing competing products, Coca-Cola had created a brand.
Business analysts had been familiar with barriers to entry since the railroad boom of the nineteenth century (although the phrase itself is relatively recent). However, traditionally such barriers had been conceived of in terms of property, plant, and equipment. In Coca-Cola's case, this kind of barrier was small. The force that kept other companies out of Coca-Cola's lucrative field was invisible and did not appear on the company's balance sheet. By 1930, Coca-Cola had advertised nationally for four decades. It had constructed an intricate web of contractual relations. Here was its real power. The brand name itself, "Coca-Cola," is among the most valuable assets in the corporate world today.
The first of this book's six propositions describes a profit-through- volume strategy made possible by low prices and low margins. These propositions are generalizations that do not apply equally to all industries, and here we have an example of an exception. Coca-Cola was always a volume company, but that volume was achieved through advertising and intensive distribution rather than through a sacrifice in margins. The ability to keep margins high made Coca-Cola as profitable as it was. Apparently the unit price to the customer was so low-5 cents either for a glass at the fountain or, as bottling took bold at the turn of the century, for a 6 1/2-ounce bottle-that cheaper beverages could not win a substan- tial portion of Coca-Cola's business by selling for, say, 4 cents. A more dramatic price difference was required.
THE COMPETITOR'S OPTIONS
In the 1930s, Pepsi-Cola intruded on Coke's strategy. After Charles Guth bought Pepsi in 1931, it had a distribution base because Guth was also the president of Loft. Just as Sears-as we shall see in chapter 5-competed against General Electric and Frigidaire in refrigerators through a different distribution system, so did Pepsi attack Coca-Cola through backward integration. Had Pepsi remained tied to Loft alone, it could not have expanded beyond the New York metropolitan area. If it went into bottles, however, it would have to have some power to over- come Coca-Cola's. The necessary strategic insight was the price approach. We must emphasize that this was executed with particular drama-"Twice as Much"-and during the most price-sensitive decade in the twentieth century.
Thus we have seen how Coca-Cola erected barriers to entry and how Pepsi combated them in the 1930s. I have characterized Pepsi's approach as Phase II in nature because Pepsi was using the oldest method in history to gain market participation-price. There was no demographic or psychographic segmentation involved. In fact, I have encountered no refer- ence to research of any kind in association with Pepsi's marketing moves in the 1930s.
Price is the most consistently effective tool at the marketer's command; but if a price strategy is based on a competitor's price umbrella rather than on a cost advantage, it is always in jeopardy. Pepsi lost its price advantage and its customers at the end of the 1940s. It would have gone bankrupt bad it not inaugurated a new, Phase III era of life-style product position- ing in the industry. Steele brought Pepsi out of the kitchen and into the living room by using new advertisements to make it a respectable drink for middle-class Americans to serve their guests.
It was under Donald Kendall, however, that differentiation through demographic and psychographic segmentation made Pepsi the near equal of Coke. Kendall, the recently retired CEO under whose leadership Pep- siCo has become one of the great multinational consumer product marketers, brought Pepsi out of the living room and into the rec room, into the stadium, onto the dance floor, and onto the beach. The Pepsi advertisements of the 1960s are so different from those of the 1950s that it is only with difficulty that one recognizes that they are for the same product.
MANAGING CHANGE
With the exception of the Pepsi Challenge, competition has been on a Phase III basis ever since the 1960s. There, my guess is, it will continue. Phase III competition in the soft drink industry is defined not by economics but by imagination.
Through most of the twentieth century, Coke-the universal cola, the classic Phase II product-was the most changeless of America's consumer goods. It was only available in one bottle size as late as the mid-1950s.
Today, both Coca-Cola and Pepsi-Cola play in the Phase III world of segmentation and line extension. The transition was easier for Pepsi because it had less to lose. To some extent, Coca-Cola's strategic flexibility was hindered by its "marketing mind-set," a kind of mobility barrier not encountered in textbooks but important in the real world. The Coca-Cola Company does indeed seem to have viewed its great product as a "brand beyond competition." When a competitor finally arose, Coke was slow to recognize it.
