From the Beginning
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.