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Cola Wars: Pepsi Is Number Three, and That's a Good Thing

Hank Cardello

Recently Ad Age reported that for the first time Diet Coke has supplanted Pepsi as the number-two-selling soft drink. This news represents a major soda industry upheaval and is cataclysmic psychological news to PepsiCo.

Soft drink marketers are a proud bunch. Full disclosure: I was the marketing director for Coca-Cola and Diet Coke during the 1980s and previously served as the senior brand manager for Michelob at Anheuser-Busch. Soda marketers wear their brands on their sleeves like a badge of honor, and will protect and nurture them at all costs. So the typical industry reaction to a defeat such as this is emotionally charged.

Perhaps Pepsi should inhale deeply and take a page from the beer business.

Analogous to the epic battles between Coke and Pepsi, the Beer Wars of the ’70s and ’80s were defined by leading brewer Anheuser-Busch pitted against rival Miller Brewing Company. While Budweiser reigned supreme as the King of Beers, Miller High Life had climbed to become the second most popular beer by 1977. “Miller Time” served as the anthem for all working-class Americans. It was real beer for real men. Today, Miller High Life has disappeared from the best-selling list as four of the top five beer brands today are now “lite” beers, with Anheuser’s Bud Lite leading the pack with a 21.4 percent market share. Even the venerable Budweiser has been demoted to a distant number two at 8.9 percent.

There are three key lessons here for Pepsi.

The first is that brands that don’t dominate their market segments are especially vulnerable to line extensions that water down their appeal. Once Miller Lite, Miller Genuine Draft, and other Miller brands were launched, Miller High Life’s precarious position was exposed and its message diffused. A number-three Pepsi is in the same boat.

The second point is that consumers started shifting away from higher alcohol (i.e., higher calorie) brews and demanded lighter versions. Miller Lite’s “Great Taste, Less Filling” displaced “When It’s Time to Relax… Miller Time” as the more compelling message. This dynamic mirrors exactly what is taking place in the sugared beverage segment today. With rampant obesity and growing demand for lower-calorie versions, the long-term prognosis for full-calorie beverages does not look good. In 2000, diet brands accounted for only two of the 10 most popular sodas. Today that number has doubled to four. Only iconic brands with the market leadership and staying power of a Budweiser (or Coca-Cola) are in the best position to hang on in the face of the diet/light onslaught, while challenger brands like Miller High Life and Pepsi are forced to play catch-up.

Perhaps the most important lesson for PepsiCo is that losing this battle may not be so bad if they keep their wits about them. Will the company’s marketing legions come out swinging in the predictable attack mode, spend massive amounts of advertising dollars, and usher in a new wave of “Pepsi Challenge” ads against Coke to restore Pepsi to its former glory? Or will they continue on their Performance with Purpose path to deliver healthier, low-calorie foods and beverages to increasing numbers of consumers demanding such products?

History suggests that the former response is the likely path. According to The Los Angeles Times, Massimo d’Amore, chief executive of PepsiCo Beverages Americas, already has declared, “We want to reclaim the place that belongs to this company.“ To this end, Pepsi is buttressing its media presence and has signed on to spend upwards of $60 million on Simon Cowell’s The X Factor heralding a return of the cola wars that marked music and entertainment in the 1980s and 1990s to American television screens,” according to The Financial Times.

In addition, cola brand spending is purportedly going up by 30 percent.

The Coca-Cola Company should welcome a re-ignition of the Cola Wars. Spending substantial sums on old guard Pepsi will simply delay, not reverse, Pepsi’s slide in the rankings. Furthermore, diverting marketing funds to prop up Pepsi in lieu of supporting longer-term better-for-you-products risks forfeiting their early leadership position in this growing category. Remember, this is the company that led the industry in addressing trans fats by eliminating those offending oils in all of its Frito-Lay snack chips. They have also established a platform dedicated to improving “human sustainability,” a noble and potentially highly profitable direction for the company.

No doubt senior executives at PepsiCo are taking heat from Wall Street analysts, Pepsi bottlers, and their board of directors and are scrambling to bolster efforts behind brand Pepsi, find new management, and/or fire the advertising agency. This is the expected visceral reaction. If the company acts wisely, however, it will forge on with the current path that will reward it in the long term. If it focuses on the current brushfire, it should rename its flagship brand Pepsi High Life.

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