PepsiCo - The Battle For the Soda Market

PepsiCo is the second-largest beverage company in the world today. But what if I told you Pepsi would have been one of the many other soda drinks from Coca-Cola?

Heck, Coca-Cola could have ended the Cola Wars before they began. But they ignored the chance of a lifetime to buy out their relentless competitor—not once, not twice, but three times.

In this issue, I deep-dived into PepsiCo’s event-ridden history—bankruptcies, mergers, the war with Coca-Cola, Michael Jackson’s ad, and so much more. Enjoy!

Disclaimer: If you're a Coke fan, I focused majorly on Pepsi when documenting the Cola Wars because this is a story about Pepsi. I have no personal attachment to both drinks.

But you may wanna grab a bottle of Pepsi for this one 🍾.

The year is 1890, and soda drinks are beginning to gain mainstream attention among Americans. At this same time, one Caleb Bradham was on course to grab another degree from the University of Maryland School of Medicine when he suddenly dropped out due to his father's failing business.

He later picked up a job serving as a teacher in a public school, but the smell of medicine kept calling to him. A year into his new job, Bradham quit and established a local pharmacy, the Bradham Drug Company, in New Bern, North Carolina.

While running his business, Bradham couldn't stop himself from thinking about creating a soda for the soda fountains in his pharmacy. I mean, if a local pharmacist can create a growing popular Coca-Cola soda drink from his backyard, what’s stopping him from doing it too?

In 1893, he set out to work and came up with an amazing recipe that included kola nut extracts, vanilla, sugar (a key ingredient), carbonated water, and other rare oils. He began selling this unnamed syrup from his pharmacy, and soon customers fell in love with it, tagging it as "Brad's drink."

Drawing inspiration from the Coca-Cola name and pepsin (a digestive enzyme), Bradham began marketing this new soda as Pepsi-Cola - a digestive drink - in August 1898.

As the popularity of Pepsi grew in New Bern, Bradham saw the opportunity for his new drink to become an independent, full-fledged brand. As a result, he registered the first Pepsi-Cola trademark, incorporated the Pepsi-Cola Company in 1902 with himself as the President, and moved production from his pharmacy to a nearby rented warehouse in 1903.

In its first year (1904), Pepsi-Cola recorded sales of nearly 8,000 gallons of syrup. As a wise businessman, Bradham reinvested his earnings into the business and purchased a bigger building where he moved production and bottling.

Pepsi-Cola began selling in six-ounce bottles, and sales reached almost 20,000 gallons in 1904. Such amazing growth meant the company had to begin what other brands do - franchising.

Pepsi-Cola expanded to the point that it was bottled in 250 plants across 24 states in the U.S., with distribution carried out in motorized trucks.

In 1910, Pepsi-Cola held its first bottlers convention in Newborn, and after the event, the invigorated bottlers supercharged the company's growth. Barely five years after the event, Pepsi-Cola had over $1 million in assets.

The story of Bradham and Pepsi-Cola looks set to have the perfect happy ending. Then World War I happened.

Is it Game Over?

The war disrupted international trade, and the government began a sugar rationing scheme due to limited supply. As a result, the price of sugar skyrocketed from 3 cents to over 28 cents per pound.

For fear of buying at a higher price in the future, Bradham purchased sugar at this new price in large quantities. Shortly after, the price of sugar crashed, causing Pepsi-Cola to suffer a heavy loss.

In 1920, Pepsi-Cola reported a loss of $150,000 in its annual report, having only two out of the previous 250 bottlers remaining with the company. Surprisingly, Bradham tried selling the company to Coca-Cola, but the soda giants passed up the opportunity. Would they regret this decision?

The Pepsi-Cola Company declared bankruptcy in 1923, and Bradham went back to his quiet life of running a local pharmacy. This seemed like the end for Pepsi-Cola—or is it?

Craven Holding Corporation bought the company's asset for about $30k and resold it to a Wall Street financier named RC Megargel for $35k.

Megargel began operations, hoping to raise funds for the company and keep it alive through his Wall Street expertise. However, the stock market crashed shortly, and he began running a single bottling plant in Richmond, Virginia. On top of this, the Great Depression set in, resulting in another huge revenue decline.

Like a brand destined to fail, the National Pepsi-Cola Corporation—the new name Megargel gave the company—declared bankruptcy for the second time.

Coca-Cola once again received an offer to buy Pepsi-Cola and gain a monopoly over the cola drink market. And like before, it was a no-no. Pepsi-Cola wasn't worth it for them. Or so they thought.

At this point, Charles Guth, President of Loft Inc., enters the picture.

Loft managed a network of 115 stores and about 1400 soda fountains across America. At the time, Guth was trying to negotiate a deal with Coca-Cola to get additional discounts on the Coke syrup Loft uses in its soda fountains.

Considering the large quantities of syrup that Loft buys from Coke, Guth felt they deserved a discount. But Coca-Cola refused. I mean, with their market share at the time—it was Coke vs. others. I would too if I were them.

Guth, gutted by the action of Coca-Cola, decided to seek an alternative cola brand, and a bankrupt Pepsi-Cola seemed like the perfect deal.

In 1931, Charles Guth bought Pepsi-Cola from RC Megargel in a deal that saw him acquiring a 91% stake in the company. This is when things begin to get interesting.

There’s A New Sheriff In Town

Guth leveraged his position as President of Loft Inc. to use its labs and chemists to reformulate the Pepsi-Cola formula so the drink could have a sweeter taste. After that, he removed Coca-Cola entirely from the Loft chain and replaced it with Pepsi-Cola. In 1932, over 3.5 million Pepsi-Cola bottles were served at Loft soda fountains across America.

Coca-Cola, angered by the new development, slapped Pepsi-Cola with a lawsuit for trademark infringement. Guth almost sold the company to Coca-Cola during the period, but he eventually gained victory in court. The Cola Wars were destined to happen!

Soon again, Pepsi-Cola was about to go insolvent as the financial demands to run the company were increasing steadily, largely because of the cost of bottles.

Unlike previous times, the story takes a somewhat opposite trajectory. Guth found a solution to the problem by using brewery bottles for selling Pepsi Cola.

The new bottles (355 mL) were double the size of standard soft drink bottles (192 mL) at the time. Initially, Coca-Cola and Pepsi were all sold in 192mL bottles for $0.05, but due to the new bottle size, Guth had to increase the price of Pepsi-Cola to $0.1. However, the price hike caused sales to slow down, especially as the Great Depression was setting in.

Then Guth took a bold step by cutting down price back to the normal $0.05, and accompanying the move with a marketing campaign that was tagged "twice as much for a nickel."

Consumers were sold. Considering the Great Depression at the time, allowing cost-conscious customers to purchase double the volume of a cola drink for the same price made Pepsi a consumer favourite.

Pepsi, after years in the shadows, became popular among Americans and made sales of over $450k in 1934. Sadly, Pepsi's original founder, Caleb Bradham, died in 1934, when the company began making exploits in the market.

In 1935, Guth moved Pepsi to Long Island, New York - close to the Loft headquarters - where he built a large service bottling plant. In the following year, Pepsi-Cola granted 94 bottling franchises and reached a profit of $2.1 million.

Guth had turned Pepsi-Cola from a bankrupt business into a respected soda drink in America. But Guth made a foul play while growing the company.

Most of the progress he made with Pepsi was gotten through the finances and resources of Loft Inc.

In 1936 Loft began facing financial struggles and Guth decided to resign from the company to fully face his new successful Pepsi company.

The amazing growth of Pepsi under Guth caught the eye of Loft's shareholders, and upon a discovery that he loaned Pepsi money without the board’s approval, Loft sued him for 91% ownership of Pepsi. The Guth vs. Loft case lasted for years, and in 1939, Loft defeated Guth in the Supreme Court of Delaware, grabbing 80% of the Pepsi-Cola Corporation.

As a result, Pepsi and Loft Inc. merged as one company - the Pepsi-Cola Company - under a new President, Walter Mack, a major financier who helped Loft drive the case against Guth.

Let’s Market It

Mack had no hands-on experience in soda drink making, but his drive for intense marketing made him quite the fit for the job.

However, competing against the giant Coca-Cola, which had a large marketing budget compared to an upstart Pepsi, wasn't an easy task. For Mack to maintain the mainstream attention of Pepsi - ignited by the 'twice as much for a nickel' campaign - he needed to be creative.

Pepsi began campaigns all across America which included sky riders spraying PEPSI in the sky, billboards, and the notable Pepsi Cola song—the first jingle in national radio advertising history.

The song was a hit, and it grabbed the attention of listeners all over the country. It was like a cultural song on the streets across America. Pepsi left a mark on the minds of customers, and what followed was a record-breaking increase in sales.

Also, most soda drinks at the time, including Coca-Cola, sort of neglected African Americans in the production and marketing of their products. Pepsi saw an opportunity in the untapped "negro market" and created an African American marketing team to build Pepsi sales in black communities - although not all of its white bottlers agreed with it.

Pepsi began running more newspaper ads with people of colour, portraying them as a happy, normal family rather than through stereotypical images.

Another boom in sales! Most people of colour switched from Coca-Cola to Pepsi to show their support for the company. The sale of Pepsi eclipsed that of Coca-Cola for the first time in Chicago.

Coca-Cola could no longer overlook the competition. But as Pepsico was on course for exponential growth, World War II came around. And like the first war, sugar rationing came along with it.

Pepsi was forced to increase the price of its drinks, crumbling the 'twice as much for a nickel' campaign and sending sales on a downward trend. History was about to repeat itself!

Coca-Cola, on the other hand, struck gold. They received a contract from the U.S. government to provide soft drinks to Allied troops around the world. The move saw Coke becoming a sort of morale booster for troops in the war, winning the loyalty of veterans, and gradually gaining worldwide recognition.

While Pepsi lagged behind, trying to boost sales in America, Coca-Cola had become a prized trademark around the world.

A USSR-Mixed Comeback

Pepsi managed to stay alive during the war and began making strides again when the board captured Coca-Cola’s former executive, Alfred N. Steele, as its new CEO.

Steele brought innovative changes to the company, including a new logo, a new slogan, and a new swirling bottle design. His celebrity wife, Joan Crawford, also became a public face for the company. As Pepsi began to recover its steam, Steele suddenly passed away. A great shock for the company!

Don Kendall became the new CEO and made his first mark at the U.S. National Exhibition in Moscow in 1959.

Over 400 companies were invited, including Coca-Cola. Pepsi wasn't invited.

However, Coca-Cola turned down the opportunity due to the USSR's earlier heavy criticism of capitalism and most American companies. As a result, the U.S. State Department invited their close rival, Pepsi.

Don Kendall, was a close friend of Vice President Richard Nixon and, upon his urging, brought USSR leader Khrushchev to the Pepsi booth to have a sip of their soda drink. He ended up drinking almost half a dozen glasses.

Pepsi's marketing team saw the opportunity, and a photo of Khrushchev having a Pepsi sip filled the front pages the next day with the words, "Khrushchev wants to be sociable. Be sociable; have a Pepsi." The move boosted sales of Pepsi at home.

After a series of negotiations, the USSR struck a deal with Pepsi to have the brand sell its drink in the region. However, Pepsi faced a major obstacle in getting the drinks into the region as sales of rubbles outside the USSR were banned at the time.

To navigate this hurdle, Pepsi made a deal with the USSR to sell Pepsi-Cola in the country in exchange for distributing its Stolichnaya vodka in the U.S. The deal made Pepsi the first American brand to produce and distribute products in the USSR.

But even with this great leap, compared to Coca-Cola, Pepsi was still an underdog in the soft drink market—until the marketing team at Pepsi began looking beyond the surface level.

The Pepsi Generation

Coca-Cola had gained a stronghold in the soda preference of people born before World War II, but they overlooked the younger generation—baby boomers (teens and youths), or as they would be later called, The Pepsi Generation.

Pepsi grabbed this opportunity and began a marketing campaign with TV ads focused on children, teens, and youths having fun rather than the Pepsi product itself. It was the first time in marketing history that a brand made a marketing campaign all about the consumer.

As ads featuring the new generation flooded TV screens, almost every youth and teenager in the U.S. wanted Pepsi above any other soda drink. Pepsi sales continued increasing, stamping its foot in popular culture with the campaign. Pepsi has become a major player in the market and is now closing down on Coca-Cola.

In response, Coca-Cola made a great ad that preached hope and unity amidst the ongoing Vietnam War. And it worked; thousands of people thanked the company for such a message in troubling times. And you already know what follows such thank-yous - sales and more sales.

But Pepsi didn't stop growing. The company began introducing new drinks like Mountain Dew and Diet Pepsi among many other products, to increase its total market share.

In 1965, Pepsi struck a merger deal with Frito Lay, a fast food company, resulting in the Pepsi Corporation (PepsiCo). The deal saw the combined sales of both companies reach over half a billion dollars.

PepsiCo continued growing, doubling sales year upon year, from $1 billion in 1970 to $2 billion in '71, while increasing its employee headcount to 50,000. In a bid to expand Pepsi drinks into restaurant chains, the company acquired Taco Bell and Pizza Hut.

But even though Pepsi was growing rapidly, Coca-Cola remained far ahead in the race for the soda market.

The Cola Wars In Full Swing

At this point, the folks at PepsiCo began researching why Pepsi couldn't contend with Coke in the market. Was it that Coke really tasted better than Pepsi? Or was it purely based on stronger marketing?

During the research, Pepsi found out that while a larger percentage of people are Coke lovers, they preferred Pepsi if they tasted both drinks blindly.

Upon this revelation, Pepsi began a comparative TV ad known as The Pepsi Challenge in 1975 in Dallas, Texas, where it's yet to break into the market. People would do a Pepsi vs. Coke blind taste test, and after picking the one they loved the most, the identities of the drinks are revealed.

Many hardcore Coke lovers were surprised that they chose Pepsi over Coke, and they switched brands.

The ad saw an increase in Pepsi sales in the region, and, as a result, Pepsi took the campaign nationwide. For the first time in Pepsi's history, it overtook Coke in retail sales in the U.S. In 1982, PepsiCo sales soared to over $7 billion while expanding to several other countries, including China and Brazil.

But this victory wasn't enough for Pepsi yet, as retailers were only a section of the market. To build upon this success and cement its name as a major player, Pepsi made a bold move. Enter the Pop legend, Michael Jackson.

Pepsi gave Michael Jackson (MJ) the highest brand ambassadorship deal at the time, worth a whopping $5 million, to vitalise its relationship with “the new generation."

Before the deal could yield fruit, MJ and Pepsi encountered a big obstacle. During filming one of the TV commercials, MJ's hair caught fire due to a mistake from the technical crew. However, this hurdle didn't stop him from sending Pepsi to the top.

The Michael Jackson Pepsi Generation commercials debuted on TV screens in 1984, and they sent the market wild. Off the script, if you saw this as an ad on YouTube, you won't skip it for nothing. One of the uploaded videos on a YouTube channel has over 128 million views.

The campaign gave Pepsi a powerful boost, forcing Coca-Cola to make several blunders, including changing its formula in what was one of the biggest blunders in marketing history.

PepsiCo became a global conglomerate of beverage businesses—tea, sports drinks, juice, snacks, etc.—with its products consumed in more than 200 countries around the world.

A company that went bankrupt twice has become the second most valuable beverage brand in the world (behind Coca-Cola), worth over $241 billion as of the time of writing.

My Two Cents

• You can never capture the market from a big competition by playing the same games with them. Zoom into the market and find that section that almost everyone is ignoring. Pepsi did, and the rest is history.

• Allow innovation and creativity to work their magic in your marketing strategy. I mean, that's why it's called marketing in the first place.

• No one fights a giant by playing it safe. The entrepreneurs who think they are crazy enough to change the world are the ones who probably do.

Post-Credits

Did You Know?

Pepsi almost entered a deal with the USSR in 1989 that would see the latter exchanging 17 nuclear submarines for bottles of Pepsi. The deal later fell through and this saved Pepsi millions of dollars as the subs were pretty outdated at the time.

Some interesting links I came across during the week:

• I discovered a very funny food podcast called Tastebuds while researching for this issue. You're gonna love this episode on Pepsi vs. Coke.

• Elon Musk and Jeff Bezos have built two of the most successful technology companies in the world but they have a somewhat opposite approach to building. The one on Elon and the other on Jeff.

What story would you want me to cover in the future? Hit me up with the reply button.

Until I come your way next week, design innovative marketing campaigns and grab that market share. Gracias!