It was a perfect example of attack advertising. To attract new restaurants for its soft-drink business, Pepsi-Cola bought a three-page ad two months ago in Nation's Restaurant News, a big trade magazine. The ad asserted that Coca-Cola Co. had not required McDonald's Corp.--its largest client--to pay the same price increases for syrup that it had imposed on smaller chains. "In effect, Coke's pricing policy is requiring you to subsidize the operations of your largest competitor," the ad read. Coke fired back in its own ad, calling the claims "absolutely false."
While cola marketing has never been a gentleman's game, the new nastiness in Pepsi's tough ad shows how worried the nation's No. 2 cola maker is about soda-fountain customers. Fountain sales account for almost $10 billion in retail soft-drink sales annually. That translates into 31% of Coca-Cola's U. S. volume and about 21% of Pepsi's.
But unlike the scene in supermarkets, where Coke leads Pepsi by about five percentage points, Coke has built up a commanding advantage in the fountain business, with 63% of the market, leaving Pepsi with 25%, according to industry newsletter Beverage Digest. Since mid-1990, Coke has wrested such major accounts from Pepsi as Burger King, Wendy's, and TW Services, a large Hardee's franchisee (table). Says Charles S. Frenette, general manager of Coca-Cola Fountain: "We're working hard to make our product ubiquitous."
The fountain wars aren't being fought just over the promise of immediate profits. In fact, compared with profits on a can of soda, the margins are tiny for fountain syrup, which customers buy for $2 to $5 a gallon. And recession has blunted growth in the restaurant business, which buys 60% of all soda syrup.
But less tangible reasons provide Pepsi and Coke with plenty of motive for duking it out. Having Coke or Pepsi exclusively on the menus of McDonald's or Burger King is a potent tool for building brand strength. Availability at restaurants can influence consumers' choices at the supermarket, where the cola giants make their real money. So, losing too much ground in the fountain war could erode Pepsi's mverall strength in the long term. "In my mind, whenever a customer wants a Pepsi and can't get one, it's bad for business," says Rick Routhier, general manager and head of Pepsi's national sales.
CHAIN REACTION. Unfortunately for Pepsi, its diversification strategy has played right into Coke's hands. PepsiCo Inc., Pepsi-Cola's parent, owns the Pizza Hut, KFC, and Taco Bell fast-food chains. So buying Pepsi's syrup, argues Coke, is putting money into a competing restaurateur's pocket.
Although Pepsi has been in the fast-food business since the mid-1970s, few customers listened to Coke--at first. But now, a massive expansion of Pepsi's restaurant business is making other operators think twice. "Suddenly, we looked around, and we were surrounded by Pepsi restaurants," says Thomas H. Hensley, chief executive of Druther's Systems Inc., a 65-unit restaurant chain based in Louisville, that also owns some 68 Dairy Queens.
Druther's switched over to Coke in April, in part because of the competition issue. Hensley also believes he'll get more marketing and promotional support from Coke. (Druther's soft-drink sales declined over its three-year contract with Pepsi.) Burger King Corp. also cited Coke's marketing clout as its reason for dumping Pepsi. But, says Jack Eberly, a Burger King franchisee in Eugene, Ore., "I don't think we would have switched if it hadn't been for the competitive situation with Pepsi."
Pepsi gave its rival even more ammunition in January, when Taco Bell bought a small Midwestern hamburger chain called Hot 'n Now and announced plans to expand it. That worried regional burger chains. And Coke has conducted market research to convince convenience stores such as 7-Eleven and Circle K that Pepsi's fast foods compete directly with the sandwiches, hot dogs, and other snack items sold in quick-stop shops.
WANNA BE IN PICTURES? To win new accounts, Pepsi is arguing that its expertise in running fast-food eateries can help customers. And some chains don't feel threatened by Pepsi. "Their restaurants aren't a big factor for us," says Arthur P. Barrett, president of Franchise Associates Inc., whose 120 Howard Johnson restaurants switched to Pepsi earlier this year. Pepsi is also going after nonrestaurant accounts such as General Cinema Theaters Inc. and Universal Studios' theme park. Pepsi recently launched a contest offering soda buyers the chance to play a bit part in a movie filmed at Universal.
Pepsi's Routhier says the new efforts will improve volume enough this year to make up for the loss of the Burger King account. But winning new accounts has also produced some controversy. In March, according to a memo that found its way into the press, Coke told fountain employees that it was resigning the Marriott Corp. account because the hotel and food-service company had requested a $50 million-to-$100 million low-interest loan as part of the deal. The memo also said that Pepsi had agreed to these conditions.
Marriott declines comment, and Pepsi doesn't talk about customers. But industry sources say both Coke and Pepsi generously subsidize the costs of customers' soda marketing and equipment leasing--much to the dismay of smaller rivals. "Let's face it -- you're locked out," says Peter C. Gorman, vice-president of food service for Royal Crown Cola Co., which has less than 1% of the fountain market. In fact, the Federal Trade Commission is investigating whether fountain-sale practices are anticompetitive.
Most industry executives don't expect the FTC probe to uncover anything substantive. But you don't need a government investigation to know that this is one food fight that isn't likely to end anytime soon.
PEPSI KEEPS FIGHTING...
New Pepsi accounts 1990-91 (est. volume: 30 million cases)
Bonanza Family Restaurants
Norwegian Cruise Lines
*Movie theater chain
...BUT COKE KEEPS WINNING
New Coca-Cola accounts, 1990-91 (est. volume: 100 million cases)
Casey's General Stores