British billionaire Richard Branson can afford to buy all the market research he needs. But last summer, the Virgin Group chairman conducted his own blind taste test at his children's school, pitting a cola produced by Toronto-based Cott Corp. against Coke and Pepsi.

When roughly three-quarters of the kids preferred Cott, Branson set up a joint venture with Cott to launch Virgin Cola. By the time the new soda hit British stores in mid-November, Branson had orders for 35 million cans--and already, the brash executive predicts that "within 3 to 4 years, Coke and Virgin Cola will be vying for market dominance."

Preposterous? Maybe. But over the last four years, Cott has transformed itself from an obscure regional bottling company into a leading private-label player by creating dozens of store-brand sodas that compete with Coca-Cola Co. and PepsiCo Inc. as never before. This year, Wal-Mart Stores Inc. will sell over 1 billion 12-ounce servings of soft drinks produced by Cott and sold under its Sam's American Choice label. In Canada, Cott has grabbed a 23% share of all sodas sold in supermarkets. And in Britain, Sainsbury Classic Cola, which is bottled by Cott, now accounts for over 60% of the cola sold by J. Sainsbury PLC, Britain's top food retailer.

"PARASITES." Those successes should push Cott's sales past $750 million in its 1995 fiscal year, ending Jan. 31, up from $49 million just four years ago. Analyst William Leach of Donaldson, Lufkin & Jenrette Securities Corp. estimates that earnings will hit $35 million--a far cry from the $700,000 earned in 1991.

But now Cott faces a stepped-up battle for survival. Though Coke and Pepsi dwarf the upstart, they are launching a fierce counterattack to halt private labels. Cott and other private-label bottlers are "parasites," Coca-Cola President M. Douglas Ivester told a recent industry meeting. But "on our turf, the parasite is nothing but a tiny bug, waiting to be crushed."

Cott is hardly shrinking from the fight. Chief Executive Gerald N. Pen-cer has now set his sights on becoming a broader private-label powerhouse. Even as it rapidly expands its sodas in the U.S. and abroad, Cott is adding beer, "New Age" beverages, and foods to its menu. Leading the charge will be President David Nichol, who was lured to Cott last summer after building North America's most successful line of quality private-label products: the President's Choice line sold by Loblaw Cos., Canada's top supermarket, and 12 U.S. chains.

Still, the counter-attack is drawing blood. With roughly a 2.5% share today, Cott has helped propel private labels to a 12.5% share of the $20 billion U.S. supermarket soft-drink business--up from 9.5% in 1990. But now brands are regaining ground. "For the past six months, we've seen share declines for private label," says Paul Clancy, director of market strategy for Pepsi Cola North America. "We've neutralized their growth."

So far, most of the pain has been felt by smaller private-label bottlers--not Cott, whose revenues grew by 64% in the first half. But its profits are being hit. Coke and Pepsi have slashed prices to retailers by as much as 30% in regions where Cott is strong. Coke has also increased payments and other incentives to retailers to get them to display its products more prominently. Meeting the price cuts has taken a toll on the much-smaller Cott. While earnings rose 55% in the first half, to $19 million, Cott's gross profit margin fell to 16.3%, from 17.7% a year earlier. With the price of aluminum soaring, margins are expected to slip below 15% next year.

All this has pummeled Cott stock. It now trades at around 10, down from last year's high of 37--and the heavily shorted stock could drop further. "Investors have seen that Coke and Pepsi can make Cott's life difficult," says Jennifer Solomon, an analyst with New York-based brokerage Josephthal, Lyon & Ross Inc.

SHELF RESPECT. If it's losing investors, Cott may yet be winning the all-important battle for retailers' hearts and minds. For one thing, it has given them a newfound feeling of clout over the national brands. Having a strong store brand "has improved the way Coke and Pepsi deal with us," says Dave D'Arezzo, a grocery group manager for Wegman's Food Markets Inc. in Upstate New York. And because Cott's products cost less than Coke or Pepsi, "we can give consumers value and still earn better margins than on national brands," says Gary Smith, vice-president for private-label marketing at Safeway Inc., one of Cott's largest customers. By 1999, analyst Leach expects Cott to hold 8% of the U.S. supermarket soda sales.

Still, Cott has no presence in huge parts of the $50 billion U.S. soft drink market, such as vending machines and fountain outlets. To broaden its appeal, Cott is following Coke and Pepsi into New Age beverages such as iced tea, fruit-based drinks, and spring water. And it is casting an eye on the lucrative $10 billion fountain business. "Why wouldn't McDonald's consider paying 50% less than Coke for Cott's cola?" asks Pencer. A McDonald's spokesman scoffs at the idea. "Coke and McDonald's are a winning combination," he says.

Cott is also looking farther afield for growth. In Japan, where cola prices are sky-high, Cott's beverages now make up over half of the canned soda sold by its first customer: the 5,000-store Ito Yokado chain. And Cott is eyeing dozens of other countries. But with 80% of its operating earnings coming from overseas, Coke will likely fight back with price cuts just as at home.

Already, with the North American price war hammering margins, Cott's ability to expand on its own is limited. That's why it's now seeking out wealthy partners. The 50-50 joint venture with Branson is the first such deal. Under it, Cott will handle bottling and distribution, while Virgin will handle advertising and promotion. By Christmas, Virgin Cola will be sold in over 3,000 British retail outlets. And next year, Branson plans to expand Virgin Cola to the U.S., Japan, and other markets.

Nichol is also trying to sweeten Cott's appeal with retailers who want to build their own private-label pantries. He is now developing a line of top-quality foods--such as ground coffee, prepared lasagna, and cookies--that will be marketed by Cott's existing retailers under own-store labels. Eventually, Cott might produce up to 200 of such items.

But with private-label food sales also showing signs of peaking, that market isn't likely to be any easier. Nichol concedes that Cott is facing a "fight of massive proportions." One taste of battles to come: After Cott ventured into private-label beer in 1992, Canada's two major breweries launched low-priced brands of their own. Then John Labatt Ltd. paid Loblaw $28 million to wrest the contract to brew its President's Choice beer away from Cott. Although it has launched a rival label, Cott admits that margins in its brewing business have plunged more than 40%. With competitors waiting around every corner--and now well aware of what the private labeler can do if given free rein--Cott will have a harder time avoiding the wrath of giants.

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