Cola Wars: All Noisy On The Eastern Front

There's plenty to be said for being first. By following American GIs overseas in World War II, Coca-Cola Co. built a powerful bottling system that 50 years later allows it to outsell Pepsi-Cola 6 to 1 in Western Europe. But Pepsi has its own first to boast about: It popped open the Soviet Union.

Pepsi's ties to Russia go back 33 years, to when Nikita Khrushchev tasted the bubbly stuff at an international trade fair. Don Kendall, Pepsi's CEO at the time, had called on his friend, Vice-President Richard Nixon, to arrange a meeting. By 1973, Kendall had negotiated an exclusive agreement to sell cola in the Soviet Union, freezing out Coca-Cola until 1985. Thanks to those efforts, the former Soviet bloc is one of the few big markets where Pepsi enjoys a strong lead over Coke.

But now the cold war is being replaced by the cola wars. And as governments revert from communism to free-market economies, Coke isn't being shy about firing shots in Eastern Europe. It already has launched moves into eastern Germany, Romania, Poland, the Baltics, and Ukraine. And on Jan. 16, Coke announced plans to build a syrup production plant in Moscow, which will allow it to set up 2,000 soda-fountain kiosks all around the city. "A feasible economic environment simply didn't exist before, so we didn't have an emphasis on Eastern Europe," says E. Neville Isdell, president of Coke's Northeast Europe/Africa division. "Now we do."

The market potential in the region is enormous. Each of the 290 million citizens of the former Soviet Union consumes only 39 soft drinks a year on average, compared with the 770 servings each American guzzles. And given that Pepsi and Coke together command less than 15% of the Soviet market, both stand to gain when the economies open up. "This whole market is going to explode," says D. Wayne Calloway, PepsiCo Inc.'s CEO. "Clearly we're going to participate in that, and so is Coke."

Coke's main strength in the East is that it can tap the resources of a strong plant and distribution infrastructure in Western Europe as it expands. For instance, when Coke snapped up all five of the former East Germany's bottling plants--beating Pepsi to the punch--it imported managers from plants in Frankfurt and West Berlin to help refurbish them.

PASS THE STOLI. But Coke's presence still pales in comparison with Pepsi's. Pepsi moved 45 million cases in the Soviet region last year, about double Coke's share, according to industry newsletter Beverage Digest. And its 85 joint bottling ventures scattered throughout the former Soviet Union and Eastern Europe give it critical mass. Pepsi also has strong countertrade agreements in the former Soviet Union. Because of the difficulties in converting rubles to dollars, it arranged in 1972 to exchange soft-drink concentrate for Stolichnaya Russian vodka. Coke has barter deals, too. But it trades concentrate for products such as Russia's Lada autos, which are much less marketable than Stoli.

Calloway plays down the notion of a new cola war in Eastern Europe. "There's a big world out there," he says, "and there's more soft drink business than either one of us can get going for a while." All the same, unless Calloway is willing to invest big and compete hard in the region, he could lose the edge his diplomatic predecessor negotiated so hard to achieve.