The Soda Pop Wars – From Guest Blogger Sreeny Cherukuri

The First Essential Scary Truth

Leave it to guest blogger Sreeny Cherukuri to show even in the worst of economics times a boatload of money can be made anyway.  Only in America.  Enjoy!

Soda Pop Wars 2.0 – or how $1 ice tea is changing the world

For the MTV generation, the term Cola Wars stirs up memories of a 1980’s arms race where Coke and Pepsi sought to outdo each other by signing bigger and bigger music stars to peddle their beverage to American youth who were drinking it anyway.  The mutually agreed destruction reached its ultimate during a year when Pepsi paid Michael Jackson enough money to set his head on fire – only to be trumped by Coke paying George Michael not to appear in a commercial at all.     The outcome was inconclusive, and both combatants have lived to see another day.

Today, we are in the midst of a new soft-drink war, not between the two beverage giants, but between them and the world they have created.

Over most of the past 50 years, the calculus of the restaurant industry has been that the most profitable items are the soft drinks –  5¢ of sugary syrup – sold for $1.49.  The restaurants would keep peddling soft drinks with their meals, and both they and the beverage company would make their cut.  Cross sponsorship and loyalty to a single vendor were the basis of the bond forged between the companies.   For years this relationship worked as escalating drink sizes and prices provided both with rising incomes.

Little discussed was the profit split between the restaurateur and the beverage company from soft drink sales.    “Little discussed” because the beverage giants had the power to muscle any one who dared challenge them.   After all you might leave Coke (the behemoth of fountain drink sales) for Pepsi, and gain a percent of margin – but you certainly couldn’t leave both of them and be in the restaurant business.    So Coke/Pepsi dictated the rules, but as long as everyone was growing and making money it was OK.

Summer of 2008

While the slowing economy was forcing restaurants to embrace value menus, the soft drink giants were paradoxically pushing up prices (when the ubiquitous 20 oz. bottle went from $1 to $1.25 or more).

In 2008, McDonald’s fired an opening salvo with a 32 oz Sweet Tea for $1.  What was interesting about this discount beverage was that it was not made by Coca Cola (McDonald’s longtime partner), but rather by McDonalds themselves.      It is obvious that this offering was diverting beverage sales, because by the end of the summer, McDonalds was offering all drinks for $1.   Since the franchises’ primary concern is profitability, presumably Coca Cola was forced into a pricing adjustment because its sales were impacted.

Since then, many franchisees have continued McDonald’s $1 drink pricing has continued in all seasons and most times of day.  And as McDonalds has broadened their drink offerings to include coffees and smoothies, it appears they are making a play for the “non-meal” beverage consumer – so Starbucks is clearly in their crosshairs as well

Other restaurants have also been forced to compete.

For example:

·       Last year Taco Bell introduced its own branded frozen drinks; and this year they have introduce their own Soda and Lime “coolers” which compete directly with Pepsi’s products.   Interesting because they are using the same soda water – just adding their own syrup, rather than Pepsi’s.

·       A number of Subway restaurants, have taken the extreme tact of charging for water — or saying they only have bottled, etc.   This is likely a sign that $1 beverages, have made their combos unattractive.

·       Recently Pepsi co has been forced to incentivize Taco Bell by offering free Doritos along with a Pepsi product in Taco Bell’s $2 combos.  (Frito Lay is part of PepsiCo, the more profitable part)

So where will it all end, who knows.  One thing is clear the old pecking order is being revisited.    While the Coke and Pepsi brand names still add sales and cache to restaurant’s bottom lines, it is clear that the restaurants are questioning the split.

Perhaps these are storm clouds on the horizon of the big beverage makers – just as the microbrews and imports have decimated the major brewers.   Perhaps in the future we will see more store branded drinks. (Starbucks was able to establish cache as such). Perhaps it will lead to the rise of Micro soda brands, local craft beverage.

Or perhaps Evian is just Naïve spelled backwards.