The cold warriors (page 1 of 4)

By Ranvir Nayar DUBAI

Until the early 1990s, Pepsi, the world's second largest cola company, was in an incredible position in the Middle East. Due to a boycott of its rival, the company had nearly the entire market to itself. Barely a decade later, however, Pepsi is struggling to maintain its lead over Coke, which has staged a comeback as dramatic as its ouster four decades earlier. The reasons for Pepsi's failure are various, but they can all be traced to the company's attitude: We're number one, went the thinking, and we don't have to do anything to stay there.

Pepsi may still be number one in the Middle East, but Coke is satisfied with the outcome of the battle so far. After having been pushed out of the market by the three-decade-old boycott of a range of American products in parts of the Middle East, Coke has been re-entering key markets in the region since the early 1990s. Within a decade, Coke has reclaimed a third of the entire market from Pepsi.

What is surprising is not the fact that Coke won significant market share, but how quickly - and to what extent - Pepsi lost its own share of the market. Coke officials openly admit that they have been surprised by their performance. "If you take the largest markets, like Saudi Arabia where we came back in 1993 and we had an entrenched competitor there," says Bashar al-Kadhi, public affairs director for Coca-Cola Middle East in Bahrain, "that is one of the markets where we have really made inroads. We now have 30 percent of the market and if five years ago we told people that we would have 30 percent of the market, I don't think people would have believed us. We have done it and we are very happy about it." (Independent industry analysts put Coke's share in the kingdom at a more modest 22 percent.)

The Middle East and North African markets currently account for only a small percentage of global sales for both Pepsi and Coke. Coca-Cola sold 3 billion liters in the region last year - barely three percent of its global sales. Overall, the carbonated soft drink market is worth about $7 billion at the retail end.

But what makes the market irresistible for the two giants is its potential. The region's hot weather naturally creates demand for cold drinks. The public consumption of alcohol is extremely limited, if not totally forbidden, in most countries in the region. Thus, on all social occasions, the choice is between fruit juice and carbonated drinks. Another positive factor is the region's youthful population. Twenty-five percent of Saudi Arabia's population is under 20. And it is this segment of the population that accounts for the largest chunk of sales, although Saudi Arabia's current per capita consumption is less than 20 gallons per year, compared with 55 gallons in the United States.

Comeback. It certainly has not been an easy comeback for Coke. The red giant has had to fight Pepsi tooth and nail for a share of the highly competitive Middle East market. Planning regional market strategies has kept the Coke management and sales team - as well as bottlers and partners - on their toes for the better part of the last decade. Coke began by looking at the investment required to re-enter the market and to rebuild its entire infrastructure - bottling plants, distribution network, refrigerated trucks, warehouses and sales teams.

Coke says it has invested nearly $500 million in the region in the last five years; the latest big-ticket item was the $20 million plant opened in Saudi Arabia last year.