Coke and Pepsi battle it out

In the late 1980s, the Damascus-led boycott against Coca-Cola crumbled. For the first time since 1967, the red giant swept into the Gulf. PepsiCo, which remains the dominating leader in the region, nevertheless still hasn't gotten over the shock of Coke's reappearance on the scene.

During Coke's period in exile, Pepsi bottled almost all soft drinks sold in the Gulf. Today, the Coca-Cola Company quenches the thirst of almost a quarter of the region's soda drinkers. In Saudi Arabia, where Coke was originally slapped with the humiliating moniker 'red Pepsi,' the underdog now feasts on almost a fifth of Pepsi's former market share.

Today, Pepsi is fighting hard to hang onto its part of the cake in the Middle East, the only region where the company is number one. For both Coke and Pepsi, though, it is fair to say that the cake isn't just sweet - it's growing.

According to Middle East Grocer magazine, carbonated drink sales in the region have doubled in the last 10 years, reaching $850 million in 2003. John Fisher, editor of Beverage Digest, says there is still 'much more potential for consumption.' That's an understatement.

Unlike Western Europe and North America, Arab markets are far from saturated. Americans drink up to 840 eight-ounce soft drink servings a year. Kuwaitis consume less than half of that; Saudis buy a third as much and Yemenis one-fortieth. The Gulf's warm weather and restricted alcohol consumption bode well for soft drinks, too: only tea, juice and water challenge soda. There's no doubt about it. For both colas, growth lies in the future.

Coca-Cola's takeover of Pepsi's market share in the Gulf is especially startling given the local culture of brand loyalty. 'Everyone has a preference,' says Daniyal Qureshi of the Dubai marketing firm Streamline. 'Pepsi drinkers would not be happy if they couldn't get their Pepsi [at restaurants]; they'd drink water before Coke.'

What, then, explains Coke's apparent rise in the region? The company's long absence, in part. 'Building from scratch gives you the opportunity to innovate,' says Martin Norris, a Brit who helped implant Coca-Cola in the Gulf from 1988-98. 'You have leverage: rather than working on an existing factory's capabilities, you build flexibility into your new factory.'

During the heady early days, Coca-Cola introduced half-liter thirst-killer bottles, single-serving, resealable PET bottles and newly invented time- and heat-resistant bottles. These lightweight, five-layer nylon packs doubled Coke's shelf life to about 15 weeks at temperatures up to 100°F. That matters. In the UAE, small-town shops often can't refrigerate drinks, says Mike Henny, a US government official who promotes American business interests in the country.

Ironically, even PepsiCo's two-decade headstart fueled the newcomer's rise. During Pepsi's glory days, the company sold 95 percent of all soda in the Gulf. Vendors and distributors complained that PepsiCo took them for granted, and would even deny them short lines of credit.

Grant Smith, director of IRmep, a Washington-based think tank on Arab affairs, calls that 'typical monopolistic behavior.' Fifteen years later PepsiCo is still making amends. Last June, the company opened a call center to aid vendors, distributors and bottlers.

In Bahrain, where Coca-Cola set up regional headquarters, a team of creative types identified attack channels. They soon declared point-of-sale territory strategic. While Pepsi concentrated on sponsoring sporting events, Coke fortified their retail spaces.

'That's where consumers make their purchase decisions,' says Dick Thornton, a Philippines-based Coca-Cola consultant familiar with the Gulf. 'If you're traveling down the highway and see a Coke billboard, it's impossible to make that all-important impulse purchase.'

Coke and Pepsi have, however, steered clear of a Middle East price war. Coca-Cola decided, then, that display marketing, not cost, would clinch sales. 'We focus more on the development of local retail outlets,' says Petra Lindner of Coca-Cola's Middle East communications office in Vienna.

To secure prime supermarket realty, Coke slipped freebies - including glasses, barbecue spatulas and iceboxes - into beverage packs. 'Because of that they get main-aisle display,' says one shopper in Dubai.

Pepsi waffled, then stumbled along with copycat promotions. Coke pushed their point-of-sale plan further: the company treated vendors to free fridges. (With the caveat that non-Coca-Cola Company trespassers would be evicted.) To further pamper retailers, delivery personnel carry communication gear so vendors can send inventory requests to the warehouse in real time.

When it comes to consumer relations in the region, Coke has certainly been aggressive. But the same kind of aggressive tactics have harmed the relationship between the company and its Middle East bottlers. When Coca-Cola shut down its regional office in Bahrain - in March 2003, on the brink of the war in Iraq - and laid off a number of personnel in the process, local bottlers feared the worst. According to one Gulf-based bottler, Coke failed to fully explain the company's new regional strategy, leaving its partners in the lurch.

Meanwhile, PepsiCo has smartly moved to expand its product line in the region. Despite flat overall industry numbers, Pepsi Beverages International (PBI) in Dubai has seen increased market share for its individual brands, including Mirinda, Seven Up, Mountain Dew and, of course, Pepsi.

Last year, the company moved to closely integrate its beverage operations with the snacks business, which includes the Frito-Lay range. These operations were brought under the mandate of Pepsi Beverages International, which was earlier known as Pepsi International.

In another venture, PBI went in for an alliance with Lipton on tapping the emerging category of flavored tea drinks. More recently, it hit the markets with Pepsi X, its contender in the so-called 'energy drinks' category, which has been outstripping growth in the wider carbonated soft-drinks market.

Apart from Pepsi X, the energy drinks market, so far dominated by Red Bull, has seen other contenders moving in - including Power Horse from Austria and Blue Ox. The category carries far higher margins than those available in the rest of the market, and the initial volumes for the Pepsi X have been deemed favorable.

'Name any category, and we have an offering for the consumer. More importantly, our brand is the market leader in that category, or very close to it,' said an official at PBI in Dubai.

Last year, the Coca-Cola Company boasted $21 billion in revenue. That force de frappe allows the firm to make strategic decisions that cost more in the short run. Pepsi licensed five bottlers in Saudi Arabia.

On paper, the setup was cheaper. In the real world, the arrangement turned into a convoluted negotiating mess. All of the facilities, owned by different families, are competitors in other sectors. To implement changes, PepsiCo has to sweat it out at the negotiating table. Their archrival deals with one bottler per country, and buys part of it. But that strategy has also had its problems.

Last year, PepsiCo scored one clear victory in the region. In a partnership with their UAE distributor, Dubai Refreshments Company, and the state-owned telecommunications firm Etisalat, Pepsi launched e-vending. Now, anyone with a cell phone can simply dial a number displayed on Pepsi vending machines, choose a treat and pay when their phone bill arrives. Pepsi's Dubai office says the system, for now limited to the UAE, works 'extremely well.'

PepsiCo donates to pan-Arab educational charities, but Coca-Cola has taken the philanthropy lead. In Egypt, Coca-Cola supports youth centers, trash pick-up drives and a children's cancer hospital. In Palestine, the company hands out school supplies; in Lebanon, Coke planted cedar trees.

In Jordan, Coca-Cola gives computers to schools. In the Gulf states, Coca-Cola's outreach programs only began in the mid-1990s: today, Coca-Cola supports the Disabled Children Association in Saudi Arabia and the Red Crescent Society in the UAE. The beverage makers' public relations efforts, however, haven't satisfied everybody.

The boycott is back. This time, however, Pepsi is a member of the black-hat club. In 2002, a cluster of Arab organizations asked Muslims to shun goods from America, seen as an enemy of Islam and a supporter of Israel.

In Bahrain, the Al-Montazah supermarket chain, for example, boosted sales by pulling about 1,000 US products off its shelves, and other grocers followed suit.

Coca-Cola and Pepsi, sometimes considered unflattering shorthand for the United States, took the brunt of the blow. Coca-Cola admitted that the boycott trimmed some $40 million off profits in the Gulf in 2002. (In January, Ahmet Bozer, president of Coca-Cola Middle East, qualified the context as 'challenging.') Pepsi, with its red, white and blue logo, may have been harder hit.

Still, damage from last year's invasion of Iraq could have been worse, says Carline Levy, UBS's beverage analyst in New York. 'We thought there would be a big backlash,' she says. 'It's been less negative than anyone worried.'

Still, two months ago Coca-Cola's Bozer took pains to call the company's flagship beverage an 'international symbol, rather than an American one.' Coca-Cola also touts itself as an employer: in a statement written for this article, the company notes that more than 20,000 Middle Easterners are on its payroll.

Bozer is fighting a lost cause, says IRmep's Smith. In 2003, Coca-Cola retreated from Bahrain to Athens. 'We see that retrenchment as the rise of local brands. Coca-Cola feels they are identified with US regional policy, and there's nothing they can do about it.'

Some numbers support the IRmep. US exports to the Middle East dropped $31 billion from 1998-2002. Branded, value-added goods - all the stuff easily recognized as American - were hit the hardest. 'Our piece of the pie is shrinking,' says Smith, 'and it's because of our degraded image.'

To satisfy politicized consumers, a batch of 'Muslim colas' slid into the market. 'Don't Drink Stupid, Drink Committed,' read the labels of Mecca Cola, from France. Like the UK-based Qibla Cola, Mecca Cola promises a cocktail of refreshment and activism (the companies donate 10 percent of profits to Muslim charities, mostly in Palestine).

In the Emirates, sales of the local Star Cola are up. Iran's Zam Zam Cola, originally concocted for Arab markets, has spread to countries including France and the United States.

The alternative cola game is not new. In Latin America, soft drinks including Colombiana and Peru's Inca Cola and have already positioned themselves as national alternatives to America's multinationals. The Latin colas play off nationalism. The Arab colas, however, are tied to a greater force, says Smith, the Arab culture specialist. 'Strumming the strings of Islam is powerful,' he says.

Maybe, but only to a point. In the UAE, sales of Iran's Zam Zam soft drink surged last year, then quickly petered out. 'People will take a political stance for just so long but then they go back to something they know is good. It comes down to quality,' a Dubai resident told Arabies TRENDS.

In the mid-1980s, analysts at Chase Manhattan developed the 'six-pack theory.' In stabilized consumer markets, the theory goes, two top competitors will slug it out for some 80 percent of sales.

A pack of four lightweights fight over the crumbs. Still, the beverage giants remain cautious. The world swills down a 1.2 billion servings of Coca-Cola per day. Eighty percent of that is drunk outside the United States - in potential boycott territory.

So both multinationals decided to erect regional images. Their tool? 'A lot of TV promotion,' says Krishna Kumar, a Pepsi sales manager in the UAE. The internationalist TV spots - those shot in Europe and dubbed into Arabic - were scrapped.

'They were generic,' says David Wilmsen, an Arabic-language specialist at the American University in Cairo. Now both competitors produce Arab ads in the Arab world to harness what Coke calls 'local consumer insights.'

Both firms air commercials, for example, with Ramadan plots. And local personalities enjoy the starring roles. The Omani ace rally driver Hamed Al-Wahaibi endorses Coca-Cola, as does Saudi pop singer Abdul Majeed Abdullah.

Elsewhere, Coca-Cola is stumbling over its own feet. In the United States, Coke had wooed a lucrative client, Burger King, into selling the novel Frozen Coke drink at the fast-food giant's restaurants. To clinch the deal, Coca-Cola had presented flattering results of customer tests at Burger Kings in Virginia. Burger King signed up, decreed the slushy drink mandatory in all outlets, rolled out an advertising campaign . . . and watched the treat flop.

Last year, Coke finance manager Matthew Whitley told his superiors the marketing tests were rigged to sway Burger King. Whitley was laid off. He sued, and shares went south. The US Securities and Exchange Commission opened a formal probe, and federal prosecutors launched a criminal investigation.

Coca-Cola apologized for the swindle and paid Burger King $21 million. Coke settled with Whitley last October, but the investigation into criminal activity, including an alleged illegal slush fund, continues.

December brought another defeat. After locals in Plachimada, India, complained a Coke plant was depleting scarce ground water, the High Court in Kerala state ordered Coca-Cola to get their water elsewhere. Coke said the villagers were paid to protest.

In February, other employees leveled fresh charges against Coca-Cola. Douglas Daft, then head of Middle East and Asian operations, allegedly shipped out excess beverage concentrate in 1999 to inflate sales figures. The practice, called 'channel stuffing,' is illegal. Daft - the current chief executive, who has announced that he will step down later this year - is under US federal investigation.

The following month brought more embarrassment. In March, British drinkers of the beverage company's Dasani mineral water were surprised to learn their elegant blue bottles held filtered tap water. A team of professional tasters couldn't tell the difference between faucet water and Dasani, more than 3,000 times as expensive. The British Food Standards Agency opened an investigation.

Last year, Coca-Cola laid off seven percent of its entire workforce. It also awarded an $8.4 million bonus to its top six executives. Daft will retire at the end of the year with an $84 million stock award.

Smoke from Coca-Cola's public relations brushfires, however, isn't blowing into the Middle East. Last year, Coke sported double-digit volume growth in the region.

In February, a Morgan Stanley beverage report declared 'increasing competitive intensity from Coca-Cola' a 'key risk' for PepsiCo. Deutsche Securities renewed its 'buy' rating for Coca-Cola.

Once the Middle East leader, Pepsi is now a defender, clawing to slow its slide, fighting to retain, not gain, market share. In the words of a Pepsi official in Dubai, 'It is our aim that Pepsi's share of a market should not go below 75 percent.'

Coca-Cola, the Middle East underdog with momentum, seems to relish the fight. 'The Coca-Cola Company welcomes free and fair competition,' a spokeswoman declared in February. So do consumers.

The Coke and Pepsi challenge, after all, is to seduce us all to buy their products. Andy Owen, president of his eponymous marketing consultancy in Dubai, put it nicely: '[Coke and Pepsi] are at each other's throats, and that's good news for all of us.'