Coke and Pepsi battle it out (page 1 of 5)

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.