One year ago, Coca-Cola Co. introduced "new Coke," sweetening the 99-year-old formula of the world's most famous soft drink. And it walked headlong into a furious consumer backlash.
Coke's secret tests of the new Coke formula convinced its executives that Americans would prefer the new, lighter taste to the old. But they badly misjudged the depth of brand loyalty they had spent years and bundles of advertising dollars creating. And they also overlooked the stubborn streak in many consumers who don't like being told what's good for them.
Faced with a revolt that could have poisoned its standing with millions of consumers, the company undid its decision. Ten weeks after the introduction of new Coke on April 23, it brought the old Coke back in a new label, "Classic Coke," giving itself two entries in the basic sugar-cola market, new and Classic Coke.
If Coke had to swallow its pride, it washed it down with millions of gallons in new sales. Revenue rose 10 percent last year and, although operating income from soft drinks remained flat at $880 million because of high marketing expenses, its stock has moved from a low of $66 a share to $113 on Friday.
Both Coca-Cola and its chief rival Pepsi-Cola claim to have profited from the new-Coke/old-Coke switcheroo. Revenue and profits at PepsiCo Inc., Pepsi-Cola's parent, rose by more than 7 percent last year, boosting operating income from soft-drink sales to $263 million. Pepsi-Cola's stock price closed Friday at $92.38 a share, near the high point for the year.
Both are moving aggressively to stake out even stronger positions in the industry this year: Pepsi with its planned acquisition of Seven-Up Co., the fourth-largest soft-drink producer, and Coca-Cola with its plan to acquire Dr Pepper Co., the nation's No. 3 soft-drink manufacturer.
One standard measure of soft-drink sales -- a food-store survey by A. C. Nielsen -- shows Pepsi with 19.3 percent of total soft-drink sales compared with 14.7 percent for Classic Coke and 3.5 percent for new Coke during December 1985 and January 1986.
By that verdict, Pepsi is ahead by more than one percentage point. In a country where people drink more soda than tap water, according to the industry, even a one-point edge is worth more than $350 million in annual sales.
But Coke is the champ if estimates of soda-fountain and vending-machine sales are added to food-store sales (providing a broader but less reliable comparison), according to the magazine Beverage World. Pepsi's 17.6 percent market share trails the combined 17.3 percent for Classic Coke, and 6 percent for new Coke.
Financial analysts such as Emanuel Goldman of Montgomery Securities in San Francisco believe that the tremendous publicity Coke received from the controversy made it the big winner last year.
"They're going to come out of this smelling like a rose. Coke Classic's image is up in the sky," said Goldman. Before the switch, Coke had been losing ground to Pepsi in the basic sugar-cola market, particularly among younger consumers. The controversy has revived some loyalty for Coke. "People aren't taking Classic for granted. It's something they love and adore," Goldman said.
A key question for 1986 and beyond is whether new Coke has a future, however.
Consumers bought the equivalent of 415 million cases of new Coke last year, beginning with the April 23 introduction, and that 6 percent market share made it a bigger seller than Dr Pepper, Seven-Up and the other smaller labels.
But while Coca-Cola sees new Coke on an upward path, outsiders believe new Coke is slipping. McDonald's Corp., Coke's biggest fast-food customer, recently announced it would switch from new Coke to Classic, joining others in that industry.
Coca-Cola, having committed $30 million on a new ad campaign for new Coke, will be very reluctant to pull the plug on the product, analysts such as Goldman predict. "If it makes it, fine. If not, it will occur -- as it's said -- in the normal course of human events," Goldman said.
New Coke does seem headed for a smaller niche rather than an enduring place as a strong, growing national soft drink, according to Larry Jabbonsky, editor of Beverage World. "That's already happened. The 4 to 5 percent share it has today is certainly not spread evenly around the country," he said.
Jabbonsky expects a nip-and-tuck struggle between Pepsi and Coke for bragging rights in the basic sugar-cola market.
Last week, Donald Keough, president of Coca-Cola Co., told stockholders that Classic Coke "is once again the No. 1 cola in America, the best-selling soft drink of all . . . ," a claim the company said was based on March data for food-store, fountain and vending-machine sales.
"That's baloney," responded Stuart C. Ross, manager of marketing communications for Pepsi-Cola USA. "We don't know where he's getting the numbers from, but it's probably from the same research department that told him new Coke would be such a success."
The decision by Coca-Cola's executives to make the switch to new Coke and then reverse themselves undoubtedly will be taught as a marketing case study for years at business schools around the country.
Initially, some onlookers suspected a Machiavellian design to gain attention. Coca-Cola officials say they simply blundered, misjudging the public's emotional ties to traditional Coke.
Experimenting with the taste of Diet Coke, its researchers came up with a possible new formula for Coca-Cola, a sweeter, lighter taste much closer to Pepsi. That got the attention of Coca-Cola executives, who have worried about Pepsi's growing appeal to younger consumers.
Secret taste tests involving 190,000 consumers revealed a clear preference for the new taste, and as Coca-Cola executives explained it, they had no choice. "Thousands of consumers across the width and breadth of this country have told us this is the taste they prefer," Coca-Cola Chairman Roberto Goizueta said at the company's elaborately hyped press conference in New York's Lincoln Center last April 23. "How could we deny Coke soft-drinkers a better Coke?"
The reaction staggered the company. Protests were launched. Letters poured into Coke's Atlanta headquarters, including one from a woman who said that, thanks to all the fuss, her 13-month-old daughter's first word was "Coke."
Goizueta and Keough say that, given the same opportunity, they'd do it all again, Jabbonsky and other interviewers reported. Their only change in strategy would be to bring Classic Coke back sooner, he said.
Jabbonsky has doubts, however. "When you consider the public embarrassment, it's difficult to believe they'd want to go through that again," he said.
"In working with consumers, you have to give them a choice. Coca-Cola didn't do that," said James Harralson, executive vice president of Royal Crown Cola Co.
Coca-Cola saved itself by the rapid return to Classic Coke, he said. "They're in better share because they added to their volume by the free publicity they got. . . . It caused a lot of people to try Coke just to see what it was like." The company couldn't have paid for the publicity, he said.
In his view, it was a reckless roll of the dice, notwithstanding the 190,000 taste-test results. "I don't think there's anybody else willing to take a brand as well established as Coke and gamble with it to that extent," Harralson said. "You don't take that big a risk."
But under Chairman Goizueta, Coca-Cola in the 1980s has adopted a radically different attitude toward market risk, venturing far beyond its century-old redoubt atop the soft-drink industry.
Matched step for step by Pepsi, Coke has poured new products on the soft-drink market. After Diet Coke came Caffeine-Free Coke, Caffeine-Free Diet Coke and Cherry Coke, all of them breaking the company's hallowed injunction against putting the Coke name on any other product.
The moves reflected Goizueta's concept of leverage: If Coca-Cola didn't use its world-famous brand name in more creative ways, it would be wasting its most valuable asset.
Not content to confine itself within the competitive soft-drink business, Coca-Cola has moved into television and movie production in search of more lucrative opportunities in the leisure and entertainment markets. Two of its first releases, "Gandhi" and "Tootsie," became box-office smashes in 1982, and others have followed. This year, it announced plans to purchase Merv Griffin Productions, whose game show "Wheel of Fortune" is a television mainstay.
A management willing to battle in those unpredictable, opportunistic markets wouldn't faint at the switch to new Coke. But to Goldman, the old-Coke/new-Coke controversy was last year's story. The battle this year and next will be for position in the fast-growing lemon-lime soft-drink market.
Pepsi's new product Slice sold 90 million cases last year, getting off to a fast start that promises a strong future, according to financial analysts. Slice lemon-lime and orange drinks are being joined this year by cherry cola and apple drinks.
Pepsi's hopes for Slice are high. "We've set a goal for Slice to be the third-largest trademark in the soft-drink business -- Pepsi, Coke and Slice," said Roger Enrico, president of Pepsi-Cola USA. To gain third place, Slice will have to take 10 percent of the soft-drink market, a goal that Montgomery Securities' analyst Goldman believes is within reach.
Coke's entries are lemon-lime and orange drinks under the Minute Maid name, but analysts believe it will be the underdog against Pepsi. And a combination of Pepsi Slice drinks with Seven-Up, the leader in the lemon-lime field, would be a real powerhouse.
An attorney for one of Coke's smaller competitors noted the widespread speculation that Coke's planned acquisition of Dr Pepper was, in part, a roundabout way of upsetting the Pepsi-Seven-Up merger. If both acquisitions occurred, Coca-Cola and Pepsi would control 80 percent of the soft-drink market, a potential concentration of power that reportedly is troubling Federal Trade Commission staff members now reviewing both mergers.
By following the Pepsi/Seven-Up announcement with its own deal, Coke may have helped tip the scales against both deals, the lawyer said. If not, Coca-Cola winds up with Dr Pepper, the third-largest soft-drink firm.
As Coca-Cola demonstrated last year, the game is not for players with weak hearts, shaky nerves or thin wallets.