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Joy of (Vanilla) Pepsi?
Coke holds the bragging rights, but Pepsi's upping the ante in the cola war with new Pepsi Vanilla.
August 8, 2003: 11:17 AM EDT
By Parija Bhatnagar, CNN/Money Staff Writer

NEW YORK (CNN/Money) - To some it's just "plain vanilla." But Coca-Cola and Pepsi see it a little differently, more like a multimillion-dollar flavor battle that's about to get tastier.

New York-based PepsiCo (PEP: Research, Estimates), the No. 2 soft-drink maker behind leader Coca-Cola (KO: Research, Estimates), is launching Pepsi Vanilla and its diet version in stores across the country this weekend.

In this instance, industry watchers say Pepsi has its work cut out for the new brand.

Coke came out with Vanilla Coke in May 2002 and it was a resounding success, selling 90 million cases, according to trade publication Beverage Digest.

In fact, Coke's flavored soft drink has been purchased by about 29 percent of U.S. households, the strongest one-year trial rate among recent carbonated soft drink introductions, according to market research firm AC Nielsen.

"The vanilla colas are an important line extension for both companies, and Pepsi has the distribution capabilities to support a new brand" said Todd Stender, analyst with Crowell, Weedon & Co.

"There's definitely room for Pepsi in the vanilla sub-segment, even if Pepsi Vanilla may not be as good as Vanilla Coke," Stender added.

Pepsi begs to differ.

"We're doing vanilla our way," said Dave DeCecco, spokesman for PepsiCo North America. "If consumers want Pepsi Vanilla, they can have it now, and we want a share of the market."

And DeCecco insists Pepsi Vanilla's taste will be unique.

"In our market research, consumers told us that they wanted a vanilla soda that was lighter and smoother that what is currently on the market," DeCecco said.

No matter how hot the battle gets between the two arch rivals, Coke won't be sweating it too much.

Atlanta-based Coca-Cola, the world's largest beverage maker, is still comfortably perched in its slot as the U.S. market leader.

In fact, the company increased its market share of the $63 billion U.S. soft-drinks market by 0.6 percentage point to 44.3 percent in 2002, according to Beverage Digest. Meanwhile, PepsiCo saw its market share dip by 0.2 percentage point to 31.4 percent.

Industry analysts credit Vanilla Coke's launch last year as a huge success for Coke, similar to Pepsi's breakthrough in 2001 with Mountain Dew Code Red, a cherry-flavored variation of the drink.

"We're a little surprised that Pepsi decided to enter the vanilla segment," said Mart Martin, spokesman for Coca-Cola. "When we came out with Vanilla Coke, Pepsi originally said the idea sounded 'a bit vanilla.' But, whatever."

Pepsi, Coke both losing their fizz
According to Beverage Digest editor John Sicher, Coke and Pepsi can keep taking potshots at each other, but that won't detract from the real concern: The soft-drinks market is slowing down.

"Soft-drinks sales have declined from annual rates of growth of 3 percent in the 1990s to less than 1 percent," said Sicher. "That has largely to do with the growth of bottled water, which is growing at 26 percent a year."

For the second quarter, Coke's U.S. volume grew 3 percent, driven by strong sales for Vanilla Coke, Diet Vanilla Coke and Sprite, Coke said in its earnings report.

Pepsi's North America volume grew 4 percent for the quarter, led by a better performance from its Mountain Dew and Diet Pepsi brands, although its trademark Pepsi brand disappointed.

Said Sicher, "At this juncture, innovation is critical, and it needs to include new beverages, new packaging and new marketing. Vanilla Coke added incremental volume for Coke, and I think it will do the same for Pepsi. Pepsi is a huge brand name, and a new product will generate a lot of interest."

The Pepsi Vanilla ad campaign is coming, and DeCecco said consumers should watch out. "The ads kick off mid-August, and they will reflect the fact that Pepsi Vanilla is fun."

DeCesso isn't saying whether the company will hire a new pop star as spokesperson for the brand, but it's a possibility. "I can't comment on that. You'll just have to wait." he said.

Previous stars who've appeared in Pepsi ads include singers Michael Jackson, Stevie Wonder and Britney Spears. Pepsi last year replaced Spears with Beyonce Knowles, lead singer of pop group Destiny's Child, as its latest celebrity endorser.

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--Analysts quoted in this story do not own shares of Coca-Cola or PepsiCo., and their firms do not have an investment banking relationship with the companies.

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http://money.cnn.com/2003/08/07/news...ex.htm?cnn=yes