Fizz (17 page)

It had launched just two weeks before the stock market crash, and it still had to find a way to stand out from its hundreds of competitors. But 7Up had some advantages. For a start it had Howdy's bottling network to tap into, giving it instant reach across America, and because the drink was lower in sugar than most sodas, it was cheaper to make, which made it an appealing option for other cash-strapped bottlers. It also successfully promoted itself as a hangover cure, running a “7Up for 7 hangovers” campaign that pitched the drink as capable of easing the effects of overdrinking, oversmoking, underdrinking, mental lassitude, overwork, overeating, and over-worry. After sales of 7Up syrup reached 5,920 gallons in 1930, the drink began a
steady rise. In 1933 syrup sales topped 174,000 gallons before shooting up to 2,074,000 gallons a year by 1936, after Grigg's post-Prohibition decision to start promoting his soda as a mixer that “tames whiskey” and “glorifies gin.”

As 7Up raced to the top of the lemon soda league in 1936, Coca-Cola was marking its fiftieth anniversary with a party for its employees. By then Jones's fears about beer had subsided, and the flamboyant and towering Coca-Cola sales chief was convinced that Coke was here to stay. “There may be war,” he told the assembled Coca-Cola men and women in a tub-thumping speech. “We can stand that. There may be revolutions. We will survive. Taxes may bear down to the breaking point. We can take it. The Four Horsemen of the Apocalypse may charge over the Earth and back again—and Coca-Cola will remain.” But even as he uttered those words Coca-Cola's dominance was under renewed attack from an old foe reborn. Pepsi-Cola was back.

In 1922 the original incarnation of the Pepsi-Cola Company had gone down in flames, a victim of the sugar price bubble. While the drink's creator Caleb Bradham retreated to the North Carolina drugstore where it all started to eke out a life of obscurity, Wall Street investor Roy Megargel bought the tattered remains of the Pepsi dream. Megargel tried to bring the drink back from the dead but soda fountains snubbed it, bottlers ignored it, and Coca-Cola's advertising juggernaut crushed it. By 1931 Megargel's Pepsi was on its deathbed. Then, just as all looked lost, Charles Guth called.

Guth came from a family of confectioners. His Russian father, Emil, owned a Baltimore confectionery business, and his two elder brothers, who were born in Russia before the family moved to America, were already making candy for the store by the time Guth was born in 1876. Guth followed in his father's footsteps, starting in 1899 with a candy store of his own in Baltimore before building and selling three successful chocolate businesses. By the middle of the 1920s he had hit on his biggest success yet: a chocolate drink named Mavis.

Despite his trade, Guth was no sweetie. In 1913 he shot and killed his chauffeur after the driver attacked him with an axe for firing him. He bribed Coca-Cola bottlers to produce Mavis on the side, much to Coca-Cola's
annoyance. Guth also liked to be imposing despite his five-foot-six frame, so he had the desk in his office placed on a raised platform so that employees and those who did business with him would have to look up to him. Then there were his ruthless dealings with the Loft family, who owned the New York candy store chain Loft Inc. In August 1929 Guth persuaded them to swap Loft shares for a stake in Mavis. Within seven months of the deal Guth had used his shares in Loft to install himself as the company's president and seize control of the family business.

After his devious takeover of Loft, the gray-eyed tycoon bought two more New York candy store chains—Happiness and Mirror. By 1931 he controlled an empire of 225 candy stores, many of which had soda fountains selling Coca-Cola. Guth figured that since his stores went through thirty thousand gallons of Coca-Cola syrup every year, Loft deserved a discount and the right to buy directly from Atlanta headquarters rather than the local distributor. Coca-Cola disagreed. Guth threatened to stop selling the drink. The response from Atlanta remained the same.

Furious at Coca-Cola's unbending attitude, Guth decided he would carry out his threat by picking up the pieces of Megargel's shattered dream. He struck a deal with the Pepsi owner. Guth would pay $12,000 for the rights to Pepsi and give Megargel a royalty on sales and a one-third share in the resurrected business. Megargel readily agreed and signed over the business. To pay for the rights, Guth took $10,500 out of Loft's bank account and established the third Pepsi-Cola Company in July 1931 with him and Megargel as the only shareholders. Guth then set about reformulating Pepsi.

Guth didn't like Pepsi. He regarded its taste as unsatisfactory, so he ordered Loft chemist John Ritchie and his assistant Thomas Elmezzi to fix it. But Guth's sweet tooth made it a challenging job, and his constant demands for a sweeter beverage eventually resulted in something closer to sugar water than cola. “We'd bring him a sample, and he'd say ‘No, no, no, you've got to make it sweeter,'” recalled Elmezzi in his biography
The Man Who Kept the Secret.
“We'd wait a couple of hours and bring him the same sample. ‘Oh that's good.'” After a few weeks of tests the chemists eventually hit on one that their boss thought was “about right” and Guth ordered
Loft's soda fountains to start selling the new Pepsi-Cola, which now also included caffeine.

Guth knew what would happen next. Another of Woodruff's business innovations was the trade research department, a division that was charged with investigating retailers who might serve a cola other than Coca-Cola when people asked for a Coke. Its investigators, a motley crew of ex-athletes and security guards, acted like a private police force. Retailers resented and feared them. These Coca-Cola cops would visit soda fountains hoping to catch out soda jerks. If a suspect beverage was served they would collect a sample to send to Coca-Cola's labs for analysis, demand samples of the syrup, and threaten legal action. To make sure any lawsuits were successful, the investigators worked in pairs so that they could confirm each other's recollection of events in court. Sometimes they would come back to the same fountain day after day waiting for a slip-up.

But Guth did not run an easily frightened mom-and-pop outfit. Knowing that Coca-Cola's undercover spies would soon be swarming over his stores, Guth issued written orders to his soda jerks telling them that “under no circumstances is Pepsi-Cola to be offered for Coca-Cola or compared with it.” As an extra precaution he offered a $10,000 reward to any customer who was offered a Pepsi when they asked for a Coca-Cola at one of his stores. Inevitably some staff slipped up, and the Coca-Cola cops were there to catch them. In 1932 Coca-Cola sued and, for good measure, sent Guth a claim for $30,000 for finding that Pepsi was served at his stores when a Coca-Cola was ordered. The Cola War had begun.

Coca-Cola hauled more than one hundred Loft employees before the court for questioning, but Guth's canny precautions paid off. The judge accepted that Loft had substituted Pepsi for Coca-Cola but noted that Guth had clearly told staff not to do this. Coca-Cola, the judge ruled, should have informed Loft rather than suing and dismissed the case. Pepsi had headed off Coca-Cola's initial onslaught.

But while Pepsi survived in court, shoppers weren't buying. Even with Guth's numerous stores, the drink was floundering. In response Megargel sued for unpaid royalties, so Guth used $35,000 from Loft's coffers to buy him out. By 1933 Pepsi was heading for a third bankruptcy. Guth tried selling
the business to Coca-Cola for $50,000 only to be rebuffed. Shortly after failing to sell Pepsi to Coke, Guth met a bottle merchant who suggested selling the drink in twelve-ounce bottles to set it apart from Coca-Cola's six-and-a-half-ounce containers. After realizing that the difference in cost between making a twelve-ounce soda and a six-and-a-half-ounce one was almost nothing given that the bulk of the liquid was water, he decided to try selling Pepsi-Cola in twelve-ounce bottles, but for the same nickel price that Coke charged for half that amount. In November 1933, he tested the idea in Baltimore and within six months more than one thousand cases of Pepsi were being sold every day. Guth's twice-as-much-for-the-same-price sales pitch was perfect for the Great Depression, offering American families a way to make their money go further. By the end of 1934 Pepsi-Cola was a different company: the floundering failure had morphed into a swaggering upstart that was making big inroads in the cola market. Guth expanded into Canada by setting up a bottling plant in Montreal, and he poached a Coke executive to run it. Coca-Cola fumed.

Other soda companies quickly jumped on the bigger-is-better bandwagon in the wake of Pepsi-Cola's success. After losing its court battle with Coca-Cola, Chero-Cola had renamed itself Chero only to see sales melt away. With its cola in terminal decline, the business relaunched itself as Nehi, offering a range of root beer, grape, and orange sodas. But after watching the success of Pepsi-Cola, Nehi launched a twelve-ounce-for-a-nickel cola that it named Royal Crown Cola. By 1938 this new cola had revived the company's fortunes and Royal Crown, or RC as it was also known, had become the third-biggest cola in America. Hires Root Beer also followed Pepsi's lead, and its switch to twelve-ounce bottles in 1936 saw the company bounce back. Within two years, sales of Hires were back at pre-Depression levels, and the trend toward ever-bigger soda serving sizes had begun.

But while Guth devoted himself to Pepsi-Cola, Loft was falling apart. Its finances were in shreds and in October 1935 Guth decided the answer was to cut wages. The announcement sparked fury among his employees, and Guth had to lock himself inside his own office as a mob of angry workers gathered outside. He eventually escaped with the help of the police. The
staff at Loft's chocolate-making plant in Long Island City went on strike, leaving the company without a supply of candy for the crucial holiday season. Eventually Loft's shareholders rebelled and forced Guth to quit. He didn't care; he was more interested in Pepsi-Cola now.

His replacement at Loft, James Carkner, started his new job by reviewing the company's finances to figure out what was going wrong. While poring over the books he spotted the money that Guth had used to bankroll Pepsi-Cola, a company that Loft owned nothing of. Two weeks later Guth found himself being sued for the control of Pepsi-Cola by the candy chain he had treated as his own. Loft had no money to see through its legal action, and there was a real risk that Guth would simply fire Carkner, retake control of Loft, and drop the lawsuit. Loft needed outside help and in its hour of need it turned to the Phoenix Securities Corporation, a Wall Street investment trust that specialized in bringing dead or dying companies back to life.

Phoenix's president Walter Mack was an energetic Harvard graduate with slicked-back hair, and a leading figure in New York City's Republican Party. In 1932 Mack ran for the New York State Senate, but lost after refusing to pay upper Manhattan mobster Dutch Schultz $5,000 to rig the vote. After the election Mack gathered testimonies from voters about gangsters casting multiple votes and kicking people out of the polling stations—testimonies that led to a clean-up of election practices in the city.

After being approached by Carkner, Mack looked over Loft's books. Phoenix had already taken control of a large drugstore chain and figured he could turn Loft into a manufacturer of cheap candy bars to sell in those stores. So he agreed to prop the company up. Pepsi didn't figure in his thinking at all. “A lot of people thought I was awful smart that I helped finance it because I knew what could happen to Pepsi-Cola, but that's not the truth,” Mack recalled at the Pepsi-Cola Bottling Association's annual meeting in 1975. “It wasn't till I got really into it and studied Pepsi-Cola that I saw.”

Phoenix pumped $400,000 into Loft and bought up shares to keep it in business while it fought for control of Pepsi. In November 1937 Loft won its case and gained control of Pepsi on the grounds that Guth had built the business using its money, facilities, and staff. Guth appealed immediately, and the court decided that in the meantime Guth would stay at Pepsi as
general manager while Walter Mack would become its president. As recipes for disharmony go it was a potent one. Guth shoved Mack into a cramped, sweltering office stuck above the chocolate plant's boiler room and banned staff from supplying the Phoenix president with stationery. He also kept the men's room locked so that Mack was forced to use the facilities of a nearby restaurant. “It was like a two-headed monster trying to function while in constant battle with itself,” Mack wrote in his biography
No Time Lost.
“We couldn't agree on anything.” Luckily for Mack this frosty working atmosphere came to a rapid end in 1938 when it became known that Guth was secretly setting up a rival cola company in Canada called Noxie Kola. Guth was fired, and Mack took charge of a flourishing business with a network of 313 bottlers and annual profits of $4 million.

Under Mack's leadership Pepsi went from strength to strength. He introduced a standard Pepsi bottle to end the Guth-era practice of sticking a Pepsi label on any old bottle that came its way and finally gave the drink a distinctive brand with a new red, white, and blue logo. When it came to promotion, Pepsi's advertising budget couldn't hope to match that of Coca-Cola, so Mack got creative. In 1939 he struck an exclusive deal with Sid Pike, the owner of the patent for the commercial use of skywriting, which had been developed in World War I to allow military planes to communicate with troops on the ground. For years after, Pepsi took its message into the heavens, drawing the words “Drink Pepsi-Cola” in fluffy, mile-high and mile-wide letters. By 1947 Pike's planes had carried out more than six thousand sorties in the United States, Canada, Mexico, and Cuba. Each of these giant ads cost the company just fifty dollars.

Pepsi also broke the model on the radio. The 1930s saw a boom in radio ownership as the number of American homes with a set soared from 40 percent at the start of the decade to nearly 90 percent at its end. Coca-Cola got into radio advertising early, running its first radio spots in 1927, but struggled to find a way to translate Lee's effective print promotions to the new medium. Even after more than a decade on the air the company was still scratching its head about how to sell itself over the airwaves, with Coke executive Ralph Hayes lamenting in 1938, “For whatever reasons, our several radio experiments, up to now, have been less than satisfactory or
successful. To date, it has probably been our least effective medium, considering the expenditures involved.”