Authors: Tristan Donovan
It proved so popular that he opened a second, equally successful root beer and burger restaurant in 1920 in Stockton, a few miles south of Lodi. Thrilled with the success and aware of the growing market for roadside service, Allen teamed up with one of his employees, Frank Wright, and formed a partnership called A&W. They opened five outlets around Sacramento. While the food and soda remained the same, these stands focused on serving passing traffic rather than sit-down indoor service. The fast-food drive-in had been born. As the momentum behind the A&W stands grew, Allen bought out Wright and adopted a franchise model that foreshadowed the business models of the fast-food chains that came in its wake. The franchise model worked wonders and A&W Root Beer Drive-Ins spread across America as fast as the roads could be built. By 1941 more than 260 A&Ws had opened across the nation.
The ideas that A&W tapped into with its pioneering fast-food stands evolved rapidly, and by the 1960s a burger joint called McDonald's had become the leader of this culinary revolution. McDonald's started out as a drive-in barbecue joint in San Bernardino, California with carhop service, but in 1948 the McDonald brothers decided to reinvent their popular restaurant. They wanted to serve their customers faster, and their answer was the “Speedee Service System.” The carhops were fired, replaced by self-service. Out went the crockery, in came paper cups and plates. To stop wasting time with bills and tips, they got customers to pay up front for their food, which was now churned out in seconds on a cooking assembly line modeled on Henry Ford's car factories.
The new McDonald's with its instant service and standardized meals proved exceedingly popular, but the McDonald brothers barely imagined their drive-in would expand beyond San Bernardino's city limits, let alone spread throughout America and the world. But while the brothers didn't believe they had invented the restaurant of the future, Ray Kroc did. Kroc first got a taste for business while working as a soda jerk at his uncle's fountain in his birthplace of Oak Park, Illinois. “That was where I learned you could influence people with a smile and enthusiasm and sell them a sundae when what they'd come for was a cup of coffee,” he recalled in his biography
Grinding it Out.
Kroc first noticed McDonald's after they ordered an unusually large number of the Multimixer milkshake machines he was selling. Curious, he traveled to California to find out why and was so impressed he bought the right to sell McDonald's franchises. Under Kroc's leadership McDonald's grew into the biggest fast-food chain in the world and became the trailblazer of a new generation of restaurant chains that included Burger King, KFC, Pizza Hut, and Taco Bell.
For every fast-food chain, soda was a major source of profit. People almost always wanted a drink with their food, and soda was incredibly cheap to make. A cup of soda would cost mere cents to make but could sell for more than ten times that amount. So great was the markup on soda that fizzy drinks were the most profitable item on fast-food menus. With so much profit to be made from peddling soda, fast-food chains did everything they could to get customers to drink more of it and began increasing serving sizes so that they could make even more from selling beverages. With fast-food chains selling so much fizzy pop, soda companies clamored to win their business. But most fast-food chains wanted the number-one soda, and Coca-Cola won most of these lucrative deals, including the biggest deal of them all: McDonald's.
Coke's advantage in fast food was a constant source of frustration for its rivals. Dr Pepper could infiltrate Coke's stronghold thanks to its classification as a pepper drink, but rival colas faced an uphill struggle in trying to persuade fast-food joints to abandon the market leader. Pepsi tried undercutting Coke without success and eventually resorted to offering generous deals mainly to give the fast-food companies something to use to push down
Coke's prices. In 1976 Royal Crown decided that if it couldn't negotiate its way into fast food, it would buy its way in and snapped up the beef sandwich chain Arby's. PepsiCo followed suit, buying Pizza Hut, Taco Bell, and KFC and converting them to Pepsi sellers. While these acquisitions gave Pepsi a significant presence in fast-food restaurants, it also caused several chains to refuse to buy Pepsi, as they didn't want to fund a rival.
With Coca-Cola dominant in fast food, its rivals looked to the more open battleground of the supermarkets and convenience stores as the prime way to boost sales. In these stores they used a mixture of sweetheart deals, clever display equipment, bigger and better value bottles offering more pop per dollar, and a bit of bullying to make their drinks stand out on the shelves. To grab shoppers' attention soda companies developed equipment that would make their products stand out, which they then handed out to the major retailers. They built reinforced displays that could withstand constant collisions with supermarket carts and constructed increasingly elaborate coolers to keep their soda temptingly cold.
One of the most audacious was a trapezoid Pepsi cooler with three glass-fronted doors that was designed to sit at the end of supermarket checkouts, where it could offer chilled drinks within easy reach regardless of where a customer stood. “It was expensive, but we captured that end-aisle space with it,” says McGarrah, who designed the cooler. “Every marketplace wanted it. We said: âFine, but if you want that machine, you have to give us that space for two years.' So for two years we owned that end-aisle space and Coke was shut out. That was worth millions of dollars of sales. It was all driven by equipment. You bring it to the store owner and say, âLook! I have a better mousetrap than the other guy. It will help you sell more product and when you sell more product you make more profit, and we make some more profit too.'”
When not using flashy equipment to gain the in-store edge, soda companies used financial incentives to get their drinks into the best in-store locations and keep the competition at bay. They offered stores discounts on their products or large one-off payments to shops that put their brands on the sought-after eye-level shelves or moved their rivals' beverages to the bottom shelves, which would require shoppers to go to the trouble of bending
down to reach them. Alternatively, the deals would require retailers to have more coolers filled with their beverages than their rivals', or to display their drinks in the lucrative impulse-buy zone at the checkout. These deals were also a way for soda companies to get their less popular brands into shops, a tactic that played a crucial role in helping Coca-Cola get its sports drink Powerade into stores back when Quaker Oats' Gatorade had sewn up most of that market.
Usually these deals would merely seek to give a company's drinks greater prominence, but in the early 1990s Pepsi and Coca-Cola started offering deals requiring stores to stop selling rival sodas altogether, carving up the retail landscape into pockets of Coke beverages and Pepsi beverages. In 1994 the Royal Crown Cola bottler in Paris, Texas, found itself on the receiving end of a spate of these deals. As its cola was shut out of stores, its sales collapsed, hurtling down to a quarter of what they had been just a few months earlier. The company sued on antitrust grounds, but while Pepsi made an out-of-court settlement, Coca-Cola refused to give way. Coke initially lost the case but got the decision overturned after appealing to the Texas Supreme Court, which ruled that while such deals had the potential to be anticompetitive there was no evidence suggesting this was the case. Shoppers could go to other stores if they wanted and, the court concluded, Royal Crown seemed more a victim of too much rather than too little competition.
The war of attrition in retail may have been intense, but it looked tame compared to the battle for vending machine dominance. Soda companies found themselves not only fighting each other but also facing down mobsters and armed criminals in their crusade to offer ice-cold refreshment. The first coin-operated soda vending machines had appeared in the late 1930s, and after World War II ended they rapidly spread across America. By 1952 more than six hundred thousand of these silent soda sellers had been installed across the nation, dishing out millions of bottles of pop every year to impulse buyers outside gas stations, in hotels, in shops, in the street, in the workplace, and pretty much everywhere people went. By the end of the 1950s vending machines accounted for 11 percent of Coca-Cola's sales. “Typically vending machines were free to the retailer, but they had to do x
cases a week or a month to keep it and they paid for the electricity,” says McGarrah. “In return, we were getting these signsâbig, beautiful signs. You'd drive past the gas station and there would be vending machines with signs bigger than the gas station's and when the station shut down at night, all you would see were the vending machines all lit up. Even if a place didn't sell much it had a big impact.”
Vending machines were also an ideal way to get customers to try new drinks for the first time, says McGarrah: “We called vending âpaid cold sampling'. When Pepsi bought Mug root beer it put it in every vending machine. People would try it out of the vending machine outside the supermarket and then buy a six-pack inside. You'd sell them a cold one there and then they would buy warm ones to take home.”
Vending machines not only attracted sales, they also attracted trouble. For the delivery drivers who would stock the machines and collect the cash, it was a job fraught with danger. “My wife's brother worked on one of those trucks, and, one time, a guy jumped on his truck and stuck a gun in his face, robbed him of the money,” recalls McGarrah. “Another guy I knew carried a gun. This guy jumped on the passenger side of his truck, stuck the gun in and he says: âOK, OK, I'll get out, I'm going to come round the front of the truck and give you the money box'. He had the box but he also had his gun. So when he got out of sight of the guy he held the box up and pulled out his gun. Got to the front of the truck. Bang! Bang! Shot the guy dead. One year later a guy jumps on his truckâbang!âhe shoots him off the truck. It was like the Wild West, fricking crazy.”
It wasn't just random criminals who saw opportunity in the hundreds, sometimes thousands, of dollars the vending machines swallowed. Coin-operated soda machines were also a handy racket for the Mafia. Mobsters found the cash-based business of vending machines a handy tool for money laundering. Some would set up vending machine businesses and then shovel the money they made from drugs and other criminal activities into the machines so they could declare it legitimately without any expectation that they could prove where the cash originated. Others would fill their Pepsi and Coca-Cola branded machines with cheap knock-offs for extra profit or simply skim money off the top of what they made while telling
the IRS they sold far less soda than they really did. “The vending business historically has been a very lucrative way to make money disappear and a great way to wash money on the other side,” says McGarrah. “If you've got drug money coming in and own a vending machine business, it's the most successful vending business you ever saw. For a machine that a normal person would make $400 a week from, you make $4,000 and you've put drug money into a legitimate business.”
While Pepsi and Coke tried to catch some of the criminal elements who operated on the fringes of soda vending, it didn't always go according to plan. “The people stealing from the vending machines were organized. They had keys and everything,” recalls McGarrah. “We set up one guy in Orlando who we knew was breaking into the machines at this hotel. We set up the camera in a room to watch the vending machine right outside the hotel room. We thought we were so good. So we do this and then all go to off to dinner together. The guy breaks into the room and steals all the video equipment!”
Failed stings aside, by the middle of the 1980s the trench warfare in the supermarkets and streets, the promotional blitz, the barrage of new flavors, ever-growing container sizes, and rush of mergers were going Pepsi's way. Even the fast-food companies were warming to Pepsi, with the company scoring a major victory when it persuaded Burger King to drop Coke and buy Pepsi. As 1984 began Coca-Cola was worried. In the 1950s it had outsold Pepsi two to one, but now its lead was just 4.9 percent, and Pepsi was ahead in retail by a whisker. The Pepsi Challenge had persuaded plenty of people to reassess their cola loyalties too. In 1972 18 percent of soda drinkers only drank Coke; now only 4 percent would drink nothing but Coca-Cola. Coke wondered what was going wrong. It had the ads, twice as many vending machines, the fast-food advantage, a competitive price, and the world's biggest brand. Everything seemed to be in order. As it searched for an explanation it couldn't help but keep coming back to the message of the Pepsi Challenge that maybe people just preferred Pepsi. Maybe tastes had changed and people now wanted a sweeter soda. Could it be, the company's executives wondered, that the secret formula wasn't that good after all?
With its market research studies confirming people's preference for Pepsi, Goizueta decided it was time to slay the ultimate sacred cow and initiated a project to develop and test an alternative Coca-Cola formula. For months the company created and tested new recipes, trying out alternative formulas on thousands of people in blind taste tests that they explained away as an experiment with a new production process. But even as they homed in on a Pepsi-beating formula, whenever the company's market researchers asked people about changing the Coca-Cola formula, the answer was a resounding no. Budweiser sure, Pepsi fine, Coke never. Yet the warning signs went ignored. By September 1984 the company had hit on a new, sweeter formula that significantly outperformed Pepsi in test after test. With a better cola in the bag the company now had to decide what to do with it.
One suggestion was to launch it as a separate cola, but that risked suggesting something was wrong with regular Coca-Cola. That tactic could also split their market and hand the number-one-soda crown to Pepsi. By the end of 1984 Coca-Cola's senior executives had reached their conclusion: they would replace the old formula with the new flavor. They decided to launch the new Coke in 1985 so that it didn't interfere with the celebrations it had planned for its one hundredth anniversary in 1986. In April 1985 Goizueta began hinting that something big was on the way. In an interview with
Financial News
magazine Goizueta gave a tantalizing response when asked about the news that Coke had lost another percent of market share while Pepsi had gained another 1.5 percent: “We will soon be unfolding what is probably the strongest marketing program in the history of the company behind our brand Coca-Cola.”