Case prepared by Harsh V Verma, Associate Professor, FMS, University of Delhi

([email protected])

COKE – CHALLENGING AND ‘CHALLENGE’

Limited circulation only for Consumer Behavior Students

Once upon a time, in a simpler and more innocent world, you could order a Coca Colas with
being asked “Which one?”

In 1985 Coca Cola changed the taste of coke. On March 7, 1985 to be precise- little more than a
month before coke changed its formula- a ninety five year old man died quietly in Atlanta
hospital. His name was Robert Woodruff and he was one of the two giants of soft drink industry.
He became the president of Coca Cola Company in 1923 and served the company till 1984. This
stint lasted for sixty- one years. He treated his company like child. Woodruff was a man with a
single perception so brilliant that it needed no revision. He wanted to a Coke sign on every
corner. He wanted bottles of Coke in every store. His aim, quite simply was to put Coke within
arm’s reach of every possible corner. Robert Woodruff had something else going for him which,
in his view needed no updating. It was called “Merchandise 7X,” and it was the formula for Coca
Cola syrup. Merchandise X has long been best- kept secrets in the world. Coke was so protective
of it that when India demanded that they disclose their formula to its government, Coke closed
its business in hot and thirst country of close to a billion people.

Pepsi challenge was invented in Dallas, Texas, in 1974, this was an exclusive territory of Coke.
If people who lived here did not drink Coke they drank Dr Pepper, which had HQ in Dallas.
Pepsi ran a distant third-and it had problem in fighting off discount soft drinks. In desperation
Pepsi Bottling Group asked Allan Pottasch to develop a special ad campaign for the Dallas
market. Blind taste tests the pitted Pepsi against Coke were run. Not only did Pepsi win these
tests, but Coke drinkers said things like “Hey, I’ve been drinking Coke all my life. You mean I
really prefer Pepsi? I can’t believe this!” “What are you going to do now?” the testers asked.
“Guess I’m gonna drink Pepsi now?” the life long Coke drinkers said.

In 1975 after the results were confirmed by an independent research firm, Pepsi filmed them and
started running these real-life dialogues as commercials. A number of every-day people became
televisions stars. Meanwhile, the sales of Pepsi went through the roof. Soon, the Pepsi Challenge
was expanded to 80 % of the country. By 1977, Pepsi was outselling Coke in supermarkets
across America and gaining market share elsewhere. Yet, Coke still ruled supreme in vending
machines and restaurants.

In early 1984, Pepsi released the Jackson commercials. Over the following twelve months, 97%
of the American public watched them at least a dozen times. The Jackson commercials generated
immense publicity for Pepsi- and focused vast attention on “Choice of a New Generation’
advertising campaign. It pushed sales to record levels. In the end it made history.

When in doubt, do research. Coke hired Patric Caddell, the pollster who came to prominence
during Jimmy Carter’s run for the Presidency in 1976. Coke did taste test run with 200000

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Case prepared by Harsh V Verma, Associate Professor, FMS, University of Delhi

([email protected])

people costing the company over 4 million dollars. It was most exhaustive and expensive
research program in its history.

Brian Dyson who became President of Coke in 1978, addressed the issue of slipping market of
Coke and analyzed why the universal appeal of Coca cola taste was sadly slipping. “May be the
principal characteristics that made Coke distinctive, like its bite, consumers now describe as
harsh. And when why mention words like ‘rounded’ and ‘smooth’ they ‘Pepsi’. May the way we
assuage thirst has changed. “ “ You can’t look at your lead product and not ask whether or not
taste is the issue”. He asserted, “Coke didn’t win the sip testes. On sip tests, Pepsi was validated,
and taste, over time must play a role. you can’t ignore it. If you want to be a leading brand, you
can’t have a taste disadvantage that is proclaimable”.

In these tests, 55% of the people tested preferred New Coke. When researchers informed
consumers that they tasted two varieties of Coca Cola, the preference for New Coke, went up
61%.

Responding to a long, slow decline in market share and the ‘Pepsi Challenge’, corporate officers
announced with much fanfare that a new and better soft drink had been developed: a new Coke
was introduced. The decision to change Coke’s taste was made after long and careful study.
Perhaps the single factor most responsible for strategy was the success of Pepsi Challenge in
which person after person would select Pepsi over Coke in taste test. The regional executives at
Coke decided that if taste was the problem, a change in the taste of the beverage would solve the
problem. After extensive research and testing, a new drink was developed. Market research on
hundreds of consumers confirmed that the new formulation tasted better than Pepsi in blind taste
test.

After the announcement and the distribution of the new product into the marketplace, public
response swift. Within few days a mass revolt was underway. Lawsuits were filed. Over forty
thousand letters poured into corporate headquarters in Atlanta, Georgia, complaining about the
bold change. One writer fumed, ‘I don’t think I would be more upset if you were to burn the flag
in the front yard’. After receiving the negative publicity, Coca Cola hired Bill Crosby to endorse
new Coke. The strategy appeared to have little impact and was quickly discontinued. Of course,
Coca Cola finally capitulated, and six weeks after the original announcement it brought back the
old flavor in the form of Coke Classic. In an attempt to explain marketing failure, one Coca Cola
executive stated. ‘It didn’t matter how ‘New Coke’ tasted, what these people resented was the
audacity of Coca Cola in the changing the old taste’.

What happened when the executives at Coca Cola relented and brought back Coke Classic. On
the day of the announcement, the consumer affairs department received 18000 calls of thanks.
Consumers seemed to feel as though the public had beaten the corporation. Even the company’s
image improved and at the end of 1985, the image of Coke had moved form a position lower
than Pepsi’s to a level substantially higher than Pepsi.

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Case prepared by Harsh V Verma, Associate Professor, FMS, University of Delhi

([email protected])

Two years later, during summer of 1987, both Pepsi and Coke launched advertisements in which
Pepsi challenged the Coke Classic and New Coke challenged Pepsi. The Wall Street Journal
commissioned a taste test of Coke Classic, Pepsi and New Coke. It revealed that 70 % of 100
tasters confused the three colas. When confronted with the confusion of brands, the consumers
became defensive and accused the tasters of shaking the bottles. Other blamed the results on the
use of plastic cups rather than glass. In the interviews consumers were asked why they preferred
the various brands. When asked why they would drink Pepsi, one person said, ‘It’s too preppy.
Too yup’. The New Generation –it sounds like Nazi breeding, Coke more laid back’. On the
other hand, a Pepsi drinker said, ‘I relate Coke to the status quo. I think Pepsi is a little more
rebellious, and I have little rebellion in me’.

Even though ‘old Coke’ was brought back, the company continued marketing the new drink as
Coca Cola. Early in the experiment, New coke’s market share varied by region. Nine months
after the brand’s introduction, it was outsold by Classic by 9 to 1 in Minneapolis and 8 to 1 in
Dallas. However, in Detroit, New Coke outsold Classic. Even three years after the introduction
of New Coke, it represented only 2.3 percent of the market. The low market share occurred
despite the company spending twice as much on advertising for the new product as for Classic.
As the company reduced the brand’s advertising, its market share decreased. By 1989 it
represented only 1.3 % of the market. One Pepsi executive said,’ It’s market share has the half
life of uranium. Every time I took, It’s gotten smaller’.

In the 1990s Coca Cola still struggled to identify a marketing strategy for New Coke. By 1991
the brand was no longer one of the top ten soft drinks. The corporation even began
experimenting with a new name for the drink. In a market test in Spokane, Washington, the
brand was called ‘Coke II’. Long a Pepsi stronghold, the bottlers in Spokane responded
vigorously to the campaign. A retaliatory ad was created in which four counterfeit men sat on a
porch talking about the colas. One says to another while he sips form a Pepsi ‘shoot’. They are
changing Coke again. What do you suppose made them do that? Just then a Pepsi delivery truck
drives by and honks its horn at the guys. According to one report, Coke II market share jumped
to 4 percent in Spokane, but then fell back quickly when the market test ended.

By 1992 Coca Cola still had not developed a coherent strategy for New Coke. It seems that the
brand may have been demoted to a back up role. if Pepsi brought backs its taste tests, Coke
would always counter with its own ads showing that people like Coke II better than Pepsi. Will
company introduce Coke II nationally? The company continued to do test marketing on the new
name in such cities as Chicago. According to some critics, however, the idea is foolish. One
expert said. ‘its crazy to squander resources on a brand that everybody knows is dead’.

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