PEPSI'S RESPONSE

SOMERS, N.Y. -- It's a brand-new year -- just the right time for a reality check on private-label soft drinks.That's just what Craig Weatherup, president and chief executive officer of Pepsi-Cola Co. here, thinks is coming.For two years or more, Weatherup, along with the rest of the branded soft drink industry, has watched what he called "phase one" of private-label softdrinks unfold as supermarket

SOMERS, N.Y. -- It's a brand-new year -- just the right time for a reality check on private-label soft drinks.

That's just what Craig Weatherup, president and chief executive officer of Pepsi-Cola Co. here, thinks is coming.

For two years or more, Weatherup, along with the rest of the branded soft drink industry, has watched what he called "phase one" of private-label soft

drinks unfold as supermarket chains have reworked their beverage strategies and made changes largely aimed at boosting the prominence of their own store labels.

Those makeovers were the offspring of a continuing, high-profile debate over what the role of store brands can and should be. It's a high-stakes contest in a category pouring out $10 billion in supermarket sales annually.

But the terms of the debate are changing, Weatherup said during an interview at Pepsi's headquarters here.

Until now the industry has seen a duel of competing concepts -- a duel dominated by the deft arguments of premium private label's advocates and colored by the desire among food chain CEOs to find a ready weapon against their fearsome competitors, the mass merchants.

This year, retailers will be listening less to private label's spin doctors and more to their own bottom lines, Weatherup predicted.

"We are about to get into phase two, and that will play out in 1995. Phase one, really, was the majority of U.S. supermarket chains responding to the Cott initiative," he explained, referring to Toronto-based Cott Corp.'s successful marketing of a turnkey store-brand soda program. In fact, Cott had signed 60 U.S. chains to its program by November 1994.

Weatherup said Cott has a convincing argument, based on "offering experience from Canada, offering product, package, delivery system, billing system, selling support system and pointing to Sam's Choice, and traffic moving to other channels -- and pushing this as a great way for the supermarket industry to respond to its competitive issue, which is club stores and mass merchandisers.

" 'Just sign here, and it all happens.' That was presented to every retailer over the last 18 to 24 months. And it was well done, well thought out," he said.

And it was just what many supermarket operators were eager to hear: a solution to the problem of competing with the low prices Wal-Mart, Kmart and Target were routinely offering on branded colas.

"Many people went into that program. With the chains that had their own private-label program already, it became a way to rejuvenate them. At the other end, there were people who did not really see it as a big part of where they were going with their store concept, but they wanted to be in the game," he continued.

Weatherup obviously has spent a lot of time watching and analyzing the progress that Cott and its retail partners were making. His company tried to counter its arguments, he added, but private label's momentum has been formidable.

"We argued that we did not think the category's economics were being accurately portrayed; that some people were not necessarily fully attuned to differences in the situation down here [compared to Canada]. Most of our retailers just said to us, 'OK, we appreciate it, but this is going to be a part of our category equation, at least for now.' Even with the studies and data that we had, it ended up being more of a conceptual debate."

Weatherup interprets the response of most retailers as a "a conscious decision to devote a certain number of their profit dollars to marketing goals. It's no different than them taking a 24-pack at $5.39 cost and running at $3.99, because they want to make a statement or draw some traffic."

Of course, store-brand advocates would differ with that reading, insisting that a program like Cott's offers retail profit advantages over branded programs. But this year, with the initial, emotional phase of the movement fading, Weatherup expects the category volume and profit records at chains across the country to tell a different story.

"Now the economic sort is going to happen, the evaluation of facts about where sales are going," said Weatherup. "I say that because the cost pieces are now in hand -- real data and the disciplines of ECR and activity-based costing to help the evaluation process."

Weatherup said another moment of truth may arrive when chains attempt to answer the question of whether premium store-brand soft drinks are indeed an effective way to lure traffic back from Wal-Mart supercenters, Super Kmart Centers and Price/ Costco units.

"Coke and Pepsi displays are being migrated to the back of the store, if they are there at all, and our frequencies have suffered at some of those chains that have really pounded at private label," he lamented. "I think as supermarkets generate more and more private-label activity, more ads, more displays, more space, better pricing, the data will show that the growth rates in other channels have accelerated dramatically on carbonated soft drinks."

Mass merchants will still have the upper hand, he said, because consumers will persist in wanting "their Coke and Pepsi, at 89 to 99 cents for a 2-liter or whatever," and if it is not featured in supermarkets, then they'll find it at Sam's.

In other words, he expects aggressive store-brand marketing to have the opposite effect on traffic from what chains intend. "I think more than a few retailers will be looking at same-store sales and doing the same evaluation," he added.

Another prediction: Too many "premium" store brands in a given market will eventually obscure the distinctions between individual stores' labels. They'll just cancel each other out.

Weatherup hopes in markets where there are half a dozen chains with colas named something like Select or Classic, all wrapped in vaguely familiar red labels, some of those retailers will decide the game isn't so intriguing anymore and return to a greater emphasis on branded soft drinks.

Weatherup sees store brands faltering already. His company is eager to share scanning data gathered by Information Resources Inc. indicating private-label carbonated beverages lost case volume share throughout the summer.

Meanwhile, Pepsi says, its own Pepsi-Cola brand volume was up 18% in the period from Memorial Day to Labor Day 1994, compared to 1993; and Diet Pepsi's volume was up 10%.

Weatherup attributed that progress to Pepsi's penchant for innovation, by creating and marketing "The Cube," a uniquely shaped 24-pack case, and by launching and marketing a freshness dating program for Diet Pepsi.

Now, that's not the way a corporate "sheep" behaves, in Weatherup's view. He was referring to comments made by Douglas Ivester, president of Coca-Cola Co., at last year's InterBev convention.

While he did not name names, Ivester labeled most of his competitors as either sheep -- scared, reactive and ineffectual -- or private-label parasites feeding off the industry and bringing nothing to the party. Finally, he labeled his own company as a wolf -- noble, innovative and independent.

"I thought it was great theater," Weatherup said of Ivester's colorful presentation. "I know the Coca-Cola Co. would like to see itself as the ultimate wolf and the rest of us as sheep. But the facts would suggest that is not the case. The No. 1 selling brand in food stores is Pepsi."

Weatherup did commend Ivester, however, for his portrayal of private-label soft drink purveyors as parasites. "I don't think he intended to insult some retailers, but I know some retailers were insulted and I think that was a mistake. But the issue here is Cott," he said.

"Cott's position is insulting to everyone. including the consumer," he continued, alluding to the long-standing assertion by Cott President David Nichol that branded firms, desperate to hold on to their brand equity, will waste huge sums of money on pointless marketing, product extensions and other devices, and then pay for it all by exacting a "brand tax" from consumers built into the shelf prices.

"Regarding this whole 'brand tax' garbage, the reality is that this weekend there will not be a single football game, county fair, local parade, church bazaar or community event that is not supported or funded by Coca-Cola Co. or the Pepsi-Cola Co. Period," Weatherup said. "We've spent a ton of money supporting those types of things, every day. And to blow it off as idiotic, as evidence that Coke and Pepsi and retailers are stupid, is pretty insulting."

And so it's a new year, and the debate continues. You can bet on this: Craig Weatherup will be watching.