Despite the new curvy Coke bottles and Coke attorney Harold Hirsch’s constant lawsuits, one Coke-wannabe prevailed and thrived. Here’s how Pepsi came alive.
Pepsi-Cola, like Coke, came from the South. It was formulated by a former Confederate Army officer, pharmacist Caleb B. Bradham. His New Bern, North Carolina, pharmacy thrived because it provided a soda fountain alternative to saloons of the town. Like other druggists at that time, Bradham began tinkering with new elixirs and patent medicines, using the knowledge he picked up in medical school.
He modeled one concoction after the wildly popular Coca-Cola. Intended to relieve stomach disorders and ulcers, “Brad’s Drink,” as it was called, was a pleasant mixture of vanilla, exotic oils and spices, sugar and the African kola nut. It became popular with the locals. He renamed it Pepsi-Cola in 1898, and in 1902 started peddling it to other soda fountains. Two years later, he sold shares in the business and copied coke’s franchise system to begin marketing Pepsi in bottles. By 1909, Bradham had 250 bottlers in 24 states. He was getting rich.
World War I, though, changed all that. Rapidly fluctuating sugar prices and labor costs rippled the company. By 1922, the Pepsi Company was bankrupt, and Bradham went back to filling prescriptions at his New Bern drug store.
A Wall Street money man named Roy C. Megargel bough up the company’s assets and started a new Pepsi-Cola company in Richmond, Virginia. When he failed to come up with enough investment capital to keep it going, though, the company went down in flames again in 1932.
Next in line came Charles Guth, president of Loft, Inc., a candy company in Long Island, New York. Guth had a grudge against the Coca-Cola company for not giving him a volume discount on the Coke syrup he sold each year at his 115 soda fountains. He decided to make his own beverage, so he took money out of Loft’s till to buy up the Pepsi rights, including Megargel as a silent partner, and started still another Pepsi Cola Company. He tinkered with the recipe to his own taste preferences and began serving it in his stores.
Coca-Cola, ever-vigilant in protecting its own market, sent its undercover agents into Loft stores, then filed a lawsuit, claiming they had fraudulently been served Pepsi-Cola when they had ordered Coca-Cola. Guth countersued, claiming that Coke was illegally harassing and maligning his stores and employees. The bitter court case would be played out in slow motion over the following decade.
Meanwhile, however, the Pepsi-Cola Company had other troubles. With Loft stores its only outlet, the company was losing money fast, and Guth decided he wanted out. he even offered to sell Pepsi to Coca-Cola, for a modest price. In the blunder of its life, Coke turned him down. His partner Megargel, meanwhile, sued for funds Guth owed him, so Guth bough him out for $35,000, of which all but $500 came out of Loft’s company funds.
Pepsi, now 91% owned by Guth, was about to go under for a third time, when a used bottle dealer suggested that Guth start bottling his drink in used beer bottles. Even though the bottles held nearly twice as much as coke’s 6.5-ounce bottles, he decided to charge only a nickel since the depression was on. Because Pepsi offered twice as much drink for the same price as a Coke, Pepsi’s sales went through the roof. Guth’s candy stores, however, were falling apart. Stockholders revolted, and he resigned his presidency.
The Loft Company board of directors sued Guth in 1939, after discovering he had taken most of the money for his Pepsi venture form their till. After a bruising battle, the court ruled that Loft, Inc., was the legitimate owner of Pepsi-Cola.
Regardless of the legal issues, Coke noted with alarm that Pepsi continued to do booming business. The battle soon escalated beyond sending undercover agents into Loft stores: Coke sued Pepsi over trademark violations, claiming proprietary rights to the name “Cola.” On the first day of the trial, Coke lawyers made a big show of hauling out huge stacks of legal documents detailing its victories over trademark infringers.
From weighty precedence, it looked like an open and shut case. The widow of the victim of an earlier Coke lawsuit called on Walter Mack, the new president of Pepsi, to offer condolences. Her husband had been president of something called Cleo Cola. She casually mentioned that Coca-Cola had given her husband a $35,000 check to put him out of business.
a payoff? Mack couldn’t believe his ears. Maybe Coke wasn’t so sure of victory after all. The next day in court, Pepsi’s lawyers asked about the check, and Coke’s lawyers asked for a two-day recess to respond. That afternoon, Coke president, Robert Woodruff called Mack and invited him to meet the next morning. According to Mack the conversation went like this:
“Mr. Mack, I’ve been thinking about this lawsuit, and I think we ought to settle it. Is that agreeable to you?”
“It is, under one condition.”
Mack took a piece of paper and wrote, “I, Robert Woodruff, president and chief executive officer of the Coca-Cola Company, hereby agree that the corporation will recognize the Pepsi-Cola trademark and never attack it in the United States.” He handed it to woodruff, who drafted a similar agreement stating that Pepsi would recognize Coke. Both signed and then shook hands on the deal.
The truce didn’t last long. Coke, saying the agreement applied only to the U.S., dispatched attorneys to file trademark violation suits in countries all over the world. A lower judge in Canada ruled for Coke, but Canada’s Supreme Court reversed that ruling. Because Canada was a member of the British Commonwealth, Coke appealed to the highest Commonwealth court, the Privy council in England.
“It was a hell of a dirty trick,” Mack observed later, “because it was during the war and they had lawyers over there. The Privy Council had set a date, and Coke figured we wouldn’t be able to get anybody over there.” Pepsi hired Wendell Willkie, who had just finished an unsuccessful presidential bid. Willkie was able to get the government to fly him over to England in an Air Force bomber, ostensibly to make speeches for the war effort. He got there in time to represent Pepsi in the courts. The Privy Council ruled in favor of Pepsi’s claim that “cola” was a generic term and requested that both companies coexist in peace.
That, though, wasn’t going to happen. Although the suits and countersuits stopped, the two companies continued to slash at each other in the marketplace. Coke managed to finagle a position as a quasi-government agency in World War II as a boost to the morale and energy levels of the fighting boys. Shipped with food and ammo as a “war priority item,” the deal spread coke’s market worldwide at government expense. Also at U.S. expense after the war, fifty-nine new Coke plants were installed to help rebuild Europe. What isn’t widely known, though is that, despite Coke’s wartime posture as an All-American icon, Coca-Cola continued bottling in Nazi Germany throughout the war, using syrup smuggled in through circuitous contacts in the international business community.
During the war, one of Coke’s officers served as a consultant to the Beverage and tobacco Board, which (according to Pepsi president Mack) he used to help Coke and hinder Pepsi. For example, one of his first directives limited sugar users to 80% of their 1941 consumption. That was acceptable for coke’s long-established bottling operation, but many of Pepsi’s bottlers were not even established in 1941. After the war, Pepsi accused coke of working to extend sugar rationing beyond necessity.
But Pepsi played dirty, too. While coke extended its influence deeper into the Democratic executive branch, Pepsi courted Republicans, most notably Senator Joe McCarthy, who, in exchange for a $20,000 “loan,” became know in the Senate as the Pepsi-Cola Kid. Two decades later, Pepsi would hire defeated presidential candidate Richard Nixon as their chief counsel. Pepsi later helped bankroll Nixon’s successful presidential bid.
More legitimately, Pepsi and Coke also fought it out in the advertising world, trading slogans and marketing punches left and right. Both used elaborate advertising campaigns and giveaways. (Pepsi, for example, bought the exclusive rights to sky-writing when it was new and wrote “Pepsi Cola” over nearly every city in America.)
Coke’s ads usually focused on cementing its image as an all-American institution; Pepsi’s on being the upstart challenger favored by youth and other non-stodgy types.
The Cola Wars continue. . . .