Pepsi One's Market-Share Quandary: Now You See It, Now You Don't

A year after its launch, fans of PepsiCo's (PEP Quote) Pepsi One like to say that it's the most successful new soft drink since the 1982 debut of Diet Coke.

Considering the dismal string of launches since then -- not only the infamous New Coke, but also gems such as Crystal Pepsi and Josta -- that may be entirely true. But neither is Pepsi One lighting a fire under sales of Pepsi's sagging cola division. And once Pepsi eases up on the spending pedal, it's not clear that the brand will be able to carve out a niche in the market and maintain even the so-so market share it now has -- particularly since the departure of Pepsi exec Phil Marineau, Pepsi One's sugar(free) daddy.

"The launch phenomenon is like artificial respiration -- eventually the oxygen masks must come off," says Tom Pirko, president of consulting firm Bevmark, which has consulted for both Pepsi and Coca-Cola (KO Quote). "In the marketplace, there's still confusion. There isn't a clear product differentiation."

Soda Coda Top carbonated drink brands, 1998
Source: Beverage Digest/Maxwell

Of course, Pepsi One is but a tiny piece of Pepsi's total beverage operations, which in turn last year accounted for around 48% of the company's sales and 35% of operating profits, both of which are now dominated by the company's Frito-Lay snack business.

But the trajectory of Pepsi One since its high-profile launch illustrates the difficulty that Pepsi and rival Coke have had in launching new brands in the face of competition from private-label sodas, huckleberry iced tea and plain old bottled water. And unless Pepsi One, or some other new drink, develops into a bona fide success, Pepsi's soft-drink division isn't going to generate any excitement with consumers or investors, say analysts. And there hasn't been much excitement lately -- Pepsi shares are off 22% from their 52-week high of 42 9/16.

Relative Success

Pepsi One has about 1.3% of the $58 billion soft-drink market, says C.J. Fraleigh, Pepsi's vice president of cola marketing. That's down from about 2% in its early days -- an expected drop for a new drink. "For a new brand, that's good," says John Sicher, editor and publisher of Beverage Digest. Good even for Pepsi, which had about $10.7 billion in soft-drink sales last year. "It hasn't set the world on fire, but it warrants being there," says one merchandiser from a convenience store chain.

But that's hardly equal to the kind of praise that was heaped on Diet Coke in its infancy. That brand grabbed just about 0.4% of the market in 1982, but then rocketed to a 4.1% share in 1983 and a 5.4% share the following year. By 1984, Coke was claiming it was the nation's third most-popular soft drink.

For its part, Pepsi says that while it certainly wants to increase Pepsi One's share of the market, it's happy with the initial response. "We are happy every which way we look at this product," Fraleigh says. He says the company had four major goals in launching Pepsi One: grow the one-calorie cola category, convince both unsatisfied cola and diet-cola drinkers that Pepsi One was an appealing alternative, turn young men on to the idea of a one-calorie drink and close the market-share gap with Diet Coke. Pepsi has done all four, he says.

Big Spender

But keep in mind that Pepsi is still spending heavily to support the brand. In the first half of 1999, Pepsi spent $46.2 million just to advertise Pepsi One, compared with $42.1 million it spent on Pepsi, and just $750,000 on Diet Pepsi, according to New York-based Competitive Media Research, which tracks ad spending. By comparison, in all of 1998, Pepsi One (launched late in the year) got $25.8 million of Pepsi's ad bucks, compared with $82.7 million for Pepsi and $13.9 million for Diet Pepsi, CMR says. Those figures don't include other forms of marketing support such as product sampling and retailer incentives, which pushed up Pepsi's initial investment in the brand to $100 million, analysts say. Fraleigh says marketing support in 2000 will be at least as much as in 1999.

And the initial ad campaign, which featured Cuba Gooding Jr. doing swan dives out of planes as if to emphasize that drinking a one-calorie soda isn't the equivalent of eating quiche, didn't exactly make for compelling TV.

Consultant Pirko believes the company would have been better off emphasizing Pepsi One's taste. Most everyone agrees that the fake sweet stuff in Pepsi One -- a new artificial flavorer called Ace K -- tastes far better than the fake sweet stuff in other diet drinks. "When you have the goods, you have an advantage, and it makes sense to use it," Pirko says. The Airborne Ranger Cuba campaign has since been replaced by one starring dorky Canadian comedian Tom Green, but the switch doesn't bode well, says Pirko. "You don't launch without a campaign that's instantly successful," he says. Fraleigh says the next phase of marketing will focus more on taste.

Jeans Therapy

The question is whether Pepsi will -- or can -- continue to spend big to support the brand, even if its share hovers in its current 1% to 1.5% range. The company says it's committed to doing so. But Pepsi also lost the brand's key supporter when Pepsi Cola North America CEO Marineau jumped ship for Levi Strauss in September.

"Obviously, with [him] gone, it can't help but lose some of its internal momentum," says Jennifer Solomon, an analyst with Salomon Smith Barney, who rates Pepsi shares outperform and calls Pepsi One a success. (Her firm participated in the underwriting for the spinoff of the Pepsi Bottling Group (PBG Quote).) Fraleigh says enthusiasm for the brand remains strong among top executives such as Chairman and CEO Roger Enrico and chief marketer Dawn Hudson.

But those executives, as well as investors, also want to see better results from Pepsi's cola division. And unless Pepsi's big marketing investment in Pepsi One begins to caffeinate the drink's market share in 2000, that enthusiasm could wane pretty quickly.