In Coke-Pepsi Rivalry, Both Sides Win

Competition between Coca-Cola and Pepsi has forced them to stay on top of consumers' tastes.
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American

business

is filled with hard-fought rivalries.

Ford

(F) - Get Report

versus

General Motors

(GM) - Get Report

.

United Air Lines

(UAUA)

versus

American Airlines

(AMR)

.

Apple

(AAPL) - Get Report

versus

Microsoft

(MSFT) - Get Report

.

Coca-Cola

(KO) - Get Report

and

PepsiCo

(PEP) - Get Report

have been battling it out in the beverage industry for decades. No sooner does one come up with a winning new product, such as energy drinks or vitamin-enhanced water, than the other swoops in with its own version. One might briefly pull ahead in sales or buzz, but the other is always close behind, ready to snatch the lead.

Competition

has forced the companies to stay sharp and on top of consumers' tastes. If you're a small business owner who fights for customers with one competitor, consider yourself lucky. A worthy opponent can be a great motivator.

That lesson was reflected in Coca-Cola and Pepsi's first-quarter earnings results this week. Pepsi seemed to pull ahead, reporting net income that was down slightly at $1.12 billion compared with $1.15 billion a year ago. Coca-Cola's profit fell 10% to $1.36 billion from $1.51 billion because of restructuring costs and writedowns.

Pepsi also announced plans to take control of its two biggest bottlers, a move that could smooth distribution and boost its bottom line. The company has offered to pay $6 billion for majority stakes in

Pepsi Bottling Group

(PBG)

and

PepsiAmericas

(PAS)

. The company already owns 33% and 43% of the companies, respectively.

Coca-Cola and Pepsi spun off their bottlers in the 1980s and 1990s. The arrangement separated the companies' pricing roles, allowing the syrup makers to arrange exclusive marketing deals with merchants while the bottlers try to profit from selling cases.

"There are two sides to the business," says Gary Hemphill, managing director of the Beverage Marketing Corp., a consulting firm. "The side that controls the brand makes the syrup and sells it to the bottlers. They focus mostly on the marketing. The bottlers' role is to produce the product and get it to the store."

Once Pepsi has control of its on-the-ground distributors, it should be easier to roll out new products quickly and coordinate marketing efforts across its divisions. The company estimates it will save more than $200 million in the process.

Pepsi's plan left analysts wondering if Coca-Cola will try to buy its bottlers. If the move turns out to be a plus for Pepsi, Coke will likely follow its lead.

It can get tiring, always looking over your shoulder to see what the competition is doing. But that scrutiny might push you and your rival to bigger and better things.

Coca-Cola and PepsiCo's "marketing is essentially the gold standard," Hemphill says. Would they be as successful if they didn't have each other?

Elizabeth Blackwell is a freelance writer based in Chicago. She is the author of Frommer's Chicago guidebook, and writes for the Wall Street Journal, Chicago, and other national magazines.