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2. Coke Keeps a ¡°Classic¡±

The story of Coca-Cola may be the ultimate capitalist success story: from an obscure start grew and empire. In the past few years, Coke has also provided us with a highly publicized example of how the marketplace operates. As we saw old Coke die and then be reborn, we seemed to watch a classroom demonstration of the laws of supply and demand and the lessons of marketing. Indeed, some wonder if the lesson wasn¡¯t too perfect, and if Coke might have planned it all along.

In 1886 an Atlanta pharmacist, Dr. John S. Pemberton, mixed up a batch of a new ¡°brain tonic¡± in the back yard of his home. The concoction contained lime juice, vanilla, cinnamon, caramel, and, for the first few years, cocaine extracts. Some of the other ingredients, and the formula used to mix then, are a closely guarded secret¡ªthe recipe that Pemberton wrote out on a paper still lies locked in an Atlanta bank vault.

In just under a century, the drink grew to become what some call ¡°the most successful product in history, ¡± bringing in more than $3.5 billion in revenue around the world, leading the $25 billion soft drink industry, making the company rich enough to acquire other giants like Columbia Pictures.

In the face of such success, when Coca-Cola announced in April, 1985, that it was going to change the formula for its flavoring for the first time, the reaction of many people was, ¡°Why mess with it?¡± There seemed to be two answers: competition and discovery of a new formula.

Coke¡¯s main competitor, Pepsi, declared victory and a company holiday when Coke announced the change, and though Pepsi may not win the battle against the new Coke, the change certainly does reflect Coke¡¯s uneasiness with the growth of #2. While Coke still easily outsells Pepsi, both regular soft drinks have been losing ground to diet soft drinks, and Pepsi has surpassed Coke in take-home sales. Coke¡¯s overall market share has declined from 24.3 percent in 1980 to 21.8 percent in 1984.

How directly this competition influenced the big change, only Coke executives know for sure. Coke says the new formula was discovered by accident when chemists were experimenting with flavor combinations for diet Coke. Since the ¡°accident,¡± however, Coke has spent $4 million over four years in research on the new product, research that convinced the company that both taste experts and consumers preferred the new taste.

The rest of the story is well known. People like their old Coke. In the first month of new Coke, 40,000 called the company to complain. Within a couple months the dissatisfied minority became a majority; sales of new Coke dropped 15 percent in June. Company leaders held a series of emergency meetings, then swallowing their pride, announced that old Coke would be brought back as ¡°Coca-Cola Classic.¡±

Although the sudden reversal was embarrassing, it may prove to be a lucky marketing move for the company. Some observers thought the ¡°mistake¡± worked out so well for the company that it must have been planned, though Coke officials deny it. Six months after new Coke was introduced, it was preferred by only 4 percent of those in one survey, but the combined sales of the three Cokes (new, old, and cherry) had gained a couple of percentage points on Pepsi. If Classic Coke can continue to please loyal Coke drinkers while new wins converts from Pepsi, the company will be in great shape. A 1 percent rise in market share would boost Coke¡¯s yearly revenues by a quarter of a billion dollars. But to many observers, a Pepsi ad said it all: ¡° After 87 years of going it eyeball-to-eyeball, the other guy just blinked.¡±

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