Why things taste bitter for Pepsi

After decades in the shadow of Coca-Cola, Pepsi has slipped to third place in the war of the cola brands, ousted by Diet Coke

Life can sometimes be conveniently distilled down into very simple choices, such as cats or dogs, black and white, bus or car. And when it comes to beverages, two of the most powerful businesses in the world have spent the hundreds of billions of pounds over decades to try and make the choice of what to drink equally simple. Coke or Pepsi?

In a battle more enduring and expensive than most global conflicts, the Coca-Cola Company and PepsiCo have been locked in a marketing blitz over their core products, Coke and Pepsi. The Cola Wars eclipse all other commercial rivalries.

Recent sales figures however, suggest the war may be over. And Pepsi lost it. Last year Diet Coke outsold Pepsi-Cola by 927 million cases to 892 million cases in the US. This relegated the drink to third place in the national cola league below Coke and Diet Coke. The news has sent commentators scurrying to build aluminium can-shaped coffins for Pepsi, often seen as the eternal underdog.

The global leviathan status of Pepsi and Coca-Cola is surprising given the nature of their invention. Both were, to all intents and purposes, snake oil; invented by quack doctors as pick-me-up remedies. The secret recipe for Coke was first mixed in Atlanta in 1886 by John Pemberton, a small-time pharmacy owner. Coca-Cola, which originally included cocaine, was sold as a nerve tonic, a digestion aid and a headache cure. Pepsi was also marketed as digestive aid and energy drink and was first made in 1898 in North Carolina by Caleb Bradham who sold it from his drugstore and named it "Brad's Drink". It was renamed Pepsi Cola in 1901 with the advertising catchphrase "Delicious and healthful".

Pepsi marketed itself fiercely, but in the 1930s the company went bankrupt twice and on three occasions the Coca-Cola Company was offered the opportunity to buy it, but didn't.

Despite Pepsi's early problems, both businesses became hugely successful and were ahead of their time in terms of international expansion and marketing. In 1926 Coca-Cola became the first company to sponsor the Olympic Games which were held in Amsterdam that year. It did so again during the controversial 1936 Berlin Games, hosted by Hitler.

Folklore maintains that the first salvo in the Cola Wars was fired in 1975, when Pepsi began its Pepsi Challenge advertising campaign in which shoppers were challenged to blind taste tests between Pepsi and Coca-Cola (naturally, in the ads Pepsi always won). However, the bitter rivalry began long before when, in 1936, Pepsi increased the size of its bottles to 12oz and sold them for five cents. At the time Coke was sold in 6oz bottles for the same price. Pepsi launched a radio campaign to let consumers know they could get twice as much Pepsi for their money.

The simmering enmity boiled over throughout the Eighties and Nineties when the battle of the brands intensified first with price wars, which resulted in weakened brand loyalty and eroded margins for both companies, and then with increasingly ingenious marketing schemes. In 1985 both brands scrambled to launch their drinks aboard the Space Shuttle Discovery in specially designed drinks dispensers. In the same year, the Coca-Cola Company answered the Pepsi Challenge with a much-hyped rebranded and reformulated Coke called New Coke. The backlash was famously huge and original Coke was reintroduced as Classic Coke.

As well as spending billions on advertising campaigns, the brands sought out celebrity patrons, injecting huge sums into sports and music in return for endorsements. Pepsi secured the services of Michael Jackson at the peak of his post-Thriller powers and branded itself as "the choice of new generation". Jackson setting himself on fire during the filming of one advert for the firm was perhaps a bad omen.

Perhaps the biggest marketing coup in cola history however, happened long before Jacko became a human torch for the Pepsi cause when, in the 1930s, Coca-Cola invented the modern day Santa Claus and dressed him to match the company livery. Today Coke still maintains a stranglehold on Christmas with its "holidays are coming" ad campaign.

The incessant battle has been fought across the globe and both companies now compete in around 200 countries. Coca-Cola dominates in most markets with exceptions in India (which it pulled out of in 1977 after the government ordered it to hand over its secret recipe and only re-entered in the early Nineties), Saudi Arabia, Pakistan (where Pepsi sponsors the national cricket team), the Dominican Republic, Guatemala and parts of Canada.

To lose out to Diet Coke has undoubtedly ruffled feathers at Pepsi HQ but the snub was not unexpected. Diet Coke is a huge brand with a long history. It was launched in 1982 and was the very first extension of the Coca-Cola trademark. Within two years, it had become the top low-calorie drink in the world.

In reality however, to concentrate solely on sales of cola drinks in relation to the Cola Wars is missing the point. Today there is a lot more to Coca-Cola Company and PepsiCo than fizzy cola. PepsiCo also owns a huge portfolio of products that includes Mountain Dew, Ocean Spray, Aquafina water, Lipton tea, Gatorade, Walkers crisps, Tropicana juices and Quaker cereals. In contrast, Coca-Cola also owns many other brands, such as Tab and Sprite, but they are predominantly in the carbonated drinks sector. And here is the crux – in the most profitable territories carbonated drinks is a diminishing market; a fact that PepsiCo predicted and reacted to first, diversifying successfully into more desirable products.

It was this foresight that led to Pepsi out-performing Coca-Cola for the first time in over a century before the economic downturn when, in the first half of the Noughties, PepsiCo stock rose more than a third while Coca-Cola Company's dropped by 30 per cent. PepsiCo retrenched, regrouped, and ultimately outflanked its old foe. It saw that demand for fizzy drinks was being eroded by demand for healthier options such as sports drinks and water and it invested accordingly.

So are the Cola Wars over? Did Coke win? PepsiCo is not planning to walk away from the battlefield just yet. It understands just as well as Coca-Cola that being locked in an eternal conflict keeps its brand alive. The relationship between Coke and Pepsi is symbiotic, without each other they lose relevance.

As Lauren Hobart, chief marketing officer of the sparkling brands division of PepsiCo says: "People love the Cola Wars. They identify themselves in many cases as 'I'm a Pepsi person' or 'I'm a Coke person.' The rivalry is just a very integral part of our heritage for both Pepsi and Coke.''

The war then is in part smoke and mirrors; a clever marketing ploy. Perhaps that's why, after the announcement that it had slipped to No 3 in the cola rankings, PepsiCo announced that it will spend 30 per cent more on advertising this year and plugged a headline-grabbing $60m sponsorship deal with the new X Factor launch in the US. Coke has been sponsoring the rival American Idol for a decade.

Like two heavyweight boxers the companies will continue to slug it out long after the bell has gone because that way, no other contenders can make a claim. Coke and Pepsi exist in a duopoly, they either buy out serious competition or render them irrelevant with marketing spend. There have been pretenders, such as Virgin Cola and the soon to be launched RC Cola, a US brand that will be sold in Asda, but eventually all-comers have to settle for small crumbs from the cake jealously hogged in the red and the blue corners.

Cola Wars: A Brief history

1886 Atlanta pharmacist John Pemberton invents 'Coca-Cola' and sells it for five cents a pop.

1888 Pharmacist Caleb Bradham invents 'Brad's Drink' in New Bern, North Carolina. He later renames it 'Pepsi-Cola'.

1928 Now available in 53 countries, Coca-Cola sponsors the Olympics for the first time.

1936 Pepsi tactically increases the size of its bottles to 12oz but sells them at the same price as Coke's 6oz bottles.

1963 Coca-Cola unveils TaB, a new diet cola. Initially popular, sales slump when scientists make links between sweeteners and carcinogens. PepsiCo launches its famous 'Pepsi Generation' ad campaign.

1971 PepsiCo negotiates a deal with the Kremlin to import Pepsi over the Iron Curtain. When Communism collapses, Pepsi's links with the Soviet regime prove unpopular, leaving Coke to dominate the Russian market.

1994 Richard Branson rides a tank into New York's Times Square to launch Virgin Cola, promising to do battle with Coke and Pepsi. The drink flops.