Class 4: Mini-Case New Coke versus Coca-Cola

1. Why did new Coke fail so miserably in 1985?

2. Why do you think Cokes rivals (like Pepsi) capitalise upon the mistake?
"God, What a Blunder: The New Coke Story By Michael Bastedo Angela Davis
True Cokeaholics know the mystic ritual well. Only one source of the murky brown
elixir is acceptable: the traditional, 6 1/2-ounce bottle. No cans, please, and
certainly none of those plastic jugs. The bottle is refrigerated for at least two hours
and a wide-mouthed glass is filled with ice--preferably five full-sized cubes. The
bottle is uncapped slowly, reverently, its contents allowed to trickle gently over the
ice until the glass is filled: too much foam squanders carbonation. The glass is lifted
and--eureka!--the tongue rejoices at the familiar, hearty, tingly, raspy, 99-year-old
taste--neither sweet nor tart, a taste that is both complex and unique. And all too
soon, as the last desperately hoarded supplies of Old Coke disappear, it is a taste
that will tickle American palates no more. (1)
In what Pepsi Cola-USA president Roger Enrico called, "the Edsel of the 80's," (2)
the introduction of New Coke represents one of the greatest marketing debacles of
the 1980's. How did this happen, and why?
The Story
Coke began with Dr. John Pemberton and his three-legged brass pot all the way back
in 1886; by 1985, Coke was closing in fast on its centennial anniversary. Coke (and
Coke chairman Roberto Goizueta) had witnessed a remarkable set of
accomplishments during the 1980's: the acquisition of Columbia Pictures in January
1982 and the introduction of diet Coke later that August were foremost among them.
There were some creeping problems, however. Most distressing of these was the fact
that Coke was losing market share to its biggest competitor, Pepsi. Coke's lead had
dropped from a better than two to one margin to a mere 4.9 percent lead by 1984.
In supermarkets, Coke was now trailing by 1.7 percent. (3) Coke was clearly in
danger of becoming the Number-Two soft drink.
This was despite the fact that Coke was far outspending Pepsi on advertising, by
upwards of $100 million per year. One major problem was that Pepsi's advertising
was simply more effective. The Pepsi Challenge had been fabulously successful:
Pepsi's share jumped 8 points almost immediately. (4) Even worse, the tests were
true: in blind taste-tests, Coke drinkers preferred Pepsi. At first Coke ads tried to
laugh off the Challenge: "They called our product 'Q' and their product 'M' and you
know people like the letter 'M' better." When that didn't work, the philosophy
changed to, "One sip is not enough." Apparently, Coke tasted better only when you
drank a full glassful. (The whole is greater than the sum of its parts in Cokeland.)
Finally, Coke was forced to conduct taste tests of its own, but here they clearly
identified the two colas. Coke won. (5)
Coke's lead in the cola market was tenuous at best. As we said before, Coke was
trailing in supermarkets by 1.7 percent, which represented a third of Coke's total
sales.

Coke's domination was largely continued by its greater availability. The difference in
share, according to Coke's own market research department, was that if someone
wanted Pepsi, she might only find Coke. Essentially, Coke's market share was being
saved by McDonald's and Hardee's. "Everyone at Coca-Cola knew that in the
coming years that situation would change, and the result was too shocking to
imagine." (6)
There was a turning tide in the upper echelons of Coca-Cola management. Roy
Stout, head of market research for Coca-Cola USA, put it this way:"If we have twice
as many vending machines, dominate fountain, have more shelf space, spend more on
advertising, and are competitively priced, why are we losing share? You look at the
Pepsi Challenge, and you have to begin asking about taste." (7)
rian Dyson, president of Coca-Cola USA, was swayed. "Maybe the principal
characteristics that made Coke distinctive, like its bite, consumers now describe as
harsh...[m]aybe the way we assuage our thirst has changed." (8) By the fall of 1983,
the top brass allowed Dyson and Stout "to explore the possibility of a
reformulation." (9) Dyson chose Sergio Zyman, senior vice-president of marketing of
Coca-Cola USA, to head the project.
Much of the market research conducted between 1983 and 1985 on a the possibility
of a new Coke was discouraging. One set of focus groups said that Pepsi could
improve its formula, but the answer to a Coke reformulation was a resounding NO.
"It was like saying you were going to make the flag prettier," said Zyman. (10) In
other focus groups, there was another problem. When asked, "What is your favorite
drink?" most people said, "Coke!" When asked, "What do you drink?" the response
was shocking: sometimes Coke, sometimes Pepsi, sometimes even a generic if it was
on sale. As Thomas Oliver puts it, "There appeared to be a disturbing gap between
what people said and what they did." (11)
But in September 1984, they thought they had found the answer. The technical
division had brewed a formula of Coke that beat Pepsi in blind taste- tests, by as
much as 6 to 8 points. Before, Pepsi had beaten Coke by anywhere from 10 to 15
points. This was an 18-point swing. "The minute we had the product, Coca-Cola
USA said let's set it in motion," said Dyson. (12) All discouraging market research
was tossed into the rectangular file.
On April 23, 1985, New Coke was released to a great deal of fanfare. By the middle
of June, people were "Saying 'No' to New Coke." (13) Reaction to New Coke was
swift and humiliating. The taste of New Coke was likened to "sewer water,"
"furniture polish," "Coke for wimps," and, most disheartening to Coca-Cola
management, "two-day-old Pepsi." (14) "I miss the battery acid tang," said one.

Cokeaholics began stockpiling Old Coke in their homes. Black marketeers sold Old
Coke for upwards of $30 a case and were looking for ways to import it from abroad.
Some desperate addicts had the drink shipped to them from Montreal by FedEx.
One Hollywood producer rented a $1,200 wine cellar to hold his 100 cases of Old
Coke. The Old Coke Drinkers of America logged 60,000 calls to their national
headquarters. (15)
The mere idea of changing Coke provoked some of the more virulent responses.
Here's a sample:

"like spitting on the flag" (16)

"At first I was numb. Then I was shocked. Then I started to yell and
scream and run up and down." (17)
"I couldn't have been more surprised if someone had told me that I was gay,"
said one husband and father of two. (18)
"Changing Coke is like God making the grass purple or putting toes on our
ears or teeth on our knees." (19)
"When they took Old Coke off the market, they violated my freedom of
choice. It's as basic as the Magna Charta, the Declaration of Independence.
We went to was in Japan over that freedom." (20)
"There are only two things in my life: God and Coca-Cola. Now you have
taken one of those things away from me." (21)
"Next week, they'll be chiseling Teddy Roosevelt off the side of Mount
Rushmore." (22)
The Mistakes: If it ain't broken, don't fix it!

In a country dedicated to consumption, Coca-Cola has been the most successful

product in history, the undisputed leader of the $25 billion soft-drink industry. (23)
A number of adjustments have been made in Coke's proportions of sugar and caffeine
since 1886. But its secret flavoring formula never before had been changed. Unlike
almost every other product ever built or brought, the one thing it never was was
new. Overhauling the ingredients of a popular product "happens all the time,
whenever you see 'New and Improved' on a label," noted Montgomery Security
analyst Emanuel Goldman. "The difference with Coke is that this is one of the most
successful products in the history of the world." (24)
The company took the gamble because Coke's market share fell from 24.3 in 1980 to
21.8 in 1984. The drop stemmed from the popularity of low-calorie drinks, including
Diet Coke, and the "Pepsi Generation" campaigns made to America's youth. "With
aging baby boomers increasingly concerned about their weight and turning to
nonsugar drinkers, most growth in the sugar segment was expected to come from the
teen drinkers. Coke needed to increase its appeal to the young." (25) Coke decided
to court teen-agers by sweetening the recipe and calling it "new" Coke. Essentially,
Coke got boxed in. Pepsi had positioned itself as the "leading edge" soft drink and
called its consumers the "Pepsi Generation." As Pepsi USA President Roger Enrico
explains, "For twenty years, we've used this Pepsi Generation campaign to reach out
not just to the young but to all people who look forward, who are curious about the
next think, who want more out of life." (26) Coke represented the past, nostalgia,
small towns, parades, picnics, American values. "There are still a lot of people in
Coke's America. But their numbers aren't growing." (27) The problem was that this
image would not necessarily appeal to the younger constituency of soft drinkers who
would dominate the market.

Were there less drastic alternatives? It could have simply changed its campaigns to
give Coke a younger image. Image is probably more important than taste in selling
soda pop. If Coke was determined to change the recipe, it could have done it
without letting anyone know. Alternatively, a New Coke could have been introduced
without knocking out Old Coke off the shelves. But the company considered, and
rejected, plans to keep the old-formula drink in circulation under the name Coke 100
or "original" Coke. Why did they make the most drastic move?
The one central mistake in Coca-Cola's decision to change the formula was
maximization. When Goizueta became chairman in 1981, he was determined to be
the chairman of change. He promised there would be "no sacred cow in the way we
manage our business, including the formulation of any or all of our products." (28)
His aggressive attitude helped reinvigorate what had become a sluggish company.
Goizueta started shattering tradition early in his tenure. Putting the sacred Coke
name on a new product for the first time, he introduced diet Coke in 1982. In early
1985 he put the Coke name on another new product, Cherry Coke. Goizueta had
moved the company aggressively and successfully into new fields, buying Columbia
Pictures in 1982. "He has breathed new life into the company," says William
Meyers. "They needed that, but now...they are tinkering too much." (29) Goizueta
and the other executives were getting caught up in the success of their previous
changes and decided to make one grand decisive move to recapture the soft-drink
market they were losing to Pepsi.
An American Institution
The taste question was crucial to Coke. But what Coca-Cola executives fail to
realize is that "there's more to marketing soft drinks than winning taste tests. More
than any other product...consumers have an emotional attachment to their soft drink
brand..." (30) Even Gay Mullins, the Seattle man who formed Old Coke Drinkers of
America, failed repeatedly to identify or prefer Old Coke in taste tastes. For most
people, Coca-Cola was the quintessential representation of Americana. "Baseball,
hamburgers, Coke --they're all the fabric of America." (31) When Coca-Cola
announced that it would bring back Old Coke, Democratic Senator David Pryor of
Arkansas, called Coke's capitulation "a very meaningful moment in the history of
America. It shows that some national institutions cannot be changed." (32) As
Coke discovered fiddling with the formula of the 99-year-old beverage was an assault
to patriotic pride; something akin to burning the flag. "We did not understand the
deep emotions of so many of our customers for Coca-Cola," said President Donald R.
Keough. "It is not only a function of culture or upbringing or inherited brand
loyalty. It is a wonderful American mystery. A lovely American enigma. And you
cannot measure it any more than you can measure love, pride or patriotism." (33)
Coca-Cola executives should have known that they were playing a very tricky game
in changing Coke. When the firm first came out with 10-oz, king size bottles in the
mid-1950s, many drinkers were beside themselves. "People raised hell with me and
said it didn't taste the same," said Crawford Johnson, president of Birmingham's
Coca-Cola Bottling Co. United. 'I told them, 'We put the same ingredients in it
that we put in the little bottle.'" (34).
One Rotten Apple Spoils The Whole Bunch!
Coke's market research on the reformulation was one of the most exhaustive market
research projects in the history; it cost $4 million and included interviews with

almost 200,000 consumers. Coke's management made sure that the taste test results
were checked and corroborated in every major market in the country. What went
wrong? The particular question which most frequently has arisen is why Coke's
extensive market research was unable to provide management with better guidance in
the reformulation decision. When announcing the reintroduction of old Coke in July
1985, Coca-Cola executives suggested that research is not capable of measuring the
types of consumer feelings that resulted from the attempted reformulation. However,
most observers did not attribute the failure of Coke's research in this instance to an
intrinsic limitation of the capabilities of marketing research. Rather, they judged
that the research was conducted or interpreted incorrectly. Although some have
argued that Coke's research error was to overgeneralize from inexact taste results,
the vast majority of people believe Coke's research efforts went wrong with what has
been called the "wrong question explanation." (35) This explanation argues that the
reason that Coke's marketing research did not detect the consumer outcry which
resulted from the reformulation was that they did not make it clear to the taste-test
respondents that if most people chose the new Coke flavor, then the traditional Coke
flavor would no longer be available.
Since the intense publicity has died down, some further details of the research behind
the new Coke decision have come to light. Specifically, it is now known that CocaCola's market research department did indeed ask the right question. In fact,
considerable attention was devoted to testing consumer reactions to the idea of
changing Coke's flavor. Coca-Cola consumers were asked a long series of questions
about what their reactions to such a change would be. Would you be upset? Would
you try the new drink? Would you switch brands immediately? "We estimated from
the response that 10%-12% of exclusive Coke drinkers would be upset, and that half
of those would get over it, but half wouldn't." (36) To center in on the debate,
Coca-Cola's research department used focused groups, a favorite marketing tool.
"While the interviews pointed to people's willingness to try a new Coke many people
just didn't believe anyone could or should tamper with the king of colas." (37)
For the most part, Coca-Cola followed standard market research procedure for the
development of a new product or the modification of an existing one. Begin with
focus group testing of the product concept, and then a survey would be conducted,
using individual interviews with a large representative sample of consumers, to verify
and quantify the results of the focus groups. Coke's only deviation from this
standard sequence is that the quantitative survey of individuals appears to have been
done before rather than after the focus groups. But this is a minor point. The
problem was that the focus group phase and the survey conflicted. "Although both
the focus group and the survey provided indications that there would be consumer
dissatisfaction, the survey results indicated that this dissatisfaction would be limited
to a small segment of the market; the focus groups suggested the dissatisfaction
would be widespread." (38) However, it is standard market research practice to trust
survey research over focus groups. Moreover, Coke's research did a pretty good of
predicting consumer response, at least initially. When the reformulation was first
introduced, the consumer response was favorable. But by the end of May 1985, it
had begun to change. It was this that Coca-Cola had not anticipated. They were
well aware that they might alienate some faithful Coke drinkers as mentioned earlier,
but the company expected that alienation to fade. It was completely unprepared for
how it would spread and deepen in the two months following the debut of the new
Coke. "It is this change in consumer opinion, and only this change, that Coke's
market research had failed to predict." (39)

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The conflict between the focus group and the survey of individuals is crucial. As it
turned out, one can see that both procedures had provided important information.
"When New Coke was first introduced, people made individual decisions on it, and
most at least acquiesced to the change. But over time, as the majority of the
population had the opportunity to be stimulated by the media reports and other
social interactions with angry Coke loyalists, most changed their minds." (40) This is
what was predicted by the focus groups. Given the 10%-12% figure from the
quantitative survey, a typical eight-to twelve focus group is likely to have at least
one angry loyalist as a member. The focus group results showed that, in this
situation, exposure to the views of angry Coke loyalists is likely to sway the others in
the group to their position. "By July 1985, Coke executives had sensed that this
social interaction was a major factor in causing their problems; it was reported in
Advertising Age that Coke officials were blaming the press for " fanning public
discontent." Of course, by then it was too late. Coke had already ignored the
research that told them how the market would respond to a flavor change carried out
in a public context." (41)
Why not two Cokes?
There were a number of reasons for this. First of all, the bottlers let it be known
that they were not interested in adding another product to an already bloated line.
Coke had just added Diet Coke, Caffeine-Free Diet Coke, Caffeine-Free Coke and
Cherry Coke. The top brass was also pushing for the addition of Diet Cherry Coke
and Minute Maid Orange Soda. These new products increased bottler costs
tremendously.
Coca-Cola management was also worried about the interplay between two flagship
brands. They were worried that a new Coke would simply cannibalize the sales of
old Coke, which would in turn allow Pepsi to become America's Number-One Cola.
A new Coke would invite "invidious comparison" between the two Cokes in the
media and the public that would ultimately hurt the sales of both brands. And
which brand would McDonald's choose? What problems could this cause?
Ultimately, Goizueta decided that the costs of two Cokes far outweighed the benefits
and steeled himself to the fact that old Coke was going to have to go.
Why wasn't anyone fired?
This is a very intriguing question. Even after the consequences and repercussions of
this blunder were analyzed, no one at Coke was reprimanded, much less fired. The
same top management team of Goizueta, Keough, and Dyson continued for a number
of years until Dyson moved on to head Coca-Cola's company-owned bottling
operations. Why was no one held accountable?
There are a number of reasons. First of all, the fact is that Coke did not lose money
as a result of this fiasco. In fact, the stock price jumped from 61.875 to 84.500, a
35.5% increase. By early 1986, the stock had reached an all-time high of $110
million. Goizueta was rewarded with $1.7 million for 1985 in salary and bonuses, and
was additionally awarded with almost $5 million in bonus for the increase in stock
price. President Keough's wage was potentially more than $3 million. (42)
According to Coca-Cola's 1986 proxy statement, these awards were given for:
"singular courage, wisdom and commitment in making certain decisions in 1985
which entailed considerable business risks, the net result of which has been, and will
continue to be, extremely beneficial to the shareholders of the company."
Herbert A. Allen, president of Allen & Co. and chairman of Coke's compensation
committee said that, "They had the courage to put their jobs on the line, and that's

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rarely done today at major American companies." (43) (Apparently the quality of
their decisions is irrelevant.) Roger Enrico argues that a mass firing would
essentially put everyone at Coca-Cola on notice that risk-taking is punished; worse
performance would certainly result.
The top brass were also helped by a system of diffuse responsibility. While Zyman
and Dyson were set up to head "Project Kansas," as the New Coke fiasco was called,
everyone, including Goizueta and Keough, was involved in the decision-making. By
no means did Dyson or Zyman go off on their own without the express consent and
encouragement of the CEO. Even Robert Woodruff, the patriarch of Coke and its
president for over two decades agreed to the reformulation. Essentially, Coca-Cola
management had no one to blame but themselves.
So what?
Coca-Cola's marketing disaster of attempting to change the formula of its flagship
brand has some important lessons for the making of public policy. First,
constituency analysis is extremely important because you never want to alienate or
abandon your base. When Coca-Cola did its market research it knew that it would
alienate 10%-12% of its faithful drinkers. But they figured that the alienation would
fade away. What they did not count on was that this alienated core would stir
discontent that would lead them to have to reintroduce Old Coke. So when making
public policies you never want to alienate your base, lest they bite off your toes.
Second, some things cannot be measured by taste tests, opinion polls, or market
research. Whether its Coca-Cola or some cherished public policy, if it becomes
ingrained as an American institution it will be very difficult to almost impossible to
try to change it. For example, back in 1987, President Reagan offered a new
insurance program to help the eldery pay for the devasting costs of acute illness.
Congress quickly embraced Reagan's proposal. Lawmakers tacked on even more
benefits which were to be paid for with a surtax on all senior citizens and passed
what became known as the 1988 Medicare Castastrophic Coverage Act. The law
seemed to please everyone, Democrats and Republicans took pride in improving
health care coverage for an important constituency. Everyone was happy.
Everyone, that is, except the seniors. Many didn't want the new benefits and few
wanted to pay for them. And so after so quickly enacting the law in 1988, Congress
spent 1989 in retreat, trying to manage an avalanche of protest from wealthier
retirees who resented the surtax. Congress finally voted to repeal the law on
November 22, 1989, only sixteen months after Reagan had signed it into law.
Happy Accident?
Coca-Cola had an essential and demanding problem as it entered the 1980's:
declining market share. What should Coke have done to fix its problem? Luckily,
Coke had the data it needed. They knew that their product was competitively
priced, universally distributed and well-advertised. The intuitive response would be
that Coke did not have an image problem, it had a substance problem (read: taste).
However, the research was also telling them that they absolutely could not change
the taste of Coke and live to see the light of the following day. What was the
solution?

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Coke had image AND substance problems. First of all, they knew that people were
saying they loved Coke, and yet they didn't always buy it. America's Favorite
Drink was being taken for granted. Yet it was still true that people, in blind tastetests, simply liked Pepsi better. Which was the easier problem to solve? Image.
How did Coke solve it? By working on substance.
It would be nice to think that Coca-Cola management had been smart enough to
realize that a blunder of massive proportions was in order. Alas, it was just a happy
accident. For one summer, Coke made headlines all across the country. People
organized to save their "favorite" drink. They even tried to file a class-action suit.
Best of all, people were reminded what they favorite drink was and that it could go
away.
Ultimately, Coke won the Cola Wars with a megabrand strategy that Pepsi couldn't
beat. Pepsi's flagship brand might be Number-One, but Coke was still rolling in
more dough. Coke still has more shelf space, more fountain outlets and more
advertising. Coke's stock price shot through the roof in a big payoff for shareholders
and executives. Thank God for happy accidents.

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