Pepsi Beat Coke

With two decades of hindsight, it is clear that Coke won the battle against Pepsi to be the world's number one cola, but it may well have lost the war to become the more successful corporation. PepsiCo is now streets ahead of its age old rival.

One of the most famous quotes in marketing was made by Donald Keogh, Coke's former chairman, when he said: 'The truth is we are not that dumb, and we are not that smart.'

The legendary comment was in response to cynical journalists who had suggested that the company's withdrawal and then reintroduction of Coke's original formula was either a brilliant marketing ploy or an insanely stupid branding error.

Whatever its motivation, the tactic worked, and Coke emerged victorious from the precarious strategic position that Pepsi had cleverly manoeuvred it into. Since then, Coke and its various brand extensions have continually beaten Pepsi into second place in most carbonated beverage markets.

With two decades of hindsight, it is clear that Coke won the battle against Pepsi to be the world's number one cola, but it may well have lost the war to become the more successful corporation. Since the start of 2006, PepsiCo and Coca-Cola are almost identical in overall market capitalisation.

But ask analysts to nominate which is best placed for the future and most will choose PepsiCo. While Coke's share price has fallen by a third in the past five years, PepsiCo's has risen by the same amount.

Coca-Cola's competitive success in the cola wars of the 80s has now become its biggest weakness in the very different markets of the 21st century.

After Coke won the cola wars it continued to focus on carbonated beverages to the extent that 85% of its global profits still come from this category.

In contrast, PepsiCo licked its wounds 20 years ago and opted for a diversification strategy. Today, less than a quarter of its global profits come from its fizzy drinks.

PepsiCo now boasts 17 brands that each generate in excess of $1bn dollars a year globally. The corporation has an enviable portfolio of brands such as Walkers, Tropicana, Aquafina, Gatorade and Quaker that all operate in different categories with equal amounts of success. Coca-Cola may be used to the number-one slot in cola, but in the other growth categories that it competes in, such as sports drinks or bottled water, it finishes a distant second to a PepsiCo brand.

A divide is also emerging in the quality of marketing at the two corporations.

One of the great mysteries of marketing is the apparent halo-effect that Coca-Cola personnel engender within our industry. It is as inevitable as it is annoying to encounter marketers who are introduced with the hushed proclamation that they 'were once at Coke'.

Big deal. Based on recent performance, that should earn the aforementioned marketer a one-way ticket to the photo-copying department. Perhaps the most astonishing feature of 2004's Dasani-gate was Coca-Cola's denials that its inept marketing was in any way responsible for the downfall of the brand.

In contrast, PepsiCo's marketers look like the real thing and PepsiCo is rapidly emerging as a world-class marketing company. Operating multiple brands can confer many synergies and strategic advantages and PepsiCo marketers now excel in key areas such as distribution, pricing and brand management. Chief executive Steve Reinemund is currently maximising PepsiCo's scale, range and diversity by applying the reinvigorated 'power of one' strategy to distribution systems, retailer relationships and consumer promotions.

The greatest challenge of brand management is maintaining a focus on brand equity over time. For this, Coke deserve plaudits. An even bigger challenge, however, is running a company in which multiple brands target different segments in alternative categories. For this, Pepsi earns the accolades and, ultimately, the title 'Victor of the Great Cola War'.

30 SECONDS ON ... PEPSICO

- PepsiCo was founded in 1965 following the merger of Pepsi-Cola and snacks firm Frito-Lay. Tropicana was acquired in 1998 and PepsiCo merged with The Quaker Oats Company, gaining Gatorade in the process, in 2001.

- The company recorded an 11.3% growth in revenue in 2005 and it has more than 157,000 employees. PepsiCo brands are available in nearly 200 countries and generate sales of about $85bn (£49bn).

- Last week, PepsiCo reached an agreement to settle a lawsuit that accused Coke of false advertising for its Powerade Option sports drink. The ads suggested it offered more energy-enhancement benefits than PepsiCo's Gatorade. Coke agreed to pull one ad and modify a second.

- PepsiCo's 'power of one' initiative aims to use the strength of its brands and businesses to create customised solutions for retailers.

Body Shop's Brand Architecture Makeover

Fortunately for The Body Shop, general consumer ignorance of brand architecture usually outweighs short- term negative reactions to acquisitions. In a few months' time, Jenny will be persuading her friends to buy Body Shop soap rather than L'Oreal in total ignorance of the fact that, ultimately, it no longer matters.

One of the wonders of marketing is the continued ignorance of consumers when it comes to matters of brand architecture. Most shoppers remain totally unaware of the ownership of the brands that they consume.

For example, Charles looks down his nose imperiously as he overtakes a Mazda MX6 in his Aston Martin. It never occurs to him that both cars are ultimately made by the same company, Ford. Meanwhile, Tracey is in the Dog and Duck deciding between a Smirnoff Ice and a Baileys, ignorant of the fact the two drinks come from a single source: Diageo.

One of the few occasions when the average consumer is confronted with the realities of brand architecture is when major mergers or acquisitions suddenly alert the media and thus the mass market to brand ownership.

L'Oreal's successful bid for The Body Shop last week had a very mixed reception. Most analysts were positive about the addition of a masstige brand with strong equity and its own retail network.

Many consumers, however, were up in arms at the prospect of one of Britain's most ethical companies being acquired by a global corporation with decidedly unimpressive records when it comes to animal testing and sustainability.

It's not just an unfortunate coincidence that major brand inconsistencies exist in this case between the purchaser and its latest acquisition. While marketers might scratch their heads at two apparently contradictory brands joining forces, investment bankers would nod their heads vigorously. Acquisitional companies often actively seek out brands with different customers, operations and brand associations from their own holdings. So the very things that make the Body Shop acquisition a contentious issue for consumers make it a smart move for investors. Where a brand manager sees contradictions, an investment banker sees diversification.

Therein lies a problem. Because once the deal goes through, the investment bankers can head off for their next big deal, while the marketers are left with a big brand mess. There can be a massive amount of damaging inconsistent publicity to be nullified after a successful acquisition. To her credit, Body Shop chief Anita Roddick was playing her usual no-nonsense, media-savvy game last week by incorrectly labelling the deal a 'partnership' and reassuring the media that the brand itself was 'protected'.

Hopefully her actions will offset some of the damage that has been done to The Body Shop brand by the deal. Five years ago, when McDonald's took a stake in Pret A Manger for similar diversification reasons, the Pret founders were equally quick to defend the move by announcing 'We'll still be in charge - we'll have the majority of the shares. Pret will continue what it does and McDonald's will continue what it does.'

Unfortunately, this passionate, brand-centric statement from Pret drew an immediate response from McDonald's, which announced that this was not entirely true. 'We have an option to increase our investment and to fully acquire (Pret) over time,' was its terse, anonymous response.

Usually the problem is amplified when, as in the case of the Body Shop and Pret deals, the acquiring company is also a consumer brand in its own right. The best model when acquiring other brands is the 'house of brands' architecture exemplified by Diageo or Procter & Gamble. Both recently made major acquisitions, Bushmills and Gillette respectively, but because of the holding firms' lack of consumer brand equity, the deals were almost totally ignored by the consumer press.

Fortunately for The Body Shop, general consumer ignorance of brand architecture usually outweighs short- term negative reactions to acquisitions. In a few months' time, Jenny will be persuading her friends to buy Body Shop soap rather than L'Oreal in total ignorance of the fact that, ultimately, it no longer matters.

Millward Brown Optimor's Valuation of Brands

Next month global agency group WPP will launch an alternative brand valuation league table that will directly challenge Interbrand's calculations. The system has been masterminded by chief research officer Andy Farr and his marketing quant jocks at Millward Brown Optimor (MBO)

Last week I reviewed the Interbrand/BusinessWeek global brand league table and concluded that, despite its dominance, it has inherent weaknesses. This is not news to anyone who works in branding: most marketers accept that the Top 100 is an imprecise but important approximation of global brand equity.

But all this is about to change. Next month global agency group WPP will launch an alternative brand valuation league table that will directly challenge Interbrand's calculations. The system has been masterminded by chief research officer Andy Farr and his marketing quant jocks at Millward Brown Optimor (MBO).

The modelling work used to generate the valuations will be based on Brandz, the massive annual survey of more than 21,000 brands conducted by Millward Brown. The resulting table will be published in a special edition of the Financial Times each year.

There are many reasons to expect the Millward Brown system to be superior to that of Interbrand. First, Brandz gives it a key competitive edge over Interbrand's league table, which relies on global guesswork to evaluate brand strength. The Brandz data provides customer-based, empirical data drawn from different international samples of representative consumers.

Interbrand estimates; MBO measures.

Second, although there is nothing shoddy about Jan Lindemann and the valuation people at Interbrand, they simply do not have the horsepower of Andy Farr's team at MBO. Farr has been publishing academic-quality research on marketing investments for more than a decade and his team has been strengthened in recent years by the acquisition of Optimor and a string of impressive hires. While the marketing press is obsessed with the transient talent of creatives, the real strength of WPP is increasingly seen in the analytical and marketing minds that now populate the group.

Despite the size and stature of Interbrand's study, WPP and its deep pockets are committed to making the MBO system the industry standard in brand valuation. David Muir, Sir Martin Sorrell's right-hand man, is well aware of the client potential of operating the leading brand valuation system. Aside from the PR advantages and new-client impact, the new valuation method could come close to the holy grail of brand equity measurement.

Imagine Ogilvy, Hill & Knowlton or any of the other WPP agencies being able to demonstrate their impact on a client's business not just in consumer terms but by connecting it all the way back to the financial value of the company. The ultimate advantage of the MBO system is the potential to link brand strategy to the kind of balance-sheet impact that even a chief financial officer cannot argue with.

There is little doubt that MBO is about to launch a superior product to that of Interbrand. But as the incumbent leader in the valuation business, Interbrand is probably the only marketing services brand most non-marketing executives - the ones with all the power and the money - have ever heard of. Ironically the biggest challenge that MBO faces is now a branding one. Can it build a brand big enough to dislodge Interbrand? In the world of brand valuation, top-of-mind awareness is everything.

In marketing, direct comparisons are usually impossible. Agreeing on which ad is the best, for example, is inevitably a matter of subjectivity - often booze-fuelled. But in this instance, both Interbrand and MBO publish their findings using cold hard cash as their metric.

We are therefore about to enjoy the rare opportunity of directly comparing two different marketing approaches.

Will the MBO calculations deviate from those of Interbrand - and if so, who has got their sums correct? All will soon be revealed.