Pepsi, reaching for 7-Up, looks to add more juice to soda wars

PepsiCo and Coca-Cola -- which already clutter the supermarket shelves and the airwaves in their battle for dominance of the huge soft-drink market -- are on the verge of drastically reshaping the beverage industry in the United States. The expected purchase of the Seven-Up Company by PepsiCo, soft-drink analysts say, would be a momentous act, bringing it almost up to eye level with rival Coca-Cola, the Atlanta giant.

Coke now holds 39 percent of the market. A single percentage point equates to about $300 million in sales. The total market was valued at $26 billion last year.

PepsiCo, headquartered in Purchase, N.Y., holds about 27 percent of the market. By acquiring third-ranked Seven-Up (now owned by Philip Morris and based in St. Louis) Pepsi would add seven percentage points -- assuming the acquisition, if agreed to, is approved by antitrust regulators. Other factors have narrowed the Pepsi-Coke gap.

Many analysts believe Coca-Cola's 1985 marketing blunder with the original Coke formula (later renamed ``Coke Classic''), combined with Pepsi's successful new fruit juice product Slice, may mark a turning point.

``Once again the industry is poised for a very substantial tiff between two nontimorous souls. . . . There's no question that Pepsi had a great year. Coke stubbed its toe badly,'' says Jesse Meyers, publisher of Beverage Digest, a trade publication.

``If this marriage [between PepsiCo and Seven-Up] is completed, the major conclusion is the likelihood that a third market force is buried for all time.''

Philip Morris purchased Seven-Up in 1978 for about $515 million. But despite its considerable marketing expertise in cigarettes, Philip Morris was not able to make the company consistently profitable and had been looking for a buyer.

Seven-Up is expected to post a pretax loss of $5 million to $10 million on revenue of $720 million for 1985, according to Emanuel Goldman, a beverage industry analyst with Montgomery Securities in San Francisco. That would compare with operating income of $5.3 million on revenue of $734 million in 1984.

Mr. Goldman believes PepsiCo's expertise in soft drinks and its connections with bottlers would be much more likely to turn the company around.

``Pepsi two years ago had virtually no position in lemon-lime,'' Goldman says. ``Slice gave it an initial entry. It's just the beginning of a whole new lemon-lime segment. If Pepsi acquires 7-Up, it not only has a major entry, it goes from being a nobody to being the major player.''

Indeed, the idea pleases bottlers, whose franchises would increase in value, Goldman says.

Although cola drinks have traditionally dominated soft-drink consumption, there is growing interest in the long-sluggish lemon-lime category, which now constitutes about about 12 percent of the market.

Indeed, PepsiCo's discovery (with Slice) that people love carbonated drinks with real juice has had an impact that may eventually prove as significant as that of sliced bread -- at least in the soft-drink world.

Pepsi's Slice brand of lemon-lime soda with 10 percent fruit juice captured about 2 percent of the market last year.

Pepsi began a nationwide roll-out of its Mandarin Orange Slice brand on Monday. Close on its heels, Coca-Cola was expected to introduce four new national products yesterday, with a drink inspired by Minute Maid orange juice among them.

Analysts differ on just how big the fruit-juice soda business is going to get. Estimates range from a few percentage points of the total market to more than 20 points by 1995, according to Mr. Meyers.

In 10 years, he predicts, the market will have molded itself into four major classifications: carbonated beverages, with 40 to 60 percent of the market; juice and juice-added drinks, 15 to 20 percent; bottled water, 15 to 20 percent; and milk- or whey-based beverages, currently popular overseas.

But for now the heat is on between the two giants to capture a market thirsty for juice soft drinks.

Coca-Cola's juice move comes late, but its marketing power and strong ties to bottlers are expected to be powerful factors.

``I never argue against the Coca-Cola Company,'' Meyers says.

For the smaller players, there is little to do but watch and wait.

The Dr Pepper Company, for example, has had to accept Coca-Cola's new Cherry (flavored) Coke competing alongside its product for bottlers' attention. Although the taste is similar, the company decided not to insist that bottlers choose one or the other, lest Dr Pepper might be dropped.