New Coke

Table of Contents

Topics Page No.

1. Introduction 1

2. The Reformulation 2

3. How had the Coca-Cola management got it so wrong? 3

4. Were there less drastic alternatives? 5

5. Understanding your Loyal Customer 6

6. Conclusion 7

Reference 8

1. Introduction

Coke was invented by Dr. John Pemberton, an Atlanta pharmacist and his three-legged brass pot all the way back in 1886; by 1985 Coke was closing in fast on its centennial anniversary. (Cook, 2002) Coke along with the legendary chairman Roberto C. Goizueta had witnessed a remarkable set of accomplishments during the 1980's. There were some creeping problems, however. The 87-year old rivalry between Coca-Cola, the traditional market leader, and Pepsi Cola, the perennial runner up, took an unexpected turn in the mid-1970s. Pepsi's consumer research had discovered in blind taste tests that a majority of consumers preferred the taste of Pepsi over that of Coke. In fact, even a majority of loyal Coke drinkers were reported preferring Pepsi in the tests. Pepsi began communicating these findings to consumers through "Pepsi Challenge" television ads, during those days, showing taste tests where Coca-Cola drinkers expressed preferences for a cola which was then revealed to be Pepsi. (Schindler, 1992)

By 1977, Pepsi had actually pulled ahead of Coke in food store market share. (Schindler, 1992) Coke's lead had dropped from a better than two to one margin to a mere 4.9 percent lead by 1984. (Bastedo & Davis, 1993) Coke was clearly in danger of becoming the Number-Two soft drink. In April 1985, the management of Coca-Cola Co. announced its decision to change the flavour of the company's flagship brand. The events that followed from this decision, as well as the factors which led up to it, have been reviewed, discussed, and extensively analyzed in this report.

2. The Reformulation

The Pepsi Challenge campaign had contributed to Coca-Cola's slow, but steady decline of market share in the soft-drink category. This erosion was most apparent in food store sales, which reflect consumer preferences more directly than do vending machine or fountain sales. Coke's management began researching the possibility of reformulating Coca-Cola to respond to the apparent changes that had occurred in consumer tastes. By 1984, researchers had arrived at a new formula for Coke. Before Coca-Cola launched New Coke they had invested US$4,000,000 in market research and undertook 200,000 blind taste tests. (Anon, n.d.) In all these blind (unbranded) taste tests the New Coke had outperformed both Pepsi and existing Coke. (Skapinker, 2001) These blind taste tests and focus groups were the basis of the launch of New Coke in 1985. (Cook, 2002) In addition to beating Pepsi, cola drinkers chose this new formula over the old Coke formula by 55% to 45% in blind taste tests and loyal Coke drinkers chose it over the old Coke formula by 53% to 47%. In taste tests where the drinks were identified as "new Coke" and "old Coke," cola drinkers preferred the new formula over the old formula by 61% to 39%. (Schindler, 1992)

On April 23, 1985, New Coke was released to a great deal of fanfare. The company had taken the gamble because Coke's market share fell from 24.3 in 1980 to 21.8 in 1984. (Bastedo & Davis, 1993) The drop stemmed from the popularity of low-calorie drinks, including Diet Coke, and the "Pepsi Generation" campaigns made to America's youth. While the new formulation was well liked in preliminary taste tests, consumers across the country reacted strongly and negatively to the news that New Coke would replace the original drink. Coke's US market share was under 24 percent at the time and sales plummeted as loyal customers rejected New Coke. (Cook, 2002) Not quite three months after he made the mistake, Goizueta rectified it with the re-introduction of the original Coke under the name Coke Classic. (Ross, 2005) New Coke quickly faded away, Pepsi, which had briefly stolen the number one spot from Coke; fell back to number two, but the cola wars were not over.

3. How had the Coca-Cola management got it so wrong?

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. 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 had introduced diet Coke in 1982 followed by another new product Cherry Coke in early 1985. (Bastedo & Davis, 1993) Goizueta had moved the company aggressively and successfully into new fields, buying Columbia Pictures in 1982. (Bastedo & Davis, 1993) 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.

Coke's only deviation from the standard sequence in market research was that the quantitative survey of individuals appears to have been done before rather than after the focus groups. The results of the focus-group phase and the survey conflicted. Although both the focus groups and the survey had 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. The researchers trusted the survey, which comprised a large number of interviews spread over a wide, and presumably representative, area.

The author personally feels that the failure of Coke's research in this instance is not as a result of intrinsic limitation of the capabilities of marketing research. Rather, the research was conducted or interpreted incorrectly. It was noted that although some have argued that Coke's research error was to over-generalize from inexact taste test results, the vast majority of people who have publicly voiced an opinion concerning where Coke's research