September 11-15, 2017

Size Wars

In one of the most memorable and oft-quoted scenes from the 1976 movie “Network,” TV news anchor Howard Beale is scolded by his company’s chairman: “You have meddled with the primal forces of nature! And you will atone!” 

Now, if you will, imagine the soft drink industry version of that scene today. Instead of Howard Beale, you have New York City Mayor Michael Bloomberg. And instead of the chairman, you have Muhtar Kent, Indra Nooyi, or perhaps the American Beverage Association’s (ABA) Susan Neely telling him how he’s meddled and will have to atone.
For that is really what the mayor has done, hasn’t he—meddled with the primal forces of the soft drink industry—by proposing to ban the sale of large sizes of sweetened beverages in the city’s restaurants, delis, movie theaters, street carts, fast-food franchises and stadiums.
After all, the size a Coke, Pepsi or other soft drink comes in has been one of the primary weapons these soft drink companies—and others—have yielded for more than half a century in their struggle to wrest every drop of sales and territory from one another. Mayor Bloomberg may not have realized it, but in his effort to use the powers of government to combat an ever-worsening obesity epidemic, he has inserted himself into one of the longest ongoing business battles in history.
The long-running battle between Coke and Pepsi over the past 50 years has experienced periods of low-intensity competition punctuated by one side or the other bringing out the big guns—many of which have had to do with packaging. 
These “Size Wars” can be traced all the way back to 1940 and Pepsi’s popular jingle: “Pepsi-Cola hits the spot/Twelve full ounces that’s a lot/Twice as much for a nickel, too/Pepsi-Cola is the drink for you”—part of a promotion where Pepsi sold twice as much—12 full ounces of Pepsi—compared with Coke’s six  ounces, but at the same nickel price. “The gauntlets were laid then for the Size War,” says Peter Sealey, whose career with Coca-Cola spanned from 1969 to 1993, ending as the company’s head of global marketing. “It really began at that point.”
And it has continued until today. Sizes of soft drinks have been manipulated over the years to convert customers—as in the Pepsi example above—boost sales, or, in the case of movie theaters today—as a means to survive.
If the mayor’s soft drink proposal is adopted as is expected by a vote of the city’s board of health this month (it could go into effect six months later, in March), some of the worst hit could be movie theaters. Today, most of their early box office returns go to the studios. And that is why the theaters rely on sales of candy, popcorn, soft drinks and other snacks for much of their income. Banning the sizes of sweetened soft drinks over 16 ounces could seriously impact their bottom lines.
And that is just for starters. Also badly hurt would be the mom-and-pop delis or bodegas that can be found all over New York City. Opponents of the mayor’s proposal point to the fact that while restricting sales in these smaller up-and-down the-street stores, one of its quirks will be that it will not apply to supermarket chains. Consumers looking for a sweetened packaged drink over 16 ounces will either bypass these mom-and-pop stores for the larger grocery store, which might be right next door, or of course, just pony up and buy a couple of smaller sizes. Another quirk, high-caloric Frappuccinos or other similar beverages found at establishments like Starbucks will be exempt from the ban since they contain more than 50 percent milk by volume.
Ironically not exempt will be Honest Tea’s best-selling item, Honey Green Tea. With its 35 calories per eight-ounce serving in a 16.9 ounce bottle, the drink is over the maximum 16-ounce package, 25-calorie-per-8-ounce cut-off of the proposed ban. Honest Tea co-founder Seth Goldman, who built his business on the premise of offering a more healthful option to consumers, was so thrown by the mayor’s proposal he took to writing a i>Wall Street Journal opinion piece in July listing the burdens it would put on his business. The piece received hundreds of comments. 
Goldman says Honest Tea is looking at potentially millions of dollars in costs to his company from the ban just by having to come up with new UPC codes, and possibly by having to order new bottle molds that would meet the new requirements. “It’s not like we picked some eccentric bottle size—500 ml is a standard size,” he says. “I kind of get a pit in my stomach as I think about what would happen if this went through. And we’re a more established company than many. But for a start-up company, then it can be devastating.”
Whether the Bloomberg administration listens to such complaints remains to be seen. “The Board of Health is in the process of reviewing comments and will then consider making modifications before the vote on September 13,” says Jean Weinberg, the health department’s press secretary. “Many people have spoken out on both sides of the proposal, and the board is taking every comment seriously.”
(The measure had yet to be voted on at press time).
She continues, “Sugary drinks play a unique role in the obesity epidemic. They provide no nutritional value and because they don’t create a sensation of fullness, people typically consume them in addition to the calories they get from food. Americans consume 200-300 more calories daily than 30 years ago, with the largest single increase due to sugary drinks.”
The Industry Fights Back
Being singled out for blame for the obesity epidemic, as Weinberg does above, is one of the things that has incensed the industry about the Bloomberg proposal. Most see the solutions to the obesity problem coming from working together with government and other officials to come up with solutions, not the government going it alone and restricting the choices consumers have when it comes to what and how they eat and drink. They point to such successes as the industry’s work with Bill Clinton to reduce the presence of sodas in schools, or with Michelle Obama to place calorie counts on the fronts of packages. That is part of the reason why the Bloomberg proposal came as a baffling surprise to many in the industry.
“We’ve said all along to Mayor Bloomberg or others, you want to do something meaningful in your city, we are willing to talk, but it’s not going to be bans on products or anything that looks like de facto regulation,” says Susan Neely, president & CEO of the ABA. “Pepsi’s domiciled in New York, Mayor Bloomberg talks to Indra Nooyi and Muhtar Kent all the time, and I can assure that they have only [said], ‘We want to work with you Mr. Mayor.’ So I think you have to ask the Bloomberg people why he thought it was going to be more constructive to punch everybody in the nose and have a press conference rather than work with us in a collaborative way.”
Weinberg, in response, says, “This proposal—like the workplace smoking ban and requirement that chain restaurants post calorie counts—was developed with a focus on improving the health of New Yorkers. Beverage industry representatives and others had the opportunity to comment at the public hearing and through written comments.”
To counter such proposals, whether it be like the New York City one, or the other proposals over the years to tax soft drinks, Neely says the industry has in place a “vast network across the country” of allies that spring into action when and where needed. “It’s not just bottlers and concentrate company employees,” she says. “It’s theater owners, and restaurants, anybody really who is involved in the food industry is part of a coalition whether it’s in New York or in another state. So we’ve got this vast network of people across the country who are opposed to this kind of onerous action that Bloomberg has proposed. And they’re ready to go at a moment’s notice.” 
Adds Tom Bené, chairman of the ABA Board of Directors and president of PepsiCo Foodservice, “Every one of us plays a critical role, from route drivers and plant workers to our sales teams and senior executives.” Bené says he is “confident about our chances to continue to win these fights against our critics who would try to make the beverage industry the ‘easy out’ to solving our nation’s obesity crisis. Ours is a team that plays offense and defense, and is ready to take on the challenges confronting us for the long term.”
Anyone in New York City this past summer could see that offense at work. The ABA was a driving force behind a campaign to portray Mayor Bloomberg’s soft drink size proposal as part of a dangerous trend towards the ‘Nanny State,’ where government makes personal decisions for its citizenry. Only, the face opposing the ban that New Yorkers saw was that of the more grassroots-appearing New Yorkers for Beverage Choices. Spearheaded by the ABA and other stakeholders who would be impacted by the ban, such as restaurants, movie theaters and bodegas, the group made its presence well-known, if not unavoidable, during the sweltering days of July. It did so on the city’s streets, in TV and radio ads, on mailers sent to homes, on movie theater marquees, at boisterous protests in front of City Hall, even on banners flown over local beaches on the Fourth of July. New Yorkers were able to make their displeasure with the mayor’s plan known by becoming members of this group, lending their names to supporting those impacted.
But given that the Board of Health is composed of Bloomberg appointees, it is expected any changes to the size proposal before adoption will be minimal at best. The industry’s strong response, however, was just as much for government officials in other parts of the country. “Of course that’s part of it,” says Chris Gindlesperger, the ABA’s senior director, public affairs. “But the other piece of that side of it is that as lawmakers in other communities look to New York to see what happens here, I think they should see that people don’t want this. New Yorkers don’t want this.” Polls have shown that the industry efforts have indeed been having an effect on public opinion, increasing the number of New Yorkers opposed to the proposal, Gindlesperger says. “National independent polling has also shown the majority of Americans don’t support it.”
In fact, the ripple effects of the NYC proposal are being felt as far away as Iowa. “I’m very concerned,” says Kirk Tyler, president of Atlantic Bottling Co., a Coke bottler based in Atlantic, Iowa, who also sits on the board of the ABA. “People read and they see things and try them. And obviously with New York being in the headlines, it draws a lot of attention. But I think we’ve demonstrated pretty well that we can mobilize our employees, our constituents, the people we do business with and educate them on why this is not a good thing.” 
Neely says the ABA’s legal team will be exploring all options if the New  York proposal is adopted as expected. (See this month for an article exploring the possible legal arguments the industry has at its disposal.)
A Fundamental Tool
Sealey, Coke’s former head of global marketing, recalls a study he once conducted at Coke where several hundred families were supplied with all the soft drinks from The Coca-Cola Co. they wanted for free. “We’re simply going to stock your pantry. And we did that for a period of six months and measured the impact of different size drinks in the pantry,” he says. 
What they discovered is the larger the package size, the more frequency of drinking occurred. With the smaller package sizes, people were reluctant to open a new package.
“So package size became a fundamental marketing tool and we discovered some people had greater packaging loyalty than they had brand loyalty,” he says.
The result over the years is that package sizes have been changed to boost fountain sales, create channel-specific sizes that are more profitable, and wrest loyalty away from one brand to another. “So what Bloomberg did was throw a gauntlet down to one of the most fundamental marketing elements the soft drink guys had to play with and therefore they have to pull out all stops to fight it,” says Sealey.
Ironically, the mayor’s proposal comes at a time when the industry is already struggling from declines in consumption of its full-calorie soft drink offerings. Says Michael Bellas, chairman and CEO of the New York City-based Beverage Marketing Corp. (BMC): “The publicity over this has been immense and rather dramatic and that alone would likely hurt the industry in the eyes of many consumers.”
Adds his colleague, Gary Hemphill, managing director and COO of information services at BMC: “It’s one more strike on a category that’s already under duress. Consumption’s been declining for seven consecutive years now and is likely to decline this year as well. So it just makes for an increasingly challenging environment. 
“People use the phrase, ‘death by a thousand paper cuts,’” Hemphill says. “This is a bigger paper cut than the average paper cut.”   
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