OAK BROOK, Ill. -- McDonald's, which has exclusively sold Coca-Cola products at its restaurants since 1955, has started offering noncarbonated beverages made by Pepsi at some outlets, reported the Associated Press.
Dave DeCecco, a spokesperson for Purchase, N.Y.-based PepsiCo Inc., confirmed that selected McDonald's outlets are offering Gatorade, Propel Fitness Water, Lipton Iced Tea, Tropicana orange juice and Mountain Dew. The outlets will not sell Pepsi or Diet Pepsi, he said. McDonald's is selling the Pepsi products in bottles, cartons and cans and [image-nocss] not as fountain drinks, DeCecco added.
News of Pepsi's involvement with the pilot program was first reported Monday by Advertising Age online. Oak Brook, Ill.-based McDonald's launched the program in two Texas cities last May and later expanded to the Kansas City, Mo. area, according to that report.
"Where consumers have freedom of choice, like they do in [convenience] stores, that's where you see Pepsi have a lead," one executive with long ties to Coke told Ad Age. "It's fountain that tips the scales for Coke, and it's McDonald's that tips the fountain scale."
So the potential is still there to chip away at Coke's fountain sales at the chain if consumers opt to go with the bottled or canned Pepsi products instead. The executive speculated that should McDonald's take the program national, it would take only 90 days to see Coke volume freefall.
"This to me is the beginning of the end," he said, estimating that McDonald's contributes as much as 10% of Coke's North American profit. If "10% of your cash flow in North America [flips] from Coke to Pepsi," the executive said, Coke's share leadership "will unravel. That's what c-stores have already found out."
Results have been encouraging enough to expand to additional markets with advertising planned for this summer, executives close to the situation told Ad Age. McDonald's declined to comment on where the test is going to expand.
Coca-Cola controls 42.9% of beverage sales in all domestic channels, followed by PepsiCo's 31.2% and Cadbury Schweppes' 14.9%, according to the report, citing Beverage Digest. Much of that lead is driven by fountain sales, where Coke controls 70% of the channel and gets a third of its domestic sales and profit. Pepsi, meanwhile, has only 20% of fountain sales.
But in all four take-home channels (supermarkets, drug chains, c-stores and mass merchants other than Wal-Mart, Coke and Pepsi run almost neck and neck, with 35.9% and 34.5% shares, respectively, the report said.
Some 25 million gallons of Coke's fountain volume is sold at Burger King each year, according to an industry executive. In the recent past, McDonald's domestic volume was more than three times that and possibly more than 100 million gallons today. The executive said that if PepsiCo's Gatorade were put on the fountain, it could easily sell more than 30 million gallons annually, making it Pepsi's biggest fountain account.
Making the competition even keener is the fact that carbonated soft drinks have declined two years in a row, with the latest year volume down 1.1% to 1.5%, according to two industry reports cited by Ad Age. Aside from energy drinks, Pepsi brands lead all the fastest-growing segments, including water, sports drinks, and ready-to-drink teas and coffees. With consumer choice accelerating the decline of carbonated soft drinks as other beverages grow and Coke's innovation programs performing sluggishly of late, Coke's foothold has become increasingly vulnerable.
But there is also the fact that "restaurants don't want to be in the [single-serve] business," BevMark president Tom Pirko told Ad Age, adding that fountain is four to five times more profitable than the bottles and cans McDonald's is now testing. "The fountain system is pure gold. They have no choice. If they don't do it, they lose business."
"It's all about giving people more choices, particularly when it comes to product variety, portability, and health and wellness," said a Pepsi-Cola North America spokesman in a written statement cited by Ad Age. "We're pleased to be working with McDonald's, and we hope consumers respond favorably to this test."
Despite the expanding cracks in the relationship, McDonald's executives have been steadfast that, no matter what, its partnership with Coke will continue. "We value our relationship with Coke," a McDonald's spokesperson told Ad Age. "They are a preferred beverage supplier."
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