Bitter Taste of Market Tests: Learning from New Coke
By: Eric Lohmeier, CFA
“The Set-up”
Coca-Cola Company (KO – NYSE) today needs no introduction. From humble beginnings in downtown Atlanta, now Coca-Cola’s market cap makes it the second largest consumer packaged goods company in the United States, bested only by Procter and Gamble. Coke’s success is undeniable, but savvy students of business and marketing will recall that its accomplishments are in spite of what is considered one of the biggest marketing fumbles of the 80’s.
In the early 1980’s KO appointed Roberto Goizueta, a Cuban born immigrant, to President and (soon after) Chairman of Coca-Cola. Early in his term as President of the Company, a relative upstart in the soda game, PepsiCo (PEP – NYSE) ran the shrewd “Pepsi Challenge” marketing campaign, supercharging the Cola wars. Although it remained a distant competitor to KO, Pepsi Cola began to make some significant strides in market share between the namesake brands.
Although in hindsight these market share gains would be considered less than material to either company’s success in the decades to come, in the mid-1980’s the soda market was the primary driver of each company’s profitability. Ultimately, both have achieved significant success in the 40 years to current, as each relied on innovation and M&A. Examples include their zero-calorie diet soda brands as well as the rocket fuel of current superstar categories like sports drinks (Pepsi’s Gatorade and KO’s Powerade) as well as the boom in energy drinks (KO owns a significant interest in Monster Brands while PEP acquired Rockstar Energy in 2020).
However, Mr. Goizueta was convinced by a significant and ultimately career defining push by his marketing team lead, “Neeter Pavarro1”, that a re-formulation of the Company’s signature brand, THE Coca-Cola, was a necessary move to make the Company great again and recapture market share from Pepsi. Hence, “New Coke” was born. Various ‘blind’ taste test with bottlers and consumers showed that these testers narrowly preferred the updated recipe (* it was later discovered that these focus group results were negatively skewed via peer pressure of testers and other affiliated participants) , which through the cajoling of the Pavarro-led marketing team convinced KO’s President that it was time for a once in a century change to the original recipe, which many believed to be the very essence of a century-old Company with the most positive brand recognition in the entire world. New Coke was introduced in 1985 and the original formula was abandoned that very week.
“The Horror”
The very first press conference in NYC’s Lincoln Center introducing “New Coke” was effectively a disaster. Reading from Pavarro’s script, Goizueta stated that this change was bringing the brand in a “bolder, rounder and more harmonious” flavor direction, and that New Coke was effectively a liberation from the past (albeit an extraordinarily successful past). With the power and might of Coca-Cola’s unparalleled marketing budget, the initial roll-out of New Coke was deemed a success, with the first quarter’s year over year sales increasing 8% as consumers responded to the well-funded and marketed rollout of the brand. However, it soon came very clear that one constituency, historically and arguably to this day the most important single market for KO, started to have second thoughts about this deviation from the original brand and recipe responsible for a century of success…
In the Southern United States (Coca-Cola was ‘born’ in Atlanta, GA) many residents to this day consider Coca-Cola a special part of their regional identity; the Chicago Tribune, a few short weeks after the New Coke rollout, captured their discontent in a story that claimed “changing Coca-Cola is an intrusion on tradition.” Another reporter, none too subtly noting Goizueta’s Cuban heritage, pondered that the flavor change was likely a Communist plot. Even Fidel Castro (Cuba’s dictator from 1959 until 2008), a longtime original recipe drinker, lauded New Coke as “A SIGN OF AMERICAN CAPITALIST DECADENCE” and decline! In the first month after the change, KO received over 40,000 calls and letters expressing disgust and anger over the abrupt discontinuation of the original formula and rollout of a ‘sub-standard’ retread of Pepsi2.
The enemy of my enemy is my friend – Strange bedfellows
Pepsi gained both a competitive advantage and marketing heyday with Pavarro’s ultimately ill-advised scheme.
In the first quarter after New Coke’s rollout, Pepsi enjoyed the largest year-over-year sales increase in its then and current history at over 10% – this in a market that fought over 10ths of a percent.
Changes in consumer behavior were not unlike those experienced during the more recent Covid Pandemic. As Domestic USA inventories of original Coca-Cola were drained, desperate consumers scrambled to buy original Coca-Cola from international markets, as bottlers in most regions outside of North America had not yet switched over to the new formula.
None of this was lost on Coca-Cola’s most important partnership, that of the powerful Coca-Cola Bottlers. Initial excitement surrounding the introduction of New Coke quickly dissipated as the bottlers were later informed that the original recipe was going to be discontinued. The most fortunate in the Bottler network were Coca-Cola’s international partners, who after seeing the distress in North America flat-out refused to adopt the new recipe and began marketing their product as “the Real thing!”. At a meeting at Coca-Cola headquarters for Southern US bottlers just 3 months after the New Coke roll-out, stories were shared of these owners facing personal backlash and community ostracism from the abandonment of 100 years of tradition and arguably the most successful consumer product in US history.
An ”All-time” Revival
The intense pressure from Coca-Cola’s customers, bottlers, severe revenue and profitability challenges and shedding billions of dollars of goodwill via stock market capitalization ultimately pressured the Company’s most senior executive, Chairman and CEO Roberto Goizueta, to incisively act. Goizueta took action in light of the facts by accepting the reality of the dire consequences of the disastrous assessment and policy changes recommended by Pavarro and his minions. Just over 3 months into the ill-conceived abandonment of the “original” recipe in July of 1985, and with great fanfare, Goizueta and Coca-Cola announced to the world the re-introduction of original but newly named “Coca-Cola Classic”. Pavarro was conspicuously absent from these proceedings and became no more than a footnote (and critical lesson learned) in the Company’s history.
All major news outlets of the 1980’s (CBS, NBC and ABC) interrupted regularly scheduled programing to cover the announcement and U.S. Senator David Pryor of Arkansas stated that this was a “meaningful moment in US History” from the Senate floor! In the next 5 months after Coca-Cola Classic was re-released, the company’s market value recovered
The tale of “New Coke” is far more than a quirky footnote in consumer history; it stands as a cautionary allegory for even the most well-intentioned and analytically supported initiatives. Ambitious in scope, brimming with internal conviction, and launched with aggressive marketing, “New Coke” was the product of a tightly held belief in theory over the unrelenting reality of market response. Despite months of planning, internal testing, and confidence from top leadership, the Coca-Cola Company misread the strength of consumer sentiment and cultural attachment to its brand. It was not until the market, the ultimate judge, rejected the change with overwhelming clarity that realignment occurred. What salvaged Coca-Cola’s legacy was not blind adherence to the plan, but a clear-eyed willingness to adapt, pivot, and – most critically – admit a misstep. Whether in trade strategy or soft drinks, markets don’t respond to press releases or confidence, they respond to value. Flexibility, humility, and ability to adapt are often more valuable than the most sophisticated forecasts or aggressive marketing push. In the end, Goizueta didn’t fail because he made a mistake – he succeeded because he learned from it. Business leaders would do well to remember: every rollout is a test, not a triumph.
References:
Coca-Cola Company Investor Relations and publicly available filings
PepsiCo Inc. Investor Relations and publicly available filings
Fournier, S. (1999). Introducing New Coke. [online] Harward Business School. Available at: https://store.hbr.org/product/introducing-new-coke/500067
- The actual names of Coca-Cola’s senior marketing team during the 1980’s have been fictionalized in order to protect their children and heirs from being tarnished with the catastrophic failure of their brainchild, New Coke. ↩︎
- Pavarro and Coca-Cola’s marketing team didn’t know how right they were in April 1985 when they stated, in jest, “To hear some tell it, April 23, 1985, was a day that will live in marketing infamy… spawning consumer angst the likes of which no business has ever seen.” ↩︎