How it began

 Caleb Bradham invented a formula for the first Pepsi-Cola soft drink in 1893. By 1931, Pepsi was suffering its second bankruptcy. Fast-forward to 2018, the company now called PepsiCo reported a turnover of $62.525 billion with a market capitalization US$155.9 billion.

Caleb came from a well-to-do family graduating at University of North Carolina. In his second year at the University of Maryland studying medicine, his father’s business failed. Caleb had to take a job moving to New Bern, North Carolina. His love for medicine stayed with him and when the town’s pharmacy came up for sale, with no capital and no credit history, Caleb convinced the owner to sell him the business based solely on credit.

The local pharmacy was more than a modern day Boots or CVS. In those days it was also a meeting place and Caleb’s friendly personality brought customers back on a regular basis. A soda fountain was a common feature where they served their customers soft drinks. Caleb was good at mixing new soft drinks and sometime in the 1890s, he created Pepsi Cola.

 Cola was in the name after the African kola nut used in some drinks for its caffeine content. However, Pepsi Cola did not contain either the kola nut or any caffeine, but tasted similar to the already popular Coca Cola. Pepsi or pepsin is an enzyme, which aids in digestion and was a popular ingredient in early soft drinks (and chewing gum). There has been some dispute as to whether or not the original Pepsi Cola actually contained pepsin as an ingredient.

Filing for a trademark on August 28, 1898 Pepsi Cola came into being. Taking on an assistant to manage the pharmacy Caleb focussed all his energy on Pepsi. In the first three months, he sold 2,008 gallons of Pepsi Cola syrup. Moving production from the drug store into a bigger facility by 1904 Caleb was selling 19,848 gallons a year. Expanding rapidly by 1910 he had 280 bottling franchises and covered at least 24 states. Selling nearly 400,000 litres of syrup a year, and in 1915 Pepsi had assets of over $1,000,000 – success!

War in Europe in 1914 sent the price of sugar soaring plunging Pepsi into a loss making business. Caleb believed once war ended things would return to normal. Finally, when price controls were lifted sugar prices jumped even higher quadrupling in two years. Customers would not pay more than a nickel (5 cents) for their soft drinks, losses continued. Taking the decision to hedge against future price rises Caleb bought huge amounts of sugar as prices peaked at twenty-six cents per pound. With a large quantity of sugar in his stores, Caleb watched the price fall back to two cents per pound. Losses compounded and despite all his efforts to raise capital nothing worked. By March 2, 1923, “The Pepsi Cola Corporation” was bankrupt. Caleb Bradham died aged 67 unaware his beloved cola brand would eventually be a huge global success.

Following the bankruptcy in 1923 creditors formed a new company and purchased all of the assets including the Pepsi Cola brand name, trademarks for $30,000. This enabled the creditors to sell the business for $35,000 to Roy Megargel who formed Pepsi Cola Corporation. Roy was a Wall Street Trader who had made a lot of money. Unable to attract investors he went on to run the business for eight years without making a profit. Then as so often happens in life more bad luck arrived in the form of the Wall Street crash in 1929. No longer able to cover Pepsi Cola’s losses June 8 1931 Megargel filed for Pepsi’s second bankruptcy.

Charles G. Guth was in the candy and soft drink business. A wealthy man he too lost a lot of money in the 1929 stock market crash. However, Guth was a canny trader managing to take control of a candy store operator called Loft Incorporated. Loft had about 200 outlets each with a soda fountain selling over 100,000 litres of Coca-Cola in one year. On the strength of this important business, Guth asked Coca Cola for a bigger discount they turned him down. Not happy Guth retaliated by expanding into the soft drinks manufacturing buying Pepsi Cola trademarks out of bankruptcy. Guth already knew Megargel after he approached for help in baling-out Pepsi-Cola. Using some very creative – if not dodgy accounting, Guth managed to finance the purchase using cash he “borrowed” from Loft Candy Stores, while keeping ownership of Pepsi Cola separated from Loft.

As part of a deal with Guth, Megargel was given shares and a salary. For three years, the business traded making a loss and Megargel did not receive a penny in wages. At one particular low point, Guth approached Coca Cola to see if they wanted to buy the business but they turned him down. Loft Candy Stores were the main customer buying half of Pepsi-Cola’s syrup. Problem was customers preferred Coca Cola and this resulted in Loft losing 30% of their soft drink sales. Coca Cola brought an action against Guth for denying Loft customer their preferred choice of Coca Cola but the suit was dismissed.

When Megargel took court action over non-payment of salary, it soon became apparent he could put Pepsi back into bankruptcy if he pursued the action. Deciding on a more pragmatic solution, he agreed to sell his own Pepsi-Cola shares back to Guth for thirty five thousand dollars. Guth, who was personally broke, “borrowed” the money once again from Loft. Had Megargel hung in for longer he would have been a lot richer!

Hampered by lack of brand recognition, in 1934 Guth took a radical decision. Recognising he was unable to compete head to head, he went for better value by selling Pepsi Cola in 12oz (355ml) bottles at the same price as Coca Cola’s 6.5oz (185ml) bottle. The result was a huge success. Sales expanded rapidly, needing more space Guth converted one of Loft Inc.’s warehouses into a bottling plant. Facilities belonging to Loft were hi-jacked to meet Pepsi Cola’s growing demand even seconding some of Loft’s employees. By 1938, Guth signed up Pepsi Cola franchises throughout the USA, transforming the balance sheet from a loss into a four million dollar profit.

Problem was none of the profit benefitted Loft Candy Stores. Guth was CEO of Loft while virtually all of his time and energy was devoted to Pepsi Cola. To make matters worse profits at Loft fell from $366,000 to $21,000 in three years. This ended when a whistle-blower leaked to the Loft board of directors it was their cash that bankrolled Pepsi Cola.  Following a dramatic and protracted court battle, Loft Candy Stores won control of Pepsi Cola and eventually the two companies merged into one business called the Pepsi Cola Company. The story of Guth and Loft battling over Pepsi has all the makings of a great TV drama!

Following an interim CEO and more boardroom shenanigans, a new man called Walter S. Mack became President and Chief Executive Officer of Pepsi Cola. If Loft had not won the court action their profits in 1939 would have been $1.5 million. Instead, they made about $28 million.

On taking over running the company, one of Mack’s first challenges was to deal with a legal battle brought by Coca Cola for trademark infringement. Coca Cola claimed they had won cases against other manufacturers for using the word cola. An article appeared in the press saying how Coca Cola had won a similar case against a firm in New Jersey called Cleo Cola forcing them out of business. The odds of Pepsi getting a different ruling in court looked slim.

A day after the newspaper article appeared Walter Mack received a call unexpectedly from the wife of Cleo Cola’s president Mrs Herman Smith. She told him Coca Cola would eventually put Pepsi out of business the same as they did to her husband’s business. Mrs Smith then said she still had a photograph of the cheque handed over by Coca Cola in settlement. Speechless by this revelation Walter Mack who had plenty of experience with the law knew immediately what this meant for them. Later in his biography No Time Lost, he wrote, “I could hardly believe what I was hearing. My mind was racing. What Coca Cola had done, in effect, was to buy the decision, and they had perpetrated a fraud in court by not disclosing it.” Making it very likely, they had done this in previous settlements.

Straightaway Pepsi’s lawyers submitted a copy of the cheque as an exhibit in the trademark dispute case asking Coca Cola’s lawyers why had Cleo Cola been paid $35,000. Shocked into action an adjournment was requested then a meeting arranged between Coca Cola President Robert Woodruff and Pepsi Cola’s Walter Mack. Over lunch at the Waldorf Towers, the two men agreed a settlement drawn up on Waldorf stationary ending the trademark dispute forever.

Walter Mack could now focus on the business and from here on the company grew fast into what they have become to this day. By concentrating on new forms of advertising, he laid the foundation for what we take for granted as completely normal promotions. Working with New York’s Newell, Emmett &Company, they devised characters such as “Pepsi and Pete,” two police officers similar in style to the very popular Keystone Kops. These two cops appeared in advertisements everywhere and the public immediately associated Pepsi Cola with them wherever they were seen. About the same time, Pepsi Cola launched what is regarded one of the most famous jingles ever written. “Nickle, Nickle” (later known as “Pepsi-Cola Hits the Spot”)

“Pepsi-Cola hits the spot 

Twelve full ounces, that’s a lot 

Twice as much for a nickle, too 

Pepsi-Cola is the drink for you.” 

Unbelievably corny to our ears this jingle was recorded in fifty-five different languages, over one million records containing this jingle were produced and the first jingle ever played from coast to coast on network radio. This jingle was huge and very popular for nearly a decade. It is hard for us to imagine just how many people chose to buy Pepsi because of this one jingle.

World War II brought the same dilemmas faced by Pepsi Cola’s inventor Caleb Bradham. After Pearl Harbour and US entry in the war, Walter Mack ordered two years’ worth of sugar to hedge against expected price rises. Almost immediately, the United States government as a contribution to the war effort seized half, followed up by quotas being set limiting soft drink companies to 80% of the sugar they had used the year before. Not to be out done Mack bought sugar in Mexico, converted it into a syrup and had it delivered to his warehouse in the US. Since sugar purchased in Mexico was not taking sugar away from other Americans, Mack expected this to be acceptable. They got away with it for two years until the government declared Mexican syrup was actually sugar and stopped the imports. Not to be defeated Mack switched strategy buying a sugar plantation in Cuba; unfortunately, he could not import that sugar either. Ironically, the plantation was hugely profitable earning Pepsi a lot of money.

After the war ended, Walter Mack dealt with issues similar to those experienced by founder Caleb Bradham. This time it was a rise in costs in general and not sugar supply. Profits halved in one year 1947 to 1948. Walter Mack continued as Pepsi Cola President until 1950. By now his business errors were compounding and the board of directors and investors made the decision to make him Chairman and to appoint a new President. Alfred N Steele (husband of movie star Joan Crawford) became the new company President. The rest as they say is history leading on to the multi-billion dollar business PepsiCo is today. It seems such a shame the inventor of Pepsi Cola Caleb Bradham, died believing his beloved brand Pepsi-Cola was lost forever.

NOTE: I am planning to write a series of articles, each one featuring a well-known brand examining early success and inevitable failures. If you find this first article interesting I welcome feedback/likes.

Many thanks David Raven

Recommended further reading:  Odyssey Pepsi to Apple John Sculley and John Byrne.

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