Coke's The Real Thing For Wendy's

Posted: October 16, 1986

DUBLIN, Ohio — Wendy's International Corp. yesterday said it was making a $1.6 billion switch from Pepsi to Coke at its fast-food restaurants, ending a 17-year relationship with PepsiCo Inc.

Wendy's said it was dropping Pepsi products from the menu at its company- owned outlets because PepsiCo's push into the restaurant business has made the soft-drink company a competitor of Wendy's.

"They, in effect, are a competitor of ours, and that is a conflict we just cannot stand," said Paul Raab, a spokesman for Wendy's.

The company also said it would urge its franchises to make the switch. The franchises are free to serve what they choose.

Wendy's, the nation's third-largest hamburger chain after McDonald's and Burger King, said it would begin serving Coca-Cola Co.'s products within two months.

The announcement will have little immediate effect on PepsiCo's overall soft-drink sales. But if other restaurants follow Wendy's lead, PepsiCo's aggressive stance in the restaurant business just might end up costing it more than it might have anticipated, analysts said.

Andrew Christon, a principal of Ippolito Christon & Co., an Atlanta

financial-consulting firm, said Wendy's decision was "the latest round in the 'cola wars' and an additional indication of the potential consequences of PepsiCo's willingness to dilute its historic identity as a soft-drink company by diversifying further into the highly competitive but potentially lucrative fast-food business."

"The other players in the fast-food business are increasingly aware of, and sensitive to, PepsiCo's emergence in the fast-food business," he said.

McDonald's serves Coca-Cola, while Burger King has Pepsi-Cola. Burger King said late yesterday it would stick with Pepsi-Cola.

Ken Ross, a spokesman for Pepsi-Cola USA's headquarters in Purchase, N.Y., said PepsiCo was disappointed to lose Wendy's, which had been "a close friend and valued customer for over 17 years."

Pepsico officials also said Wendy's was offered "a substantial amount of money" to drop Pepsi and termed the deal "a desperate move by Coke to slow our movement in the food-service business."

Ross also contended that McDonald's was the recipient of Coca-Cola's "best service and best ideas."

"We believe that Coca-Cola and its business partner, McDonald's, is the real competition for all restaurant chains in the United States, and we believe that when Wendy's gets full exposure to its new supplier, Coca-Cola, they may well reconsider today's move," he said.

Sales of soft-drink syrup to Wendy's company-owned restaurants represents 2.5 percent of PepsiCo's domestic fountain volume - which, in turn, accounts for one-fifth of the company's overall soft-drink business, Ross said.

Sales to all of Wendy's restaurants, including franchises, represents less than 1 percent of all of PepsiCo's domestic soft-drink volume, he said.

Robert Barney, chairman and chief executive officer of Wendy's, said PepsiCo "went one step too far" when it bought the Kentucky Fried Chicken chain of 6,500 restaurants.

The $850 million acquisition, coupled with its Pizza Hut and Taco Bell chains, made PepsiCo the world's largest fast-food chain in number of restaurants, with more than 14,000.

Wendy's International owns 1,212 Wendy's in the United States. There also are 2,270 U.S. Wendy's franchises and 135 international ones.

"The number (of lost PepsiCo sales) is very small initially. Who's to say that it won't balloon, particularly as competition heats up?" said George Pierides, an analyst with Standard & Poor's Corp.

"Certainly, there is some sort of conflict of interest," he said.

But Emanuel Goldman, an analyst with Montgomery Securities in San Francisco, said: "It looks like an over-reaction on Wendy's part. I would be very surprised to see it develop into anything significant."

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