From the beginning, it's always been a matter of finding the right mix for Gatorade — the right formula of athletes, of sports properties, line extensions and retail distribution, and the right ingredients. Nearly a quarter century later, the Quaker Oats sports drink is a model of effective brand management and sports marketing, with a commanding market share of around 80 percent.
Yet, the most recent questions are still about finding the right formula. Since Pepsi bought Quaker Oats in August for $14 billion, the biggest issue is whether the combination of Pepsi and Gatorade will yield a mix that's not only potable, but profitable.
While soda growth is as flat as a Coke opened yesterday, Gatorade gives Pepsi the overwhelming market leader in a growing sector of the beverage business. However, Quaker Oats' disastrous purchase of Snapple shows how difficult combining beverage brands can be. Quaker bought Snapple, another leading non-carb, for $1.7 billion in 1994 and sold it for $300 million in 1997.
Early on, the Pepsi/Quaker deal won praise for the perceived synergies in distribution and manufacturing. The manufacturing processes for soda and Gatorade, though, are completely different. Pepsi's bottlers would need to add expensive equipment to achieve the "hot fill" process used to make Gatorade.
As for the supposed distribution efficiencies, Pepsi appeased federal regulators by selling its All Sport sports drink to Monarch beverages in July. It then mollified Monarch by agreeing not to use the powerful Pepsi distribution system in shipping Gatorade to retail for 10 years.
The real benefits in the relationship between Pepsi and Quaker Oats probably lie outside of Gatorade. Pepsi's Frito-Lay division now has access to Quaker's expertise in things like rice cakes and granola bars. If the desire for good-for-you products ever hits the snack food market the way it has transformed the beverage market during the past five years, that will be important.
And there's no distribution agreement preventing Quaker-branded snacks from being loaded on trucks bearing the name Frito-Lay, which commands an even more dominant share of salty snacks than Gatorade does of sports drinks.
There are many more manufacturing and distribution synergies with Pepsi's Tropicana brand. Quaker Oats cereals, which include Captain Crunch and the flagship Quaker Oats line, combine with Tropicana to give PepsiCo an impressive share of America's breakfast table.
There is also talk of Pepsi creating marketing efficiencies with Gatorade. The first indication of that came in September when PepsiCo consolidated $350 million in billings on Gatorade, Tropicana and Aquafina water from Interpublic Group-owned ad agency Foote Cone & Belding to a yet-unnamed shop at Omnicom.
The reason: McCann-Erickson, another IPG agency, works for Coke. The negative is that Gatorade's creative was among the best in the business, from "Be Like Mike" a decade ago to more recent work. In one campaign, Vince Carter of the Toronto Raptors went one-on-one with a dinosaur.
However, in other marketing areas, Pepsi is promising to keep its distance.
"We are staying separate," insisted John Galloway, Pepsi's new sports marketing chief. "We've both got strong brands that are best off operating independently."
Given the escalating cost of property rights, there may be a temptation to combine in an attempt to save money. But Gatorade has a compelling reason to go it alone in those areas as well: 75 percent of the properties Gatorade has agreements with also have deals with Coke.
"As far as the way we approach consumers, staying separate is the way to go," said Gatorade sports marketing chief Tom Fox.
So aside from the ad agency switch, it has remained separate. Both Pepsi and Gatorade have strong sports marketing departments, with some of the glossiest properties in America. And there are already some obvious overlaps. Shouldn't Gatorade be where Aquafina is, on NCAA hoops and MLS sidelines? Should Tracy McGrady and Chris Webber be drinking Pepsi's Code Red after playing ball, as they do in a current spot, or Gatorade?
The nascent Pepsi parentage also gives rise to natural questions of whether Gatorade's size makes it even a little bit vulnerable. So-called "functional beverages," including energy drinks and nutraceuticals, that sport a basket of health claims have drawn a lot of recent consumer attention.
In addition to buying Gatorade, Pepsi expanded outside of soda by buying SoBe beverages last year. Even under the Pepsi umbrella, SoBe has its own competitive sports drink, though it really is a trifle as far as being competitive with Gatorade.
Still, the positioning of SoBe Sports System and the recent ramped-up activities on behalf of Coke's Powerade and drinks like Red Bull give some indication of Gatorade's vulnerability, at least from a positioning standpoint.
Competing marketers have taken note: Gatorade is now establishment; it's almost as mainstream as Coke.
"Grandma's buying it for the kids playing soccer; construction workers and the guy that mows your lawn drinks Gatorade now," said former NFL Properties President John Bello, who co-founded SoBe Beverages and built it to a $200 million-plus brand before selling to Pepsi last year for $370 million. "So sooner or later, anyone looking for cutting edge is going to look for something else."
That means more targeted beverages with the same kind of edgy positioning you've seen from Powerade recently. For any competitor to mount a real challenge, it will have to build patiently and become such a part of sports that its authenticity is unquestioned.
Gatorade is also deeply intertwined with grassroots youth sports, athletic trainers and research.
"Gatorade doesn't just stick coolers out there," said Chris Malone, principal consultant at Zyman Marketing Group, who worked as a Powerade marketer during his three years at Coke. "I never saw any other company, whether it was Coke with Powerade or Pepsi with All Sport, willing to devote that level of resources and commitment to building and owning that category."
For all the money the sports drink category uses to build sports associations and grassroots ties, its secret is the same as the sneaker industry — it's really used more in nonathletic occasions. Eight of 10 sneakers aren't used for athletics, and "people grab sports drinks for badge value," Malone said.
