How Sugar Caused Pepsi to go Bankrupt


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The great commodity crisis of World War I wrecked havoc on industries globally, but few firms saw their business so thoroughly capsized as did the early Pepsi-Cola Company.

Soaring sugar prices, critical supply disruptions, failed market speculation, and an inflexible business model proved a toxic cocktail of economic forces against which the soft drink upstart stood little chance.

This is the story of how in only a decade, the ambitious Pepsi soda enterprise rose from a single North Carolina pharmacy and then crashed suddenly into bankruptcy when global events well beyond its control conspired to turn its prime ingredient—sugar—into liquid gold.


Battle in WW1
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World War I caused extreme volatility in global sugar prices and supply, which directly contributed to the downfall of the early Pepsi-Cola Company.

At the start of WWI in 1914, sugar traded for around $5 per 100 pounds on U.S. commodity markets. Yet by 1920, prices had spiraled to over $15 per 100 pounds—nearly triple the cost only six years prior.

Several factors coalesced during the war years to constrain supply and spark this extraordinary price inflation.

Wartime rationing became common, as sugar supplies from abroad were hampered when producing countries like Cuba and Hawaii were disrupted by the conflict's trade blockades and shipping lanes were stretched thin meeting military needs.

Moreover, the American public was pressured to conserve sugar for the war effort. With global and domestic supplies shrinking rapidly against demand, prices were sent soaring.

For Caleb Bradham and his young Pepsi-Cola firm, still in its first decade of operation, this sugar price shock proved catastrophic.

As a fledgling company subsisting on razor-thin margins in a cutthroat marketplace, Pepsi did not have the financial reserves or production control of a long-established firm like Coca-Cola.

When Bradham's costs tripled almost overnight due to forces entirely outside his control, it spelt disaster.

With sugar constituting a predominant ingredient in his syrup formula, Pepsi-Cola's very business model was thrown into jeopardy when sugar became a scarce and prohibitively expensive commodity during the Great War.


sugar cubes used in Pepsi
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On top of market forces already wreaking havoc on prices, in 1918 the United States Food Administration implemented compulsory sugar rationing along with price controls in an attempt to tame volatility.

While likely conceived as a stabilization measure, these wartime policies ultimately only exacerbated Pepsi-Cola's predicament.

With rationing curtailing supply even further and centralized price-setting disrupting normal market mechanisms, procuring the quantities of affordable sugar necessary to produce syrup suddenly became an even more unpredictable enterprise.  

For years the Coca-Cola Company had cornered the soda fountain syrup industry with its secret formula protected behind a veil of ruthless in-house production.

But the nascent Pepsi-Cola firm had no such vertically integrated operations in place, having to source all its ingredients externally on the open market.

So while its rival could adapt through internal supply and pricing adjustments, Pepsi was left fully exposed to an externally hazardous climate where prices swung wildly on a restricted supply.

Imposed rationing and pricing directives only made navigating this business landscape more fraught with uncertainty.


Ship delivering sugar
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Further exacerbating domestic uncertainties, global sugar supply channels were seriously disrupted by the war's impact, which cut off the United States from many of its traditional import sources.

At the turn of the 20th century, over 75% of sugar consumed in the U.S. was imported from abroad, with a heavy reliance on tropical exporters like Cuba, Hawaii, and the Philippines.

However, trade blockades, naval warfare cutting off shipping lanes, and overall economic turmoil in exporting countries stemming from the First World War severely hampered global import flow.

With its major sources suddenly constrained, and rationing already restricting domestic production, the American market was gripped by a supply-demand imbalance that made sugar scarcity and extreme price spikes inevitable.

For a company like Pepsi trying to sell a 12-ounce bottle of sweet soda syrup for just 5 cents retail, massive cost inflation on the key ingredient of sugar quickly erased what little profit margin existed.

The war may have been fought overseas, but its economic impacts resonated everywhere.

Ultimately, through both direct and indirect means, the far-reaching upheaval of World War I reshaped global sugar markets to the detriment of one young soda firm.


vintage view of Wall Street
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Speculating on the wildly fluctuating sugar prices was a major reason behind Pepsi-Cola’s 1923 bankruptcy.

Revealing that the company did not effectively safeguard itself from price volatility, but rather attempted to make speculative gambles on the sugar market to its own detriment.

Without fixed-price supply contracts secured ahead of time, Pepsi’s production costs were held hostage at the whim of external market swings.

In opting to bet on an unpredictable global commodity market rather than negotiating stable contracts, Caleb Bradham and his managers essentially took a huge unnecessary risk.

For a major ingredient they had no control over, at the mercy of extreme wartime distortions, they chose a strategy akin to gambling over one favoring business fundamentals.

Once wartime sugar price inflation exploded beyond all expectations, their speculative bets imploded.

By trying to game their sourcing, without assurances their production expenses could be contained, Pepsi-Cola’s management directly engineered the financial undoing of their previously prospering company.


A Coca-Cola owned sugar plantation
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While speculation and lack of supply contracts landed Pepsi in hot water, its main competitor Coca-Cola was far better insulated from ingredients market turbulence thanks to the company's significant internal sourcing capabilities through owned sugar plantations.

By directly cultivating and refining a substantial portion of the sugar vital for its signature syrup, Coca-Cola exercised much greater control over both supply and costs compared to Pepsi-Cola's total reliance on external purchase in a volatile open marketplace.

This degree of vertical integration provided a major buffer when sugar prices went haywire globally during WWI.

Since Coca-Cola could cover a large share of its sugar input needs through its own crops and production, it did not have to immediately pass higher market prices through to their consumers.

Pepsi enjoyed no such insulation.

For every tick upward on the commodity exchange, Pepsi had to pay ever-higher amounts to outside suppliers, rapidly squeezing margins.

This cost control advantage for Coca-Cola proved a key differentiator allowing it to weather turbulent times that drowned its competitor. With its survival dependent on many unpredictable factors entirely outside the firm, Pepsi-Cola struggled to stay afloat.


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When sugar costs rapidly escalated during WWI, Pepsi tried to keep its bottle price anchored at 5 cents retail to remain affordable to everyday consumers.

But with sugar constituting such a substantial proportion of product costs, this price point allowed almost no cushion against rising input prices in the production process.

When sugar tripled in cost over just a few years, it completely eliminated the tiny profit margin on a 5 cent bottle.

The company was simply unable to pass increased sugar costs through to customers and raise the nickel price, as it feared being undercut by competitors like Coca-Cola that had more flexibility on margins.

Bradham felt enormous pressure to defend Pepsi’s market share, built on its reputation for value. But with its cost structure so vulnerable, by trying to maintain an ultra-low retail price in line with past campaigning, Pepsi had nowhere to go but bankruptcy.

In the end, the business model was not designed to withstand acute pressures at such scale.

With wartime sugar inflation persistently inflating expenses, while revenue remained static, the losses were unsustainable by 1923.

The proud commitment to their 5 cent price point, however important for branding and sales, is what ultimately did in Pepsi-Cola during the sugar crisis of WWI.