PepsiCo celebrates the 50th anniversary of its business operations in the Middle East this year but never has the brand's future in the region been so at threat. Mark Rowe reports on the company's success so far and wonders if another half a century can be achieved.

Pepsico, which is marking 50 years of operations in the Middle East, finds itself at something of a crossroads. An all-American company, in a region where anti-Americanism has rarely been so widespread, it faces several challenges to ensure that it will continue to operate successfully in the Middle East for a further half a century.

George W Bush's self-styled "war on terror" and the Iraq War have intensified trenchant viewpoints across the region in recent months. As an easily identifiable American company, Pepsi has been faced with the quandary: does it keep its head down, or continue to operate as near to normally as circumstances permit?

Some economic figures offer encouragement. Pepsi and Coca Cola still account for half the regional market for carbonated soft drinks. During the third quarter of 2003, according to the company's financial reports, international growth was 8%, with the Middle East cited as a major contributor to that figure. However, PepsiCo declines to specify exactly how the Iraq War affected sales. Independent analysis from the Economist suggests that its sales volume is down by 9% in the region and that, in the past year, "overall business at western fast-food and drinks firms has dropped by 40% in Arab countries. Trade in American branded goods has shrunk by a quarter." According to Datamonitor, the business information company, PepsiCo and Coca-Cola have lost market share from Egypt to Saudi.

"There is still a significant backlash from developing countries and the Islamic world against America," said John Band, consumer analyst with Datamonitor. "And PepsiCo is a big American brand that is associated with globalisation. I'm not sure the sentiment is against Pepsi itself, but it applies more to what it represents."

While sales of Pepsi and Coca-Cola have dropped in the region, sales of cola drinks are increasing. A major reason has been the emergence of Islamic equivalents, in the form of Mecca Cola, Star Cola (up by 40% in the United Arab Emirates) and Zamzam Cola, the last of which was, ironically, the Iranian partner of Pepsi Cola until that country's 1979 Islamic Revolution. Zamzam Cola, sweeter than its competitors, ships millions of bottles weekly to Saudi Arabia and struggles to meet demand in Iran.

Brand feels that PepsiCo may be able to counter ZamZam's success. "Sweeter tastes in cakes and tea are popular in the Middle East and PepsiCo could make their drink sweeter," he suggests. "They may also look at Coca-Cola in India, which brought the local brand Thumbs Up and so makes money from selling cola products, even though Indian nationalists may not buy Coca-Cola. I don't think PepsiCo could get away with buying a headline brand but it could buy up a local company, or set its own one up."

Yet Pepsi remains the leading brand in its field in the region and has suffered less from the boycott than its great rival, Coca-Cola, since it entered the regional market just after World War Two and has not had to deal with the decades-long Arab boycott issue with Israel.

"Pepsi is simply less of a headline brand and so attracts less attention than Coca Cola," said Band. "It has tried harder to get involved with local companies and countries that don't necessarily share the opinions of American governments."

Ironically, while perceived as all-American corporations, both Pepsi, which employs 8,000 people in the region, and to an even greater extent, Coca-Cola (which employ more than 20,000 people in the Middle East, with 22% of its worldwide unit case volume sold in the region last year) are not insignificant regional employers. Pepsi buys commodities, such as sugar, locally and its distribution vehicles come from local agents; it has a bottling partner in the Palestinian Authority area that employs 320 people. Pepsi is also using philanthropy to try and secure hearts and minds. At the World Economic Forum in Jordan earlier this year, the company pledged 20% of its Middle East corporate citizenship and philanthropy budget (it would not specify the sum involved) to IT related projects. PepsiCo Middle East and Africa will donate an additional US$1,000,000 to a fund for education involving youth in the region.

However, Saad Abdul Latif, PepsiCo's President - Middle and Africa Division, admitted this has not halted the boycott: “We have strived and succeeded in employing some of the best available Arab talent, which has allowed us to better understand and therefore serve the needs of the local community. In countries such as Jordan, Lebanon or Egypt the majority of our workforce is drawn from the local population and we are among the biggest single employers in these countries." That said, one industry source told that the intrinsically American character of Pepsi's products, which is most often an element of its appeal, is now the reason for them being boycotted."

It is difficult to effectively pass on the message that Pepsi's products are actually locally produced, by local business partners, who get hurt most by the boycott,” he said."

Will PepsiCo be around in the Middle East in another 50 years? Political developments in the region are so fluid as to make predictions unwise. "It's impossible to say what will happen," said Band. "My judgement is that it is likely that Pepsi and Coca-Cola will still be made and reasonably popular in the Middle East in 50 years. But who can say what will happen over the next five years or so. They need to be cleaner than clean and steer clear of any scandals."