Iran's Cola War (cont.)

By Eric Ellis, Fortune

Boycotts of American beverages are nothing new in the Middle East. Coke has endured persistent - and false - claims that its logo insults the Koran. Iran's diatribes against Pepsi were particularly shrill last July, when Israel clashed with the Tehran-backed Hezbollah in Lebanon.

Things have quieted since the end of the war, but the whispering campaign against Coke got so bad the company felt compelled to create a page on its Web site called "Middle East Rumors" to counter the myriad accusations.

But the fiercest battle is being fought in the marketplace, where Zamzam is defending its estimated 50 percent share of Iran's $1 billion in annual drinks sales, and Coke seems to have a clear edge over Pepsi.

Shopkeeper Shahgholi owns a store in downtown Tehran around the corner from the former U.S. embassy, today a museum displaying "U.S. atrocities" that draws few visitors. "Nine of out ten bottles I sell are Coke," he says. Sasan's Abadi says Pepsi and Coke share about 40 percent of the market, but Khoshgovar commercial manager Fahime Askari puts Coke's market share way ahead of Pepsi's. Reliable sales figures are hard to come by.

Coke may be the real thing in Iran, but you won't hear that familiar slogan here. Washington's rules forbid U.S. companies to provide their licensees marketing support in Iran. It wouldn't be welcomed anyway by the mullahs, who regard America-themed advertising as spiritual pollution. "Because of the relationship between Iran and America," Abadi says, "we are not allowed to advertise in public places."

A complicated past

The history of Coke and Pepsi in Iran is as chaotic and complex as the country's politics. Both companies were active here before the revolution, when Pepsi dominated the market through Zamzam. In the 1950s, Coke tied up in Tehran with Sasan (Pepsi's bottler since 2003) and with Khoshgovar, a private company owned by the Yazdi family that controlled distribution in Iran's eastern territory.

Though arriving late, Coke pushed ahead of Pepsi after an ayatollah issued a fatwa, or religious ruling, banning Pepsi because its franchisee followed the Baha'i faith, which is regarded as heretical by Iran's majority Shiite Muslims.

But Coke says it pulled out in 1978 as Khomeini's revolution was building. The following year the Shah was ousted, and then came the 444-day siege of the U.S. embassy, a time when Iranians risked reprisals for even being seen with U.S. products. Washington slapped sanctions on Iran during the hostage drama, but by 1991 they were relaxed enough to allow Coke to return, again with Khoshgovar in the eastern part of the country.

Khoshgovar wanted to capture the Tehran market and bought a brewery in the capital that had been shut down by the teetotaling revolution. But under pressure from the regime, it sold the site to a Tehran investment company, Noushab, which had close links to then-President Akbar Hashemi Rafsanjani, today one of Iran's richest men. In 1994, Coke licensed Noushab to sell its products in Tehran.

A year later U.S. President Bill Clinton tightened sanctions on Iran. That left Noushab with a new factory and millions of Coke bottles but no concentrate. Undaunted, Noushab devised its own syrups and filled Coke's bottles with them. An outraged Coke sued for trademark infringement in Iran and actually won a $5 million ruling, to the surprise of observers skeptical about the Iranian judiciary.

That didn't stop Noushab, leading to confusion in the marketplace when Clinton eased sanctions on foodstuffs in 1999 and Coke tied up again with Khoshgovar. For years Iran has been awash with Khoshgovar's genuine Coke and what looked like Coke in Noushab's real bottles.

Today, Iranians know that if Coke comes in plastic bottles, it's Khoshgovar's real Coke, but if it is in glass bottles, it's likely Noushab's faux Coke. Noushab declined a request for an interview, a company lawyer saying the group was "in turmoil."

How will this all play out? Sasan deputy CEO Saeed Jalilian sees a younger, richer Iran forcing out the cheaper and politically correct local brands like Zamzam in favor of foreign brands.

"People are more relaxed now, and consumers trust these brands," he says. "Lots of young people eat hamburgers. Fast food has changed their tastes." In 2006, Iranians drank an average of 95 bottles of soft drink, he says, which he sees rising to 120 by 2010. Germany, with a similar-sized population, consumes 195 bottles per person annually.

The threat of war with the U.S. doesn't bother Sasan either. Jalilian reckons that his company is a winner either way. If there's a war and the American brands are again banned, he says, Sasan will take over Khoshgovar's Coke market share with its local brand, Parsi Cola. And if there's peace - or a U.S. victory - the foreign brands will triumph. While the mullahs in the mosque might beg to differ as political winds again buffet Iran, they may not be able to do much about it.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.