By CONSTANCE L. HAYS

               THE heart of the affluent Las Mercedes neighborhood in Caracas, Venezuela, got a 150-foot
               artificial Christmas tree this year. The avenue around the tree was blocked off last month so
          that thousands of people from the Venezuelan capital could be brought in to watch Santa Claus
          arrive on a Coca-Cola truck, scattering souvenirs to all.

          "For many of the kids and people from the barrios who don't have shoes or shirts in any kind of
          repair, it was the first time you'd seen them in this area," said Brent Willis, president of the
          Coca-Cola division that oversees Venezuela. "When Santa Claus came in, they got to see the free
          celebration, and nothing comes for free to these guys."

          Similar trees and mass gatherings are planned in scores of villages across the country. The Christmas
          campaign, aimed squarely at what Willis refers to as "the hearts and minds" of Venezuela's 22 million
          people, is one sign of how intensely the Coca-Cola Company is battling for the soft-drink market in
          Venezuela, which for 50 years was one of the few places in the world where its rival Pepsico Inc.
          held an overwhelming lead over Coke.

          All that changed in August 1996 with a deal that ruptured Pepsico's joint venture with a local bottler
          and shifted everything that had been Pepsi's to Coca-Cola. The loss of one of its top-performing
          international markets was an enormous blow to Pepsi, which sued Coca-Cola over it and won $94
          million in damages from an international arbitration court.

          For close to a year after that, it was difficult to buy any American soft drink but Coke in Venezuela.

          But these days, Pepsi is teamed up with another local bottler, Polar, and is roaring back with a
          combination of deep discounts, heavy advertising and more and more cold-drink coolers
          everywhere from airports to mom and pop grocery stores.

          This marks the first time Coke and Pepsi have been simultaneously present in the Venezuelan market
          at full strength, and analysts predict it will be a long and costly entanglement for both, particularly
          now that Coke's bottler is matching Pepsi's discounts. It is not just financial interests that are at stake
          in this country half the size of Texas, but issues of corporate identity deeply rooted in the past.

          "To dismiss the sentimentality of the Venezuelan market to Pepsi would be naïve," said Andrew
          Conway, a beverage industry analyst for Morgan Stanley Dean Witter, who says Pepsi has "steadily
          and consistently" increased its market share over the last three months, to an estimated 29 percent.
          "There are emotions and profitability at stake."

          Some analysts question whether Pepsi can continue spending as heavily as it has been.

          A spokesman for Pepsi said that along with its discounts, the company had installed more than
          50,000 refrigerated display cases, known as "visi-coolers," in the last year, trying to match the
          75,000 that Coke's bottler has set up. Pepsi has about 1,500 delivery routes operating and expects
          to add 200 more by the end of the year, covering about 90 percent of Venezuela, which extends
          from the Andean highlands in the south to the Caribbean in the north.

          Coke, meanwhile, has already spent more than $1 billion in stock and cash through its major bottler
          in the region to buy the former Pepsi bottler, owned by Oswaldo J. Cisneros, Gustavo A. Cisneros
          and other members of the Cisneros family, one of the country's leading business clans. The purchase
          was completed by the publicly traded Panamerican Beverages Inc., known as Panamco, nearly a
          year after Cisneros switched allegiances.

          The original move by Cisneros turned over what had been Pepsi's network and manufacturing assets
          to Coke almost overnight. One Pepsi executive, who arrived in Caracas in October 1996, one
          month after the Cisneros switch, said there was no sign that Pepsi had ever been in the country at
          that point.

          "It was amazing, because there were 50 years of signs and machines that literally had been covered
          over in the matter of a month," said William Mullenix, Pepsi-Cola's franchise director in Venezuela.
          "You could peel them back and see the Pepsi underneath."

          Even Coke claims to be slightly amazed at how fast it all happened. "We're surprised that after
          almost two years, we have overtaken what it took Pepsi 50 years to build," Willis said.

          Coke's market share in Venezuela has dwindled recently. A year ago, it had 81 percent, but the
          combination of Pepsi's onslaught and a market weakened by devaluation of the Venezuelan bólivar
          has reduced that share to 70 percent. In addition, the decision in September to match Pepsi's
          aggressive discounting to retailers has squeezed profits, leading at least one analyst to conclude that it
          would not be a very merry fourth quarter for Panamco.

          "Their profitability is going to be very weak, and you could see a loss," said Laura D. Meizler, a
          beverage industry analyst for Salomon Brothers Smith Barney. "The discount is not even being
          passed on to the customer. The retailer is keeping it."

          Ms. Meizler expects the situation to stabilize eventually, with Panamco retaining a 70 percent market
          share and benefiting from its infrastructure and distribution network, both of which are larger than
          Polar's. Because Panamco did not have to invest in equipment in Venezuela, its focus has been on
          execution and brand-awareness programs for consumers, "instead of focusing on building
          infrastructure as Pepsi has been forced to do," she noted.

          At the moment, however, "the current level of discounting is clearly not sustainable," according to a
          recent report by Ms. Meizler on the company's activity in Venezuela. And other industry experts say
          some of the Panamco equipment will need to be replaced before long, requiring additional capital
          from the bottler.

          In advertising, Coke has a budget of more than $50 million for Venezuela this year, Willis said,
          which includes 35 television commercials that are often locally made.

          And curiously, Coke's advertising is leaning on at least one old Pepsi slogan.

          "Consumers see Coca-Cola as the choice of the new generation," Willis said, intentionally evoking
          the old Pepsi campaign. "Here Pepsi is the historical brand, and Coca-Cola is the one that is new
          and exciting."

          What may turn out to be the wild card in all of this is the joint-marketing agreement announced last
          month between Pepsico's Frito-Lay division and Polar. The plan to sell potato chips and other salty
          snacks together suggests an even closer bond with Polar. Venezuela may prove an important
          international test for what Pepsico's chairman, Roger A. Enrico, has called "the power of one,"
          referring to the combined strength of Pepsi's products.

          In any case, Venezuela is turning out to be the stage for one of the more intense confrontations
          between the two soft-drink giants. "Before now, there was a monopoly," Mullenix said. "Over the
          last two years, this place went from blue to red to red and blue."