California Pizza Kitchen Inc., which has been battling slumping beverage sales and anemic same-store revenues, is blaming soda supplier PepsiCo Inc. and moving to end their long relationship.

But Pepsi, which owned a majority stake in the restaurant chain in the 1990s and has been its beverage vendor for decades, has balked at the effort to terminate their contract. The result has been a legal battle between old partners, one that might be part of a larger shakeup at CPK, which struggled during the downturn and was taken private in a buyout by San Francisco private equity firm Golden Gate Capital in 2011.

CPK’s new ownership is trying to catch up to changing consumer tastes and is also aggressively moving to slash costs – even if it means cutting ties with old relationships.

“After the great recession, the company was a deer caught in the headlights,” said Conrad Lyon, an analyst who covers the restaurant industry for Westwood’s B. Riley & Co. “Now there’s a new guard there that doesn’t have the same loyalties.”

CPK informed Pepsi in April that it was going to terminate their contract. Pepsi threatened to sue, and even allegedly sent contract details to rival Coca-Cola Co. in order to undermine a switch, prompting a lawsuit by CPK.

The attempt to move away from Pepsi to a different vendor appears to be both a cost-cutting measure and an attempt to boost sales. Beverage sales are crucial in the restaurant business; operating at much higher margins than food sales, soft drinks and alcohol account for about one-third of an average L.A. restaurant’s total sales.

But CPK’s beverage sales are some of the lowest in the industry – and are getting worse – according to its lawsuit. This year, the Playa Vista company tried to combat that by introducing wine tastings, craft beers and mixed virgin drinks with Diet Pepsi.

The beverage changes are a sign of larger reforms afoot. The company, perceived as lagging behind a new wave of local artisanal pizza chains, has slimmed down menu options, announced it would close less profitable stores and has opened a prototype store in Florida last year to try new menu concepts. New management has spoken about the need for other changes, but has yet to tip its hand on exactly what those would be.

Industry watchers believe the company needs to go upscale, or open smaller restaurants, to survive.

“I don’t think CPK is happy with any of their sales at the moment,” said Jerry Prendergast, principal at Culver City restaurant consultancy Prendergast & Associates. “The whole pizza market has completely changed in the last five years.”

Sliding sales

CPK was considered something of a pioneer in its early days. Co-founded in 1985 by attorneys Larry Flax and Rick Rosenfeld, it is credited for helping to popularize California-style pizza using less traditional ingredients such as barbecue chicken and avocado.

By 1992, it had 26 stores, and that same year PepsiCo bought a two-thirds stake for $100 million. The chain was sold to New York private equity firm Bruckmann Rosser Sherrill & Co. in 1997. Rosenfeld and Flax left day-to-day operations after Bruckmann took over, but were brought back as co-chief executives in 2003, three years after the company went public.

Years of rapid expansion followed.

But the downturn hit the company hard, in part because families, the company’s core customers, were eating out less. By 2010, CPK recorded a loss of $400,000 on sales of $642 million, a steep drop from the $8.7 million in net income it posted on sales of $677 million in 2008.

Golden Gate swooped in the following year and bought the company at a deflated price of $470 million, down from a market capitalization of $625 million in 2007.

The company’s revenue does not appear to have rebounded since 2010, the last year it made its annual financial data public. A credit report on the company’s long-term debt issued by Moody’s in March said the company’s annual revenues were about $630 million, which would represent a 2 percent drop from 2010.

But analyst Lyon, who covered the company until it was taken private, said it is likely profitable again due to the cost-cutting measures, which CPK has not outlined publicly. He said the most likely scenario is that Golden Gate will clean up operations and take the company public again.

“Golden Gate saw a huge opportunity, not so much from driving sales but from an operational perspective to be much more lean and more efficient,” he said.

Putting its beverage contract out to bid appears to be a part of those efforts. According to its Los Angeles Superior Court lawsuit, CPK’s new ownership began raising concerns with Pepsi in late 2011 about the company’s slow beverage sales, citing “considerable year-over-year decline” and a non alcoholic beverage sales rate that was the third-lowest in the industry.

After more than a year of discussions, CPK informed Pepsi it was going to terminate the contract, allegedly prompting Pepsi to disclose confidential information to rival Coca-Cola, spawning the current legal battle.

Pepsi declined to comment. CPK did not respond to a request for comment.

Beverage deals are profitable for restaurants: Pepsi currently sells a five-gallon container of syrup, which makes about 267 12-ounce servings of soda, to CPK for $12.51, according to legal filings. On top of that, the contract calls for Pepsi to provide much of the beverage dispensing equipment to the chain’s restaurants, and advance money for advertising and marketing of Pepsi products.

The 2007 contract between the two companies expires after five years or the sale of 2.2 million gallons of syrup, whichever comes later, a contract worth about $5 million.

Mark Drooks, an attorney at Century City’s Bird Marella Boxer Wolpert Nessim Drooks & Lincenberg PC who reviewed the lawsuit for the Business Journal, said Pepsi does not appear to have crossed the line in its disclosures to Coca-Cola, and that the lawsuit appears to be an aggressive negotiating tactic.

“Perhaps CPK believes this lawsuit will assist them in any negotiation they might have with Pepsi in trying to get an early termination in the agreement,” he said.

However the beverage fight shakes out, Prendergast said the larger challenge remains updating a once-innovative company that now appears stagnant.

“The soda question is a symptom of something bigger, which is ‘What’s the whole company going to do?’” he said. “They’re at a crossroads.”