Where Did It Come from?
Two American men, 25 years apart, invented drinks that would bestride the world – as Coca-Cola and Pepsi-Cola have done - and both died in obscure penury, knowing nothing of their ultimate success. John Styth Pemberton mixed and drank his first glass of Coca-Cola in 1866, the year before Caleb D. Bradham was born.
Caleb became a North Carolina pharmacist and drug store owner and he was not one to accept for a moment Coca-Cola’s dominance over the soft drinks market. Caleb mixed prescriptions and also new concoctions to be sold at his store’s soda fountain. Sometime during the early 1890s he was selling a drink consisting of sugar, vanilla, oils, spices and extract of the African kola nut. Caleb was alert to feedback from his enthusiastic customers about what they called Brad’s Drink. Caleb became convinced his drink relieved upset stomachs and the pain from peptic ulcers, so, by 1898, he had christened it Pepsi-Cola. Its success caused him to expand his distribution base. Caleb hired a manager to run the drug store while he set up a syrup factory in the back room. He set about finding more soda fountain customers for his newly patented drink.
Business boomed surprisingly quickly. In 1902, the first year of operation, he shifted around 2,000 gallons of syrup and the next year ran advertising campaigns - Exhilarating, Invigorating, Aids Digestion - which quadrupled sales to almost 8,000 gallons. This volume was 1% of Coca-Cola’s sales in the same year. Caleb had started a long, arduous and tortuous journey. Could Pepsi-Cola become a serious rival to Coca-Cola? He made a good start: the speed of his subsequent growth was astounding. Within eight years, mostly due to an enthusiastic pursuit of bottled sales, he was selling 100,000 gallons of syrup a year. These came from a combination of his own factory, thousands of soda fountains and 280 bottlers across 24 states. For all Coca-Cola’s dominance, it seemed there were absolutely no barriers to entry into the category.
However, in 1920/21 the price of sugar first rocketed and then collapsed. This almost bankrupted the mighty Coca-Cola, so little Pepsi-Cola had no chance. Its assets of well over $1 million were not insufficient to withstand a $150,000 loss on sugar when the 1920 price of 25 cents/lb. collapsed by 90% the year after. Caleb sold off everything not nailed down and got a mortgage on what was. It wasn’t enough. In January 1922, with liabilities five times assets on the balance sheet, Caleb lost control to a Wall Street firm and left the beverages business for good.
The all-but-broke company changed hands more than once for peanuts and lost money throughout the 1920s, even though Prohibition did wonders for the soft drinks industry in general. Pepsi-Cola was in no fit state to survive the Great Depression so, in 1931, it was declared bankrupt once again.
How Did They Evolve?
Pepsi-Cola’s saviour was, ironically, a Coca-Cola customer. Charles C. Guth, the president of the Loft Inc. chain of confectionery stores, was a mercurial chancer. He was as stubborn as a mule with a temper to match. Loft Inc. ran 200 stores, which sold over 30,000 gallons of Coca-Cola a year from its soda fountains. This made Charles a substantial Coke customer, who was accounting for around 1% of their syrup sales. Yet his request for a bigger discount was turned down flat. An outraged Charles recalled a bankrupt drinks firm he had been offered for a song three years earlier.
Determined to show Atlanta they couldn’t push Charles C. Guth around, he bought the Pepsi-Cola firm for around $12,000 and kicked Coke out of his stores. To misquote Don Corleone, this move was personal, not business. It made no sense. Coca-Cola was already a national institution and its availability drove the traffic of soda fountains. Hence Loft Stores’ takings plummeted in the aftermath of the switch. In the following few years, Loft’s purchases of Pepsi syrup declined by 30% compared to their earlier volumes of Coke. Charles’ initial hope that he could substitute the syrups and nobody would notice had been stymied – partly because he liked the taste of his Pepsi drink even less than did his customers.
Charles commissioned his confectionery expert, Richard Richie, to reformulate Pepsi to taste something like Coca-Cola. Richard achieved this feat in a shade under three weeks. But it still wasn’t Coca-Cola and Loft’s customers drifted away.
Loft stores were purchasing around half of all Pepsi-Cola syrup, making the drink little more than the store’s private label cola. Charles needed new outlets for his drink. His breakthrough came in 1933 in the form of a used bottle dealer. He suggested to the ever bargain-conscious Charles that he put Pepsi in used beer bottles. These were twice the size of Coke bottles but cost next to nothing. Like a drowning man grasping a lifebelt, Charles was all over this idea. He had been struggling to come up with a proposition for bottled sales that stood a chance against Coca. After some experimentation and following a suggestion from his head candy salesman, Charles had discovered the only chink in Coke’s armour: value.
The price of Charles’ 12 oz. bottles of Pepsi was 5 cents, the same as charged for the 6 oz. bottle of Coke. This would be the saving of the brand, if not of Charles’ career. This bold tactic demonstrated two things. First, that Charles had been right to demand a discount. If he and his bottlers could fill and sell a 12 oz. bottle for 5 cents and both still make money, then Coca-Cola was abusing its brand monopoly and gouging its customers. Secondly, the move demonstrated something that remains true to this day: every brand has its price. If you can undercut a brand leader by a big enough price gap with a good enough product, then a significant number of consumers will switch.
Charles was a bright enough to realise the vulnerability of Pepsi’s own position. If he could sell twice as much cola for the price of a Coke, then so could anyone else. He had a limited window of opportunity to make the most of this opening and solidify his position as the low cost supplier. His first move was to call all the bottlers he knew personally and plead with them to tool up for the 12 oz. bottle, promising to cover any losses should it not pan out. Within six months of agreeing, the first Pepsi bottler to do so was shifting a thousand cases a day. Charles used this evidence to sign up as many new bottlers as quickly as possible.
The 12 oz. bottle was a runaway success. Within four years Pepsi was making over $3 million profit a year, through a network of over 300 bottlers covering the nation. Throughout this time, Charles C. Guth had been double-hatting. He was head of Pepsi-Cola (of which he owned 91%) while still managing Loft Stores. He had not run it very well. Loft lost money throughout the time he was resurrecting Pepsi from the grave. Loft and Charles fell out in spectacular style. The Loft owners sued him for his stake in Pepsi, claiming he had used their assets and people to build it up. Outside investors, seeing a juicy prize if the case was won, bankrolled Loft’s lawsuit, which they won. In 1935, ownership of Pepsi was transferred to Loft by the courts.
Guth, who clearly had the skin of a rhino, stayed on as general manager hoping for a chance to win Pepsi back. He was finally kicked out in 1939 when he purchased another cola company to try the same trick. Loft paid him $3 million to go away and no doubt felt it a bargain. While Guth was a loose cannon (to put it mildly) and was perhaps not the man to take things forward, the fact is Pepsi would have died without him. If he hadn’t picked a fight with Coke and then latched onto the 12 oz bottle for 5 cents, Pepsi-Cola would have gone the way of all the others Coke had put out of business. Instead, by 1940, Pepsi-Cola was the market number two, slightly ahead of Seven-Up with sales around 20% of Coke’s. They had a network of over 400 bottlers, earning the company over $8 million in profit a year; an amazing figure for a brand on its uppers seven years previously.
Coca-Cola was hugely dominant in fountain sales where there was usually only one supplier. However, when it came to bottle sales in stores where there were many suppliers, Pepsi’s 12oz was accounting for an impressive 26% of sales. Coke bottlers and franchises, already living high off the hog with a license to print money, were not keen to wipe out the capital invested in the 6oz size. A bigger bottle was not introduced for another fifteen years, giving Pepsi the time to become a firmly entrenched competitor.
Guth had been succeeded at the head of Pepsi by Walter Staunton Mack Junior, who would put his own indelible mark on the evolution of the Pepsi-Cola brand. Even though Pepsi was now well established, it was still very much the David to Coke’s Goliath. With an advertising budget one-thirteenth the size of Coca-Cola’s, Pepsi had no choice but to be creative. Mack endlessly encouraged a risk-taking approach. So when what looked like a couple of deadbeats walked into his office claiming to have the answer to all his problems, he did not throw them out. They immediately burst into song with a Pepsi jingle they had written. Mack couldn’t wait to sign them up. Most radio commercials at the time, including Coke’s, were five-minute-long, cover-all-the-bases eulogies to the endless benefits of the brand. A thirty-second ditty, sung to the tune of Do Ye Ken John Peel, while not unique (Wheaties had run something similar), was certainly in the margins of advertising practice. Radio stations didn’t want to sell airtime in 30-second chunks, when they could save 90% of the work by selling it in five-minute slabs. Nor was the advertising agency thrilled to be cut out of the creative process.
Mack approached small radio stations, which were grateful to get any advertising sales. He started spending. Within two weeks the results were promising enough to take to other stations. By the end of 1941 it had been broadcast 300,000 times across nearly 500 stations. The jingle not only built sales, but also began a unique personality for the brand. Mack built on this by abandoning the old beer bottles and adopting a unique Pepsi bottle. This became famous for its baked-on label: it was designed by the man responsible for the interior of Tiffany’s Fifth Avenue store.
The move to build uniqueness into the brand was not before time. Pepsi-Cola’s value positioning would soon begin to dissolve. The price of sugar shot up after the Second World War. This put tremendous strain on Pepsi’s price positioning: Coke was big enough to absorb the increases for far longer than Pepsi. And to maintain such a discounted value proposition long term, you needed to be the lowest cost producer. Pepsi was not, and they could hold the line no longer than 1948. They tested putting the price up to 6 cents, and launched a smaller 8oz., bottle for 5 cents. Both bombed. Sales growth completely stalled, which prompted a cabal of disgruntled bottlers to force Mack out and introduce another strongman who would shake things up.
Next in line was Alfred N. Steele. He saw straight away Pepsi’s value positioning was doomed. It was seen as quirky and cheeky, the cheap cola you served to your kids and their friends. Mindful of his predecessor’s fate, he also realised that the bottler network - a rougher, tougher bunch than Coke3’s - needed hauling back onboard the good ship Pepsi. Steele, the ultimate schmoozer, promised the bottlers if they followed him he would ‘take them out of their Fords and put them in Cadillacs’. Cocke bottlers spent their lives on the golf course. Too used to having no direct competition, they were flabby and lazy, he told them. They’re there for the taking,
For Pepsi to take on Coke, it had to match Coke standards. When the selling point had been twice as much for the same price, no one had paid much attention to product consistency. Pepsi varied in taste between different bottlers and even different production runs. That, Steele said, had to change. He sent mobile laboratories around the country. If bottlers couldn’t get the product right, they had no place in Pepsi’s system. Steele hired ex-Coke employees in droves. With the ability to deliver a consistent product, he could build a national brand, differentiated along dimensions other than price. The chosen dimensions were packaging, product and target market.
As above, the flabby Coke bottling system was highly resistant to investment and change. Steele saw that his rival could always be out-innovated on packaging. So during the 1950s, Pepsi introduced a range of sizes that met different needs. For example, the 26oz Hostess bottle in 1955 was loved by the rapidly expanding grocery chains, which Coke were slow to embrace. On the product side, Steele also saw two vulnerabilities in Coke’s overwhelming strength. First, the brand was targeted to absolutely everyone, i.e. no one in particular, and secondly it was tied to the same recipe. Coke couldn’t change its product to appeal to specific segments of the buying population and wouldn’t introduce variants that could do the same job. So the Pepsi management reached for the nuclear button: they reformulated their product with the specific aim of making it more appealing to women. Prompted also by the high cost of sugar, Pepsi adopted a lighter taste with fewer calories. Their advertising emphasised benefits such as looking smart, keeping up-to-date and being fair and debonair. Previously a copycat of Coke, Pepsi now had a differentiated product in a range that sold in the prime trade channel for reaching women - grocery stores. Pepsi had achieved a cohesive, segmentation-based approach to the market, allowing their price to creep up towards that of Coke. Steele’s marriage to movie star Joan Crawford, who was immediately dragooned into brand spokesperson, accentuated the difference between modern Pepsi and staid old Cocke. Pepsi couldn’t beat Coke overall, but they could beat them with women.
The results of this approach were outstanding. By the time Steele died in 1959, Pepsi’s sales had tripled while the market only increased by 30%. The company’s profits increased five-fold while Coke’s only doubled. Steele had also ramped up Pepsi’s overseas operations, going from three concentrate plants located abroad to twelve. The bottlers were not only driving around in Cadillacs, they believed where the company was going. They were also contributing an unheard of two-thirds of the total Pepsi advertising budget. Having Joan Crawford come open your new bottling line in the middle of nowhere did wonders for bottler commitment and morale.
The key to the Pepsi strategy was always to keep one step ahead of Coke - to do what they couldn’t, or wouldn’t do. While Coke had Eisenhower as its man in Washington, Pepsi signed up Richard Nixon. He helped engineer the publicity coup of having Nikita Khrushchev drink a Pepsi when Nixon visited Moscow. When diet drinks became a realistic possibility for mainstream companies, Pepsi was first out of the gate with Diet Pepsi. And as the grocery chains continued an inexorable growth, Pepsi brought out new sizes and plenty of promotions. But the making of the Pepsi brand came from what seems in hindsight an almost inevitable evolution of Steele’s approach. From targeting women to the Pepsi Generation, Pepsi was already in the right territory, but the genius was to take a demographic positioning - moms with young kids – and turn it into an attitudinal positioning: people who think young, who look forward, who are positive, curious and want more out of life. The first manifestation of this thinking came in 1961 with a campaign which carried the punch line Think Young. It reached fruition two years later with the slogan, Come alive – You’re in the Pepsi Generation. This was perfect for the times and was everything Coke was not.
Pepsi-Cola was used to having dynamic, forceful leaders. After something of an interregnum, order was restored in 1963 with the appointment of Donald M. Kendall. He had worked his way up from a lowly fountain salesman and was Pepsi through and through. Kendall would lead the company into its modern manifestation as not just an American drinks brand, but also a global food and beverage company.
How Did They Build The Modern Company?
Kendall did not wait long in flagging up that things were changing. Within a year of his appointment, Pepsi made its first acquisition, that of the small Virginia-based Tip Corporation and its brand, Mountain Dew. The management mantra of the 1960s was diversification and the corporate vehicle of choice was the multi-category conglomerate. Pepsi, as a highly focused soft drinks company with high margins, was a tempting target. Kendall was keen to remain master of his own fate but hampered by the fact Pepsi was too small to make major acquisitions of its own. So he engineered a merger in 1965 with another company also keen to keep out of conglomerate clutches: Frito-Lay.
Frito-Lay was itself the product of a 1961 merger between the Frito Company and the H.W. Lay Company. Herman W. Lay became chairman of the newly created PepsiCo Inc. with Kendall as president and CEO. The new company had sales of just over $500 million, made up of around one-third snacks sales and two-thirds beverages. The merger had a lot of logic:
· Both companies did most of their business with the same customers – grocery chains
· Both product sectors used a system of direct store delivery by their own or their bottlers’ trucks
· Salty snacks made you thirsty: soft drinks quenched thirst
Even though the two companies essentially operated as separate divisions of PepsiCo, the deal attracted the ire of the Federal Trade Commission. The regulator was suspicious that their combined might would create unfair competition in the snack food business, particularly in the buying of advertising. A compromise was finally agreed in 1968: PepsiCo would not buy and run ads for each division back-to-back, and would not acquire another beverage or snack food company for the next ten years. So, with no acquisition prospects within their existing categories, the company sought to expand beyond snacks and beverages. In 1964 Kendall had established the Pepsi-Cola Equipment Corporation, to lease vending machines and trucks to bottlers. This sideline became so profitable that the company deepened its trucking activities, progressively buying trucking and transportation companies. An abortive bid was made for the Miller Brewing Co. and in 1970 Pepsi spread even further afield by purchasing Wilson Sporting Goods, makers of tennis rackets and golf balls among other sporting paraphernalia.
While the snacks side of the business stuck to its knitting by introducing Doritos in 1966, mistakes began to be made on the core Pepsi USA business. Kendall was now at one step remove, focused on building the company’s international presence (see below). In the meantime, mainstream Pepsi became envious of a successful milk-based brand called Yoo-Hoo, and set about developing a challenger called Devil Shake. They discovered too late that the Yoo-Hoo Chocolate Beverage Corporation held the rights to the only technology at the time, which could give the product a decent shelf life. Pepsi had to write off $5 million development costs. Even worse was the 1967 decision to move away from the Pepsi Generation-themed advertising. The reversion to the more product-oriented Taste That Beats the Others Cold (Pepsi Pours It On) was a mistake only corrected after two years of flat sales.
The early 1970s saw strategic thrusts which quickly doubled the size of PepsiCo from the high of $1 billion annual sales reached in 1970. The sales powerhouse of the 1970s would be the massive expansion of the Frito-Lay direct store delivery system. This opened a new manufacturing plant every year as it extended its reach to over 700,000 sales calls a week in over 300,000 stores. Deliverymen had the scope to put Frito-Lay products front and centre of every snack display. On the Pepsi side, the emphasis switched from innovating new brands (most of which had flopped), and back to what had helped build the brand - innovating packaging formats. This culminated in the industry’s first two-litre bottle in 1974. The mantra of the drinks division became one of marketing package and price ahead of taste and flavour, and exploiting the greater flexibility of their bottling system. As grocery stores were getting ever larger, there was more shelving to be occupied; so more sizes were welcomed with open arms. From October 1971 Pepsi gained market share for seventy-two consecutive months, and pulled level with Coke in grocery stores. It was an impressive achievement.
However, Pepsi wasn’t doing well everywhere. In Texas it had a pathetic 6% market share and was a distant number three behind Coke and the home-grown Dr Pepper brand. Local bottlers found the Pepsi Generation thematic advertising useless against entrenched competitors and demanded head office help. An executive was sent and concurred with the local view that, outsold eight-to-one as they were, they needed an ad campaign with real balls. Moving the sales needle meant risk-taking. Seeking to understand the appeal of Dr. Pepper, the executive conducted taste tests of the three brands. He was amazed to find that Pepsi consistently outscored Coke. Even more amazing was the fact that neither Coke nor Pepsi’s head offices had ever conducted blind taste tests of the two brands, presumably because they are never bought blind (this is the main argument against blind taste tests). Hence was born the Pepsi Challenge.
More acquisitions later in the 1970s changed PepsiCo’s make-up. While Pepsi was consistently gaining on Coke in the grocery chains where all brands were stocked, it had made little to no headway in Quick Service Restaurants (QSRs). There only one cola would be served, which was invariably Coke. Kendall’s answer harked back to Charles Guth’s style - to buy the restaurant chains and kick Coke out. They acquired Taco Bell in 1977 and Pizza Hut a year later. When combined with the meteoric progress of the snacks division - Frito-Lay sales had increased six-fold since the 1965 merger - over 60% of company sales were now coming from categories other than beverages. The next year, international sales of snacks were greater than had been Frito-Lay’s entire sales at the merger.
By 1981, PepsiCo was a $7 billion a year company and the clear number one in take-home sales of cola. Their fountain business, which had been given a shot in the arm with the acquisitions of Taco Bell and Pizza Hut, improved further when Burger King also decided to switch from Coke to Pepsi. Then, in 1986, PepsiCo acquired KFC. The company solidified around three divisions: soft drinks, snack foods and restaurants, selling off the transportation and sporting goods companies in 1984. But the big Pepsi event of the early to mid-1980s was not something PepsiCo did, Coca-Cola. At last, old-fashioned, conservative Coke responded to a whole series of Pepsi moves over time. The something was New Coke.
It’s not often in business your competitor makes a move you thought they would never or should never do. When it happens, what counts is how quickly and forcefully you respond. Pepsi-Cola had been steadily gaining on Coke from 1977 to 1982, partially thanks to the national rollout of the Pepsi Challenge, but progress had slowed. So Pepsi turned up the heat. Pepsi Free, the caffeine-free cola introduced to challenge the newly launched diet Coke, exceeded all expectations - shipping 150 million cases in its first year. Also in 1983, Pepsi signalled a move away from the Pepsi Challenge. That November, it signed the biggest advertising contract in history: $5 million. Michael Jackson would appear in two commercials to add a new level of awareness to the resurrected Choice of a New Generation advertising theme. The launching of a gut-busting 3-litre bottle in May 1984 once again broke new ground. There was a lot going on with Pepsi, and Coke was left trailing.
Coca-Cola got new leadership. The long-time president Robert W. Woodruff had had a strategy of ‘do today what we did yesterday only better’. As Pepsi was changing everything all the time, Woodruff’s strategy was deemed old-hat and misplaced. A new president, Roberto Goizueta, was given the mission of shaking up Coca-Cola to increase its fizz. What better way to start than slaughter the most sacred of cows – the secret formula locked in the Atlanta bank vault. On April 19, 1985, Coca-Cola committed a major blunder: indicating they would make a major announcement the following Tuesday. Forewarned Pepsi executives could scarcely believe their luck when they got hold of a smuggled preview six-pack of the new flavour. They had three days to craft a response. They declared a company-wide holiday. They booked a full-page ad in The New York Times trumpeting that Pepsi-Cola had won the cola wars. They fed questions that the press could throw at the hapless Goizueta. Coke’s biggest moment for a hundred years had been turned into Pepsi’s best haul of favourable PR in its history. That was the disastrous something that Coca-Cola did.
Coke eventually announced ‘discovering’ this new, even better Coke formula while developing Diet Coca. This sounded less plausible, and a lot less interesting, than the idea, followed by the plain fact, that Pepsi had psyched them out and Coke had pressed the panic button. The consumer response, as we all know, was to desert the Coke brand in droves. Brand share fell off a cliff and within three months the old recipe was back, escorted by the distinctly implausible claim that the fiasco had been a success by reawakening the consumers’ love for Coke.
Pepsi did the better of the two in 1985 by growing 5%, increasing to 7% in the first quarter of 1986. It had been a masterful performance by Pepsi management. They even developed their own version of original Coke to launch - Savannah Cola. Pepsi only pulled back when they realised bulk buying of spent coca leaves (used in the Coke formula) would alert Coke’s executives, who could then bring back Classic Coke sooner than they did.
Following this triumph, corporate attention once again turned to M&A activities, and a huge move to bolster its soft drinks division. PepsiCo arranged to buy Seven-Up from Philip Morris for $380. PepsiCo were buying America’s third-largest soft drinks brand. This alone added seven share points to the company, and took them within striking distance of Coke. They would also have got a very strong international organisation plus almost an entire new bottling network (as only 20% of Seven-Up bottlers also bottled Pepsi).
Unfortunately, the Federal Trade Commission voted unanimously to oppose the deal. PepsiCo were left to buy the international unit of Seven-Up Co. for $246 million in cash. In 1987, PepsiCo’s total sales of over $11 billion were almost 50% greater than those of The Coca-Cola Company and twenty-two times greater than the year PepsiCo had been formed.
The early 1990s saw PepsiCo broaden its beverages product range by latching onto emerging trends. A range of ready-to-drink teas developed in tandem with Thomas J. Lipton was launched in 1992, followed a year later by the test marketing of Aquafina water and the overseas launch of Pepsi Max. Frito-Lay continued to extend its DSD system, with new offerings such as Wavy Lays Original and Au Gratin flavours. On the restaurants side, East Side Mario’s was acquired along with the D’Angelo Sandwich Shops chain. In 1994, following the success of the Lipton deal, new partnerships were agreed with Starbucks to develop ready-to-drink coffee beverages, and with Proctor & Gamble to use the Citrus Hill trademark.
By 1996 sales had reached $20 billion. The national rollout of Aquafina and the purchase of the Cracker Jack snack brand added more. A year later, the top-line took a hit as the restaurants division was spun off as Tricon Global Restaurants Inc. - soon to be renamed Yum! and locked into a lifetime contract to sell Pepsi beverage brands). The money from the spin-off was almost immediately put to good use with the acquisition of Tropicana (at $3.3 billion, the largest in PepsiCo’s history). Pepsi’s Tropicana could take the orange juice fight to Coca-Cola’s Minute Maid. PepsiCo was now such a large beverages and snacks company that it contributed more to the 1998 sales growth of America’s supermarkets, mass merchandisers and drug stores than any other packaged goods company.
The 21st-century began with more of the same. The Pepsi Challenge was revived, and a host of new products in fast-growing categories introduced. The standout development was a $13 billion share swap merger - a takeover in all but name - with The Quaker Oats Company, primarily for its Gatorade brand. Gatorade had a massive 84% share of the sports drink category that PepsiCo had tried and failed to crack. PepsiCo rounded out its beverage portfolio by purchasing a majority stake in the South Beach Beverage Company, for its SoBe brand. By 2003, PepsiCo was the fourth-largest food and beverage company in the world, behind Nestlé, Kraft and Unilever.
How International Are They?
Given the company’s precarious early existence, it was not until 1934 that Pepsi opened its first bottling plant outside the US, Montreal serviced French Canada, where Pepsi holds the lead over Coca-Cola to this day. Their next plants, in Cuba and the Dominican Republic, were typical of a ‘baby steps’ approach (i.e. keeping close to the US) by an American company expanding abroad. In 1940 Walter Mack poached William B. Forsythe from the Coca-Cola Export Corporation. He immediately expanded Pepsi’s overseas footprint, heading for markets where Coca-Cola was either absent or had not yet become firmly established. Thus Latin America, the Philippines, South Africa, the Middle East and the Far East all became strong markets for Pepsi. Between 1945 and 1950, Forsythe opened up fifty-six foreign markets for the Pepsi-Cola brand. This increased export sales by 45% in 1946 and another 70% the year after.
Future president Donald Kendall made his name during the 1950s pushing the company’s export side. He put into action Alfred Steele’s strategy of expanding massively Pepsi’s overseas business. During Kendall’s first three years, Pepsi International opened a new bottling plant abroad at the staggering rate of one every 11.5 days. The outcome was that an international bottler network numbering 70 in 1957 had risen to 278 by 1962. Pepsi was now available in nearly a hundred countries and international sales accounted for half of Pepsi-Cola’s total revenue. Having run out of places to go where Coke wasn’t, attention turned to Europe and bottling partnerships with big local players such as Britain’s Schweppes, France’s Perrier and the Netherland’s Heineken.
In 1966, Pepsi entered the large Japanese market followed by deals negotiated with Communist governments in Rumania and Yugoslavia. These were achieved soon after head cheerleader Richard Nixon poured Pepsi down Soviet leader Khrushchev’s throat in Moscow. But Kendall’s crowning glory came in 1972 when, following up on Richard Nixon’s Kremilin tasting, he negotiated Pepsi-Cola as the first foreign product sold with official approval in the USSR. It was a massive coup and gave Pepsi a huge advantage in what would become one of the world’s fastest-growing soft drinks markets. The only downside was that Pepsi got paid in vodka! They were given the exclusive rights to import Stolichnaya Russian vodka into the US.
In 1973, Richard Nixon, now promoting Pepsi from the Oval Office, got the brand into Nationalist China and Cambodia ahead of Coca-Cola. However, a million-dollar bottling plant in Saigon did not survive long enough to pay back its somewhat optimistic investment. The company got serious about building an overseas business for its snacks division, setting up Foods International to markets snack foods abroad. Unlike many companies, Pepsi International took a hands-on role in marketing their brands overseas. They worked with one advertising agency, J. Walter Thompson, for all the various markets, but did not mandate the use of global ads everywhere. Footage from ads shot in various major markets was pooled together and local operating companies could make their own ads by using whatever snippets took their fancy.
International expansion continued apace for the next decade. A highlight was the agreement with China to begin production of Pepsi-Cola in 1982. Three years later Pepsi beverages were available in nearly 150 countries while company snack foods had expanded at a rather more sedate pace - to ten international markets. The firm’s growing complexity prompted the first of several reorganisations: beverage operations were combined into one structural entity, PepsiCo Worldwide Beverages, while snack foods were combined under PepsiCo Worldwide Foods.
After signing a joint venture agreement in India in 1988 to bottle Pepsi, international expansion focussed more on the snacks side. Partnerships and acquisitions were the preferred method rather than the difficult task of snack foods start-ups. They signed a partnership with Hostess Foods in Canada. In 1989, they acquired two of Britain’s leading snack food companies, Walkers Crisps and Smiths Crisps. While Smiths had seen better days, Walkers would become the leading light in the PepsiCo snacks empire, building up a dominant position in the British salty snacks category. The next year PepsiCo acquired a controlling interest in Mexico’s largest cookie company. In 1991 they entered the chocolate business, with the purchase of Poland’s leading local firm, Wedel SA, soon after the fall of the communist government. The same year PepsiCo and General Mills formed a joint company, Snack Ventures Worldwide, to tackle jointly the mainland European market.
In 1995 PepsiCo began the process of making Lay’s a global brand. They introduced it into twenty markets around the world, although still met local needs, for example by producing a cheese-less version of Cheetos in China. More acquisitions achieved leading snack positions in several South American markets. Meanwhile the Tropicana brand, already significant in China and twenty-one other overseas markets, was rolled out into the huge Indian market. Due to the acquisitions of North American-centric companies such as Tropicana, Quaker Oats and SoBe, by 2003 the percentage of total sales coming from outside North America was down to a surprisingly low 32%.
How Are They Structured?
The evolution of the structure of PepsiCo has been driven by the company’s acquisition and international expansion policies. In 1984, when transportation and sporting goods were sold off, the company adopted a three-division structure: soft drinks, snack foods and restaurants. Each division had its own international unit. When the restaurants were spun off in 1997, the structure was reduced to two global divisions - snacks and soft drinks, each of which accounted for approximately 50% of company sales. 25% of beverages sales, compared to 33% of snack food sales, came from international markets.
Following its acquisition, Tropicana was initially run as a third division, alongside the now renamed Pepsi-Cola and Frito-Lay soft drinks and snacks divisions. The next structural change came in 1999, when the company spun off 60% of its North American, Canadian, Russian, and other overseas bottling operations as the Pepsi Bottling Group. The combination of decades of above-average growth from Frito-Lay, strong snacks acquisitions and the spin-off of bottling meant that: the Frito-Lay division was contributing 62% of sales, Pepsi-Cola 26% and Tropicana 12%. While Pepsi-Cola was still sub-divided into Pepsi-Cola North America and Pepsi-Cola International; the greater size and greater complexity of the snacks side meant Frito-Lay was structured into Frito-Lay North America, Frito-Lay Europe/Africa/Middle East and Frito-Lay Latin America/Asia Pacific/Australia.
Following its 2001 acquisition, Quaker Oats was effectively split into three. Frito-Lay North America created a unit dedicated to opportunities in the broader $50 billion market for convenient foods, combining Frito-Lay's cookies, crackers, nuts, meat snacks and Cracker Jack treats with Quaker's granola bars, fruit and oatmeal bars, energy bars and rice snacks. This unit generated nearly $1 billion in revenues.
Gatorade was eagerly snatched up by the Pepsi-Cola division, which had also subsumed Tropicana. The remainder of Quaker, consisting mostly of breakfast cereals, grain products and the Aunt Jemima brand was run as a separate division. In a cosmetic change, the two main divisions were renamed worldwide snacks and worldwide beverages. In 2003, just to keep it interesting, all the business’s international components were consolidated into a new division, PepsiCo International, leaving Frito-Lay North America, PepsiCo Beverages North America and Quaker Foods North America to tackle the North American market.
What Have They Been Doing Recently?
2004
Management’s challenge in 2004 was to move from a collection of acquired businesses to one cohesive new PepsiCo. Strategically, the new company defined its three distinct competitive advantages:
· Big, muscular brands. Muscular was an interesting choice of words for an assortment of soft drinks, potato chips and granola brands. And PepsiCo did have a lot of them: sixteen with sales of over $1 billion, which was more than any other food and beverage company
· Proven ability to innovate and create differentiated products. While this was undoubtedly true, it’s hard to demonstrate PepsiCo was better than any of their peer companies. The company divided its innovation efforts into three distinct types
· Type A – flavour extensions, including seasonal in-and-out products such as Mountain Dew Pitch Black for Halloween
· Type B – New sub-brands of existing brands, delivering additional benefits or meeting niche needs, such as Tostitos Scoops and Tropicana Light’n’Healthy
· Type C – Completely new platforms such as Quaker Milk Chillers and Tropicana Fruit Integrity
The pipeline would be skewed towards Types B and C (due to their greater longevity), although there was a higher failure rate, particularly in Type C’s powerful go-to-market systems. The new PepsiCo, thanks to its recent acquisitions, now had the full range of go-to-market systems. The crown jewels were the direct store delivery (DSD) capabilities in the US, UK and Mexico for the salty snack products. Nobody else in the category had anything this powerful: the Sabritas organisation in Mexico called on over 700,000 outlets, almost every store in the country.
Naturally, given the acquisitions, benefits were sought in collaboration - between categories - within the retail environment and in back-office harmonisation. The in-store component, called PepsiCo’s Power of One, involved anything from joint Superbowl Sunday promotions between Pepsi and Frito-Lay, to Breakfast Bundling tie-ups between Quaker and Tropicana. Behind the scenes, the Business Process Transformation project was launched. This wide-ranging initiative aimed to harmonise billing, purchasing and logistics and also encompassed best practice harmonisation of sales and marketing processes, together with a consolidated approach to gleaning insights into consumers and customers.
The new PepsiCo had a good 2004, growing volume by 6%, with revenues were 8% up to $29.3 billion. The new PepsiCo International division, operating in over 200 countries, was now marginally the largest in the company at 34% of sales. It delivered over 50% of the growth, justifying management’s faith that the majority of its future growth would come from abroad. However, margins would need to improve as the division only contributed 22% of operating profit. Frito-Lay North America was the goldmine, contributing nearly 40% of the profit from 33% of the sales. Within the total product portfolio, over a hundred lines displayed the Smart Spot logo, identifying products that contribute to healthier lifestyles. This range grew at double the rate of the remaining fun for you products. It was slated to provide over 50% of new product revenues from the North American market in the coming years.
Within the divisions, Frito-Lay North America grew revenue 5% (coming on top of 6% in 2003). PepsiCo International’s revenue grew by 14%, (snacks volume up 8%, beverages up 12%), both product categories doing best in the Asia/Pacific region (growing 14% and 15% respectively). PepsiCo Beverages North America increased volume by 3% and revenue by 7%. These increases were driven by double-digit increases in Gatorade, Aquafina and Propel, together with the launch of a range of Tropicana branded fruit juices distributed via the bottler system. Within the US beverages business, nearly 70% of profit came from the 37% of sales accounted for by the non-carbonated brands. These accounted for almost all the division’s growth. Bringing up the rear, with a turnover of only $1.5 billion, was the Quaker Foods North America rump business, which had managed only a cumulative 4% growth over the previous two years.
2005
With volume up 7% and revenue by 11% (both boosted slightly by taking a 53rd week into its accounting year), progress in the new PepsiCo was more than satisfactory. Encouragingly, progress was made on all nearly all fronts - no division recorded less than a 4% volume increase. Pepsi International again led the way, growing snacks volume by 7% and beverages by 11%. A series of acquisitions in the European region boosted the company’s snacks presence in markets such as Poland and Germany. PepsiCo took full ownership of Snack Ventures Europe, Europe’s largest snack food company, from their partner General Mills. This gave more latitude to develop the European snack foods strategy as it saw fit. Snacks and foods now made up nearly three-quarters of PepsiCo International’s revenues.
The three divisions operating in the US market encountered starkly different issues. The previously slumbering Quaker Foods North America was star of the show. It recorded a 9% volume increase on the back of growth in Oatmeal, Aunt Jemima, Rice-a-Roni, and Cap’n Crunch rising Kraken-like from the depths to record a high single-digit increase. Frito-Lay North America had another good year, helped by the addition of another 475 new distribution routes to the DSD system, the biggest increase for a decade.
In PepsiCo Beverages North America, however, all was not well. The 4% sales increase was made up of a 16% increase in the non-carbonated range, compensating for a decline in the carbonated brands (although diet formats were still growing, in an above-average warm summer). The core brands of Pepsi-Cola and Mountain Dew were in decline, despite a host of innovations. While Pepsi was still the number two US supermarket food brand behind Coke, the acquisition strategy that had brought in the numbers three and four brands, Tropicana and Gatorade, was looking smarter by the day. Senior management shrugged off charges that they were competing in a declining soda category by switching attention to a 2.5% increase in a category they called Total Liquid Refreshment Beverages. As its definition excluded coffee, alcohol, trap water and bulk water, it really wasn’t all that total.
Elsewhere, the Business Process Transformation project was ready to go live in January 2006. The Smart Spot initiative, applied to over 250 lines thanks to health-based product reformulations, also extended into the activity side of the calorie equation. PepsiCo was the first major food and beverage company to promote more active lifestyles via its S.M.A.R.T. programme: five steps for healthier living supported by a major television advertising campaign.
2006
With volume gains of over 5% and revenue up 8%, PepsiCo was a growth machine. It averaged 8% top-line growth over the previous five years, better than any other major food and beverage company. PepsiCo now had number one or number two positions in eighteen categories of snacks, beverages and foods. However, it was not all sweetness and light. Not only had the declines in the core US carbonated brands not been reversed, they had accelerated, down 2%. The booming non-carbonated side was bolstered by the acquisition of Naked Juice and an agreement with Ocean Spray to market, bottle and distribute single-serve cranberry juice products.
In contrast to the US woes, beverages were doing quite nicely in PepsiCo International. They were up another 9% due mainly to double-digit increases in markets such as China - where Pepsi was the leading soft drink - Russia, Argentina and Venezuela. With the snacks side also growing 9% in many of the same markets, PepsiCo International now had 18 countries with revenues of at least $300 million. It was generating 41% of company sales and an improving 36% of operating profit. Gatorade was now in 42 markets. Tropicana, which was more difficult to extend internationally as it was not shipped to bottlers as a concentrate, was in 27 countries. This was only five more than when PepsiCo had bought it.
Frito-Lay North America had a poor year by its standards, growing volumes only by 1% due to declines in both the Lays and Doritos brands. This was counterbalanced by growth in healthier offerings such as SunChips and Quaker Rice Cakes. The launches of Tostitos Multigrain and Flat Earth vegetable and fruit crisps showed which way the wind was blowing in the salty snacks category. PepsiCo was promoting a healthier eating agenda but Lays’ switch to sunflower oil was an unconvincing support. PepsiCo’s new initiatives in 2006 - working with the Clinton Foundation and the American Heart Association to develop policies for selling beverages and snacks in American schools - probably were not likely to drive growth of Lays or Pepsi. Two-thirds of the company’s growth in North America came from Smart Spot products. This prompted the company to target achieving 50% of total North American sales from such lines by 2010.
PepsiCo had multiple routes-to-market. This meant they were not as dependent on their major retail customers as more traditional American food companies such as Kellogg’s and General Mills. Wal-Mart was their single largest customer, accounting for 9% of total sales and 13% of sales in North America. Their next four biggest customers accounted for another 13% between them. Overall this represented a fairly healthy position for PepsiCo.
2007
While 12% growth looked amazing given the beginnings of the global economic crisis, the underlying figures were a bit more realistic. Only 3% of the growth came from volume. Robust price increases, particularly in North American beverages, added 4%. 3% came from a slew of small and mid-sized acquisitions while currency movements contributed the final 2%. Cause for celebration was a new addition to the list of $1 billion-plus mega-brands: Fritos Corn Chips.
A change of CEO heralded the usual corporate restructuring in November 2007. PepsiCo International was shorn of its booming Latin American components. PepsiCo Americas Beverages was created to combine the North and Latin American businesses, as was PepsiCo Americas Foods, which brought together Frito-Lay North America, Quaker Foods North America, and the Latin American foods and snacks businesses. Despite being somewhat dismembered, PepsiCo International still managed to be the largest contributor to the company’s sales and profit growth (even when the numbers were recalculated into the new structure for the entire year). However, a shift took place. PepsiCo International’s biggest individual components, Sabritas in Mexico and the UK’s Walkers, both suffered declines. Walkers’ downturn was attributed to ‘market pressures’, something which shareholders might think their executives were paid to manage. However, double-digit growth in Russia, Turkey, China, India and the Middle East more than covered these losses. International beverages continued their usual trajectory, growing another 8%.
In North America, both Frito-Lay and Quaker had decent years, growing their volume by 3% and 2% respectively. However, another mid-single-digit decline in Lays compounded worries that there was an underlying market shift taking place. Fortunately, the company seemed well stocked with healthier snacks and had significant growth from both Doritos and SunChips. The worry in PepsiCo Americas Beverages was an accelerated decline in sales of carbonated soft beverages, this time 3% down. Pepsi was the main culprit as Mountain Dew held steady and Sierra Mist grew slightly. The good news was a booming still beverages portfolio. A double-digit increase for Lipton’s Tea prompted an extension of the contract with Unilever. Aquafina, Propel and SoBe Life Water enjoyed similar growth. There was much excitement with the Gatorade brand. This not only grew double digit but also developed an exclusive deal with Tiger Woods for a signature line of sports performance beverages, beginning with Gatorade Tiger. One hopes they employed a good contracts lawyer.
2008
Even more than the previous year, the impressive top-line growth of 10% masked a less appealing story. The business had mostly stagnant volumes (up 1%), and had pushed prices up (6%) well ahead of the overall inflation rate. They took the opportunity of the crisis to pick up some well-priced acquisitions (up 2%) and benefited slightly from a strengthening dollar (up 1%). Six percent price increases in the middle of the worst recession for decades are nice if you can make them stick and hold onto the volume, but it was definitely risky.
In November 2007 PepsiCo had been re-organised into three divisions. One of these, PepsiCo Americas Foods, contributed nearly half the company’s sales. Most of the company’s performance monitoring happened at a lower level. This led to the suspicion that all the re-organisation had done was to add another layer. The six divisions that actually did the work were:
· Frito-Lay North America
· Quaker Foods North America
· Latin American Foods
· PepsiCo Americas Beverages
· UK/Europe
· Middle East/Africa/Asia
Within the year, none of the Americas-based divisions managed to grow volume whereas UK/Europe – just as affected by the recession as North America – grew by 4%. Walkers enjoyed a turnaround, while the emerging markets (dominated by Middle East/Africa/Asia) grew volume by 13%, albeit heavily acquisition assisted. So what was going on at PepsiCo Americas Beverages? Volume again declined a depressing 3%. This performance, perhaps unsurprisingly, was made up of a reasonable-looking 4% growth in Latin America, offset by a somewhat shocking 5% decline in North America. Pepsi sank another 5% while the normally reliable Sierra Mist also fell back slightly. The non-carbonated range had previously been seen by the company as good for double-digit growth. But it actually declined by 6%. This was despite a complete brand makeover for Gatorade. Maybe such makeovers (also rolled out for Pepsi, Mountain Dew and Sierra Mist), were meant to make brand managers look busy whilst failing to understand the underlying problems. Similarly within Frito-Lay, the Lays brand was now in a rut of continued mid-digit declines. In this it had been joined by Doritos. Moves into nut products and dips were all well and good, but you cannot let your biggest brands keep declining year after year.
Fortunately, all was in relatively good shape abroad. UK/Europe snacks volume grew by 16%, led by a double-digit increase in Russia. Beverages powered forwards 17%, of which half came from acquisitions. The most important of these was of Russia’s leading juice company, Lebedyansky, and the UK’s V Water. Within Asia/Middle East/Africa, both snacks and beverages grew volumes double digit with little to no help from acquisitions made within the year. The bad news for shareholders was that, despite an increase of 6% in the division’s operating revenue, total company operating profit was down 3% (thanks to PepsiCo’s share of a major restructuring charge within the Pepsi Bottling Group).
2009
The big news, coming only ten years after spinning off a majority stake in Pepsi Group Bottlers, was the announcement of the merging into PepsiCo of the two anchor bottlers, Pepsi Bottling Group and PepsiAmericas. This was at a cost in cash and shares of around $8 billion. The usual management-speak explaining the move, ‘to create a more agile, efficient, innovative and competitive beverage system’, can be read as, ‘given an even worse performance by PepsiCo Americas Beverages which declined 6%, if you can’t sell Pepsi-Cola then we will’. The merger, once finalised, would make PepsiCo a $60 billion company, although one that would now have to grapple with an asset-rich, margin-poor bottling empire.
In anticipation of the deal being approved, a new strategy was outlined. It consisted of six key elements:
· Expand the global leadership position of the snacks business. Right from day one of the original Pepsi and Frito-Lay merger, snacks had been the key category and by now beverages accounted for barely a third of sales. The snacks business had long been the more vibrant: with an ideal mix of global capability and the ability to tailor products to meet local tastes. Potato chips do not lend themselves to regional or global sourcing, given the short shelf life and transportation inefficiencies a fact PepsiCo had been leveraging to the full).
· Ensure sustainable, profitable growth in global beverages. The key element to this part of the strategy was the hope that the bottling merger, plus the brand makeovers, would turn around a now slumping US business. Developing markets, emerging categories and positive nutrition beverages were seen as opportunities. Everyone else thought the same. So this element of the new strategy was more a hope than a clear path to growth.
· Unleash The Power of One. Coming a mere 48 years after the original Pepsi / Frito-Lay merger created the potential for The Power of One, it was overdue for this be turned to a competitive advantage.
· Rapidly expand the Good for You category. As less than 25% of the annual sales was accounted for by such products, this was another strategic thrust that was not before time. Key to its success was the newly announced R&D revamp. Here a new team of clinicians, epidemiologists and food scientists were recruited to take the company beyond formulation of new flavours into the actual underlying science of nutrition.
· Continue to deliver on environmental and sustainability issues. Not new for PepsiCo and not market-leading, more the avoidance of negative press than a genuine growth strategy.
· ‘Cherish our Associates and Develop the Leadership to Sustain Our Growth’. Generic stuff.
The announced acquisition of the two main bottlers, together with a new strategy, raised the stakes for PepsiCo after a not very inspiring year. Total volume was down with another 5% piled onto pricing (which were eaten up anyway by adverse currency movements). Frito-Lay North America, by far the company’s largest profit contributor, inched volume ahead by 1%. This was entirely due to new ventures, including dips and the joint venture with Sabra. Lays was still in decline while Ruffles was down a high single-digit. PepsiCo Beverages North America had a dreadful year. Non-carbonated beverages portfolio fell off a cliff, down by a massive 11%. Chief culprits were Aquafina and Gatorade, both down double digit. Pepsi seemed to be coming off worse in the US water market, up against Danone, Nestlé and Coke’s Dasani while Gatorade was in the midst of a brand re-launch. The brand’s name was changed from Gatorade to the G series - GI, GII and GIII. Changing a brand name, especially such a well-established one, is always a big risk in a category with a lot of impulse purchasing. If busy consumers don’t see it or recognise it, they won’t go looking. One hopes the marketing department knew what they were doing. The only bright spot was in Asia/Middle East/Africa where snacks volume grew 9% and beverages 8%. Even this contained the worrying nugget that business in China had basically stalled.
2010
The impact of the bottling acquisitions - which cost the company the thick end of $1 billion in merger and acquisition charges and fees – was immediately apparent, and in several ways:
· Top-line sales shot up 33% to nearly $58 billion
· Operating profit margin percentage shot down from 18.6% to 14.4%, reflecting the lower margins made by bottling operations
· Beverages now accounted for 51% of total sales
· The US market now accounted for 53% of sales
· While PepsiCo Americas Foods was still the largest division at 37% of sales, PepsiCo Americas Beverages was now not far behind at 35%
· The move lowered the margin and made the company more dependent on the US soft drinks market, which had been in the doldrums since 2007. Where were the upsides?
Looking into the divisional performances, the eye was drawn to PepsiCo Americas Beverages, where top-line sales had more than doubled. Three key components made up this growth pattern:
· Inclusion of the bottled sales rather than concentrate sales in the acquired bottlers.
· The sales volume of brands distributed by the acquired bottlers and not owned by PepsiCo.
· The organic sales volume performance of PepsiCo brands.
Leaving aside the sales benefit of bottling brands - just a transfer of the bottlers’ net sales - total volume for the company increased by 10%. The bad news was that the inclusion of other companies’ brands more than accounted for the entire growth, meaning PepsiCo’s own brands had declined by 1%. Not exactly what the doctor ordered. Digging deeper, carbonated beverages did just as badly in the first year of PepsiCo running the bottling, as they did when the bottlers had been in charge - a 3% decline. But at least the rot was stopped on non-carbonated volumes. These grew 1%, although barely making a dent on recovering the cataclysmic losses of 2009. Gatorade, or G as we must learn to call it, recovered around half of the previous year’s losses, while Aquafina continued to go down the drain. A good increase in Lipton’s Teas was balanced by a poor year by Tropicana.
Frito-Lay North America, now shorn of the Quaker snack bars, which were sent back to the Quaker Foods unit, slightly declined. For once this was not due to Lays, which had its first year of growth in a while. The unit was looking becalmed with brands taking turns to have good and bad years, plus the problem besetting Quaker Foods North America, which was going nowhere fast. Other divisions seemed to be able to do a better job with snacks. Latin America Foods grew by 4% while snacks in Europe grew by 2%. In Asia/Middle/East/Africa a 15% growth was due to strong performances in India, China and the Middle East. A similar story existed for beverages. They grew, net of bottler acquisitions, by 5% in Europe. This was driven by Russia (where PepsiCo acquired WBD, Russia’s largest food and beverage company) and Turkey, and by 7% in Asia/Middle/East/Africa. The company was gaining new traction in India and China.
If sales performance after the bottling acquisition was debatable, it was clear the strategic issues facing the company were now mounting. One only has to look at some of the commitments the company made to see that their brand portfolio - bulging with nineteen $1 billion brands – was facing some strong consumer headwinds. A number of what were hoped to be key decisions were made:
· Reduce the average amount of sodium per serving in key global food brands, in key countries, by 25% by 2015, compared to a 2006 baseline
· Reduce the average amount of saturated fat per serving in key global food brands, in key countries, by 15% by 2020, compared to a 2006 baseline
· Reduce the amount of added sugar per serving in key global beverage brands, in key countries, by 25% by 2022, compared to a 2006 baseline
· Display calorie count and key nutrients on food and beverage packaging by 2012
· Advertise to children under 12 only products that meet our global science-based nutrition standards
· Eliminate the direct sale of full-sugar soft drinks to primary and secondary schools around the globe by 2012
· Increase the range of foods and beverages that offer solutions for managing calories, like portion sizes
· Invest in our business and R&D to expand our offerings of more affordable, nutritionally relevant products for under-served and lower-income communities
Only a couple of these could be classified as growth strategies rather than decline preventatives. But leaving that aside, PepsiCo was late to the party compared to companies such as Nestlé. Re-segmenting a portfolio that in past times had been cheerfully labelled Fun for You into three categories: Fun for You, Better for You and Good for You did not change the fact that the company’s core sales and profitability rested on salty snacks and sugary beverages. The announcement of an increased R&D investment in sweetener technologies, next-generation processing and packaging and nutritional products was several years overdue.
2011
The acquisitions of the bottlers, WBD and the enhanced agreement with the Dr Pepper Snapple Group gave a good gloss to the top-line numbers, up almost $9 billion. In truth, it was hard to see much was changing at the operational level of the pre-existing businesses. The most important unit, Frito-Lay North America, finally got a bit of traction: growing volume by 3% and sales by 6%. Still this was no return to the heady days of earlier times. Quaker Foods North America, despite having more than its fair share of the nutrition products, lost a depressing 5% volume. This was partly because of its disadvantaged position in ready-to-eat cereals where it faced the much larger General Mills and Kellogg’s.
How much longer Pepsi wanted to stay in this category was a question that perhaps the company should answer. Latin America Foods pushed forwards in its advantaged markets of Mexico and Brazil. In Europe (discounting the huge impact of the WBD acquisition that added 31% to the division’s volume), underlying snacks grew volume by 4%, thanks to the huge Walkers UK unit and 1% in beverages (when the 20% volume increase attributable to WBD was factored out). In Asia/Middle East/Africa, snacks were doing better than beverages, up 15% versus 5%.
But still, the big question: how was the bottling acquisition in the US working out? Its raison d’être was to kick-start the core bottling brands back into life. Unfortunately, carbonated volume, which was the prime business segment of the bottling operation, fell back again by another 2%. That non-carbonated volumes increased by 4% to leave the unit largely flat on company-owned brands was not helpful, considering that $8 billion of shareholders money had been splashed out on buying up the bottlers. The good news for the marketing department was that the Gatorade re-launch was finally paying off, with the brand up double-digit. This essentially took it back to where it had been before the bright idea of a G Series had come along.
What is Their DNA?
If Coke is the American Southern Gentleman, courteous, polite and well-mannered, then PepsiCo is the brawler from the Bronx, brought up on the wrong side of the tracks, parents of questionable morals, had to fight for everything it has and anything it wanted. While this may seem an odd way to view the world’s second-largest food and beverage company, we believe its DNA does derive from a toilsome life committed to permanent struggle against a dominant and dominating competitor.
Acts Like a Challenger
For almost its entire corporate life, Pepsi-Cola and then PepsiCo has been the underdog, and even when it hasn’t been, has acted like it was. This mentality is still fed by its global number two cola position in a world where there is often only really room for one. While Coke sponsors World Cups and Olympics, PepsiCo is in the trenches battling it out on Superbowl Sunday. Even where the company is completely dominant, such as in the UK with the Walkers brand, or in Mexico with Sabritas, PepsiCo has kept those businesses at the top by never getting complacent or taking its success for granted.
Irreverent
PepsiCo has a history of not taking itself, or its product categories, too seriously. It has demonstrated a good sense regarding where their products sit in people’s lives, yet combines that with a fierce pride and passion for what it does. The company response to New Coke probably did more than anything to establish itself as both fun, but deadly. Similarly, PepsiCo’s marketing activities for the Walkers brand have been ground-breaking: capturing the fun and irreverence of the product category and turning them into powerful drivers of sales increases. PepsiCo still manages to make huge brands feel warm, friendly and approachable, no mean feat in modern, global vastness.
Good Acquirers
There is no doubt the original merger between Pepsi-Cola and Frito-Lay was one of the most harmonious and successful mergers of the latter half of the twentieth century. The subsequent success, particularly on the sales side, has been astounding. Similarly, the acquisitions made at the end of the century of Tropicana and Quaker gave the beverages portfolio a breadth and a strength that lifted the company away from being Coke’s Mini-Me. On the snacks side, Walkers and Sabritas have succeeded far beyond any potential apparent in the brands in the days before joining PepsiCo. This is in no small part due to the DSD business model for salty snacks, a model pioneered by the Frito-Lay Company before the original merger but taken to new heights by PepsiCo: they pioneered technologies such as nitrogen filled bags to improve freshness. The company has barely missed a step in its acquisition strategy.
Summary
The rise of PepsiCo within one person’s lifespan from serial bankrupt to the world’s second largest, and North America’s largest, food and beverage company is one of the business success stories of the modern era. While we are no fans of the heroic CEO idea, it cannot be denied that a series of bold and aggressive leaders successively remade the company. Each took PepsiCo to a new level, rather than the success stemming from the brand portfolio or the business model. It was only after the Frito-Lay merger that the company’s success became less dependent on the whims of forceful leaders.
Since the merger, success has been inexorable, but perhaps too much so. As we have seen, at the core US market the company has latterly stalled, with a brand portfolio seemingly out of step with market trends towards healthy eating and hydration. The company has done little to get ahead of such trends. The bottler acquisition is in danger of looking more like an act of hubris than a sound use of $8 billion of shareholders’ funds. We fear that, of late, the company has actually drifted away from its DNA. It seems to regard being the second-largest food and drinks company in the world as a pinnacle of success, whereas the old Pepsi would have considered being the second-largest cola company as a grievous wrong to be righted. And are Nestlé looking over their shoulders and reacting to PepsiCo’s initiatives, as Coca-Cola was made to do? Quite the opposite. Nestlé have made health and wellness a core value, while PepsiCo sets modest targets to reduce bad ingredients by 2020. Nestlé’s water business is booming while Aquafina is floundering. Even Coca-Cola has stopped dancing to PepsiCo’s tune. PepsiCo needs to get back to the attitude that got it to where it is today.