Referensi Pepsico

http://money.cnn.com The Pepsi Machine Sales are soaring, margins are up, and investors are cheering. How Pepsi outmaneuvered Coke by looking beyond the cola wars. Katrina Brooker January 30, 2006: 4:34 PM EST

(FORTUNE Magazine) - One evening this past November, Pepsi CEO Steve Reinemund laid out a smorgasbord of snacks for his board of directors to munch on. This was not gentlemanly hospitality; it was pure business. These snacks represented Pepsi's future: a line of products aimed at cashing in on consumers' continuing obsession with healthy food. If all goes well, the line will bring in billions for the company. According to one board member, the treats were "delightful." But more than just the future of Pepsi, this spread in many ways represents everything the company has done right for nearly a decade: finding new ways into people's stomachs--and wallets--and pulling off one of the great turnarounds in American business. In October 1996, the cover of this magazine ridiculed Pepsi. The image: then-CEO Roger Enrico trapped inside a Coke bottle. The headline on the story: HOW COKE IS KICKING PEPSI'S CAN. Our theme was that PepsiCo had lost the cola wars, and the proof was everywhere. The company's profits trailed those of its rival in Atlanta by 47%. Its value in the stock market was less than half of Coca-Cola's. Coke's CEO at the time, Roberto Goizueta, was so sure of his company's dominance that he practically dismissed Pepsi, telling FORTUNE, "As they've become less relevant, I don't need to look at them very much anymore." How wrong we all were. In December, for the first More from Fortune time in this 108-year rivalry, Pepsi beat Coke, Clawbacks can't scratch AIG surpassing Warren Buffett's darling in market Finally! iPhone copy and paste capitalization. Since our cover ran, Pepsi's operating How the export addiction started margins have climbed from 16% to 23%, its net FORTUNE 500 margins from 6% to 14%. Profits, effectively flat Current Issue through the late 1990s, have climbed more than 100% Subscribe to Fortune since 2000, on track to reach $4.5 billion on $32 billion in sales this year. "Pepsi's been on fire," notes Robert van Brugge, beverage analyst with Sanford Bernstein. Over the past five years its stock has risen more than a third to a recent $57 a share, while Coke's has sunk 30%. So what did FORTUNE miss? Everything--and nothing. The great irony of Pepsi's rise is this: It has never sold more soda than Coke, even today. What we failed to appreciate in 1996 was the power of its plan for resurgence, which was already beginning to take root.

PepsiCo turned its cola Waterloo into an opportunity to retrench, regroup, and ultimately outflank its old foe. Pepsi today is one of best-run companies in the country. In the food and beverage business, there are no game-changing innovations--no iPods or Xboxes. It is a detaildriven industry, a long hard slog where gains are measured in fractions of a percent and a single percentage point in market share or margins is a big deal. This is a game Pepsi has mastered--thanks in part to the rigor and competitiveness of CEO Reinemund. "Steve's an ex-Marine, and everything you would associate with that pertains," says Ken Harris, a consultant with Cannondale Associates who has worked with Reinemund at PepsiCo. "You'll leave a meeting knowing exactly what's expected of you and the time frame in which it should be done." Reinemund has put together one of the strongest management teams around, including president and CFO Indra Nooyi, and is a hands-on manager who's been known to personally make sales calls to help Pepsi win a contract. One Christmas Eve a few years back, while on vacation with his family, he found himself at a convenience store just as a Frito-Lay delivery arrived to replenish the shelves; he put aside his purchases and helped pack chips. A devout Presbyterian, he told Theology Today in 2003 that his primary goal is "to glorify God and to serve him in the way I am called to do. I think in the business world the manifestation of that is in actions, not in preaching." (Reinemund declined to be interviewed for this article.) Reinemund certainly owes some of his company's success to stumbles by Coke, which has been plagued by CEO turnover (four in nine years) and management snafus (epitomized by a bungled attempt to buy Quaker Oats in late 2000 that allowed Pepsi to swoop in and make the deal). But Pepsi's resurgence is no accident. A decade ago Coke offered investors a compelling story: a recession-resistant product inexpensive enough that consumers would buy it in good times and bad, but valued enough that they would willingly pay an extra nickel or so above what no-name brands charged. What Coke investors didn't envision was that an emerging preference for other soft beverages--water, sports drinks--would fracture demand. Nor did they (or FORTUNE) see that the business strengths that once applied to cola would take hold across a broadened soft-drink and snack-food market--a market that Pepsi, and not Coke, dominated. Losing the cola wars, it turns out, was the best thing that ever happened to Pepsi. It prompted Pepsi's leaders to look outside the confines of their battle with Coke. "They were the first to recognize that the consumer was moving to noncarbonated products, and they innovated aggressively," observes Gary Hemphill of Beverage Marketing. PepsiCo embraced bottled water and sports drinks much earlier than its rival. Pepsi's Aquafina is the No. 1 water brand, with Coke's Dasani trailing; in sports drinks, Pepsi's Gatorade owns 80% of the market while Coke's Powerade has 15%. Throughout the past five years under Reinemund, the company has deftly moved with every shift in consumer tastes. "He's thinking about what the products should look like in the future," says Victor Dzau, a director of PepsiCo. For example, as COO in 2000, Reinemund had a hand in Pepsi's acquisition of Sobe, buying the company a critical foothold in an emerging category of New Age drinks--the business now pulls in an estimated $200 million a year. Through a

partnership with Starbucks, PepsiCo now dominates the bottled-coffee market; this year it will sell over $300 million of Frappuccinos. But Pepsi's strongest business lies outside drinks altogether. Over the past ten years, the Frito-Lay division--which seems like it sells practically every chip in every store in the country--has become a powerhouse, controlling 60% of the U.S. snack-food market. So strong is Pepsi in this arena, in fact, that many investors no longer judge it by how it stacks up against Coke. "Most people think of Pepsi and Coke fighting it out," observes Eric Schoenstein, an analyst at Jensen Investment Management, which owns shares of both. "But we don't see it that way. Pepsi isn't really a beverage company anymore: It's a food company that also sells beverages." John Carey, manager of the Pioneer fund, which has 1.6 million PepsiCo shares, says he bought the stock because of Frito-Lay: "There's no Coca-Cola in that business." That's a step up in the corporate pecking order for Pepsi's food di- vision. For most of the 40 years it has been a part of the company, Frito-Lay has taken a back seat to the highprofile cola business. "It was the unsung hero," says Mark Dollins, a company spokesman. Now the food brands dominate Pepsi's financial results: Selling Tostitos, Ruffles, and the like--as well as innovative product extensions like Wavy Lays, Limon Cheetos, and 3-D Doritos--now brings in more revenue in North America than beverages do. The news is the same when it comes to operating profit: Frito-Lay North America and Quaker Oats combined deliver 47% of PepsiCo's total, compared with 31% for North American beverages. The rest of the pie--some $1.3 billion in operating profit this year-comes from overseas, where PepsiCo's reach is huge and growing. The company operates across the globe, from Europe (where PepsiCo recently acquired Sara Lee's nuts business in Belgium, the Netherlands, and France, and a Polish snack-foods company) to China (where it owns several potato fields to help keep the chips flowing locally). The company's big push now is getting all its different fiefdoms to work together, especially in sales and marketing campaigns. As this year's Super Bowl looms, supermarket shoppers will see in-store displays that tout watching the game while munching Lays chips and slurping on a Diet Pepsi. This is part of an initiative dubbed the "Power of One," designed to push the company's businesses to approach the marketplace more cohesively. "Our Power of One really speaks to our ability to use all of PepsiCo's products, services, and talents," Reinemund explained in last year's annual report. "We view this as a key strategic growth driver." Right now PepsiCo needs that growth as it faces a toughening economic climate. The high price of energy is putting pressure on the company's margins, and nearly every aspect of its business--its suppliers, its fleet of delivery trucks, its manufactur- ing plants--is feeling the cost squeeze. The result: PepsiCo announced that this quarter it will be taking a restructuring charge of $65 million to $85 million. And barring a miraculous drop in energy prices, the coming year will bring continuing cost pressures. Nonetheless, over the past five years Pepsi has demonstrated an ability to ride out business cycles and sustain its results: Net profits have climbed 50%, sales are up 33%.

Since 2002, sales and earnings per share have grown every quarter year-on-year. The company now boasts 16 brands that bring in more than $1 billion each a year in revenue. Over the next five years, operating profits are expected to rise by 7.5% per year, compared with 5% for the rest of the industry and 6.5% for Coke, according to Sanford Bernstein. The irony of Pepsi's success is that despite how far it has come out of the cola trenches, inside the company the primary competitive driver is still Coke. Ask any employee who the enemy is and the answer comes quick: "Every one of them will say Coke," says consultant Ken Harris, who's worked closely with Pepsi. Coke may no longer be the real competition, but for the soldiers of Pepsi, it's still a very useful enemy. http://www.businessweek.com APRIL 10, 2000

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By: JOHN A. BYRNE

PepsiCo's New Formula  How Roger Enrico is remaking the company...and himself

RELATED ITEMS PepsiCo's New Formula COVER IMAGE: PepsiCo's New Formula CHART: The New PepsiCo TABLE: A Life at PepsiCo TABLE: Pepsi Facts A Potent Ingredient in Pepsi's Formula Today, Mexico. Tomorrow... ONLINE ORIGINAL: "The Sweet Spot of Convenient Food and Beverages" ONLINE ORIGINAL: Is Pepsi's Stock Finally Ready to Pop? On a recent wintry evening, Roger A. Enrico is in front of 50 of his company's most talented executives. They are at PepsiCo's headquarters in Purchase, N.Y., a massive campus dotted with sculptures by Alexander Calder and Henry Moore, to hear one of the last great warriors of the cola wars. Enrico, 55, who once wanted to be an actor, understands that great marketing is pure theater. In his 29 years at PepsiCo ( PEP), he has staged some of marketing's most spectacular productions.

Tonight, as he strides to a lectern in his dark suit and white shirt, he does not disappoint. ''Coke's leadership tried to put us out of business,'' he says flatly. ''But we did not look for a temporary boost or a short-term gain despite the selfdestructive business philosophy by our major competitor. We've been honed by fire.'' Enrico, who reluctantly succeeded the cancer-stricken Wayne Calloway as CEO in 1996, vividly describes the company's progress. But now, he says, Pepsi must show Wall Street that it can deliver superior performance quarter

after quarter. ''You can do this,'' Enrico assures the crowd. ''You have greatness in you, and you can give that greatness to your colleagues. You can make us the fastest-growing, the most profitable best of the best. I'll settle for nothing less from this team. You, my friends, can take it to the top.'' Fiery applause erupts. The executives stand. Clearly, Enrico, who made his name as a maverick marketer in the '90s, still has the touch. Smiling, he walks back to his dinner salad, satisfied with his performance. If only Wall Street would notice. At the dawn of the New Economy, when dot-com startups are the new Nifty Fifty, investors have paid scant attention to Enrico's four-year transformation of the packaged-foods giant. He jettisoned the company's slow-growing fast-food chains. He spun off Pepsi's capital-intensive bottling operations into an independent public company. He spent $3.3 billion to acquire Tropicana, the leading orange juice brand. For the first time in decades, the company is focused on just two things, packaged foods and drinks, in a trio of well-known businesses: Frito-Lay snacks, Pepsi-Cola beverages, and Tropicana juices. Perhaps the most dramatic change at Pepsi is that these days, soda and juice run a distant second to the big engine that now drives PepsiCo: snack foods, in which the company enjoys near-total dominance. Although PepsiCo's identity is still tied to soft drinks, that business now accounts for only a quarter of sales. Frito-Lay, which controls two-fifths of the world market for salty snacks, generated more than 71% of PepsiCo's profits in the fourth quarter. By almost every financial measure, PepsiCo is in better shape than it was in 1996, when one wag noted that ''Coke ( KO) was kicking Pepsi's can.'' Although its $20.4 billion in sales is now a third lower, the company's net is higher by more than $100 million, at $2.1 billion last year. Operating margins have risen to 15% from 10%, while the return on invested capital has jumped to 20% from 15%. Pepsi's position in the marketplace has strengthened, too. For the first time in its history, it boasts two of the top three U.S. soft-drink brands on store shelves. Pepsi-Cola is still second to Coca-Cola, but last fall Pepsi's Mountain Dew edged out Diet Coke for third place. Pepsi's Aquafina bottled water is the No. 1 brand in that fast-growing category, while its Lipton's Iced Tea brand boasts a 16-point share lead over Coca-Cola's Nestea. Tropicana Pure Premium, the nation's top-selling orange juice, surpassed Campbell Soup as the third-largest grocery brand in late January. TOUGH JOB. So how did Enrico bring about these changes? The cola warrior took a hard look at Pepsi's businesses and, unswayed by history or emotion, made strategic decisions to focus on the areas where the company could dominate. Overseas, that meant giving up the self-defeating strategy of going head to head with Coke in every market and instead concentrating on emerging markets that were still up for grabs. ''We kept beating our heads in markets that Coke won 20 years ago,'' says Enrico. ''That is a very difficult proposition.'' At home, Enrico has used that discipline to concentrate on grocery sales, always Pepsi's greatest strength. Taken together, Frito-Lay, Pepsi-Cola, and Tropicana make the company the second-biggest source of sales for supermarkets, behind only Philip Morris Cos.' Kraft Foods Inc. ( MO). Enrico is using that clout to finally unlock the promise that drove Pepsi and Frito-Lay to merge in the first place. By moving Pepsi drinks next to Frito-Lay chips on store shelves, Enrico has increased the odds that when shoppers pick up soda and chips, the soda is a Pepsi. Called ''Power of One,'' the strategy is disarmingly simple--but it's something Pepsi has been unable to execute in the 30-odd years since the two companies were united. But Enrico's biggest challenge has proven the most intractable. Despite improved performance, Pepsi's stock seems as stale as a bag of old potato chips. It has gone nowhere for three straight years. Even the well-publicized miscues of Pepsi's nemesis in Atlanta haven't brought any fizz to Pepsi's shares. Enrico blames a slump in food stocks and the flight of money to high tech. After all, he notes, Pepsi has met or exceeded Wall Street's expectations for four straight quarters, and 22 of 23 analysts who follow PepsiCo rate the stock a buy or higher. Yet the company's shares trade in the low 30s, barely four bucks above the price when Enrico took over. ''It's the old economy/new economy thing that's holding the stock back,'' says George E. Thompson, a Prudential Securities analyst. Sitting in his spacious office, Enrico is clearly frustrated. ''As an investor, I would not put a dime in any of these overinflated companies,'' says Enrico, whose only child, Aaron, now works for a dot-com in Los Angeles. ''I think a lot of people are going to get burned big time, and when that happens I hope they don't get scared and rush their money out of the stock market. I hope they put it in more substantive investments, like Pepsi.'' FADED GLORY. In a period when big brands have lost clout, that doesn't seem likely. Even venerable names, from Procter & Gamble ( PG) to Gillette ( G), are trading near their 52-week lows. Like his counterparts at those other packaged-goods giants, Enrico is struggling to get top-line growth of 6% or 7%. That's not enticing to investors infatuated with outfits that double in size every two years. Even Coke's recent spate of public-relations blunders and management tumult have offered few opportunities. When tainted sodas in Belgium set off an anti-Coke backlash last

year, Pepsi could only watch. ''Our market share in Belgium is so small that if we had a chance to gain anything more than two-tenths of a share point, we probably would run out of capacity,'' Enrico says. Still, if anyone can restore PepsiCo to its glory days of the 1980s, it might well be Enrico, a man whose personal transformation has been almost as dramatic as that of the company he leads. Enrico made his name as head of the U.S. soda business in the '80s. Back then, he was a master of the grand gesture. In 1983, Enrico paid $5 million to entice pop icon Michael Jackson--then at the apex of his career--to make a Pepsi commercial. After Coke's botched introduction of New Coke, he dashed off a brash--and embarrassingly premature--memoir called The Other Guy Blinked: How Pepsi Won the Cola Wars. But now, 14 years later, the swagger and flamboyance have been tempered. Enrico, the onetime impatient egoist, has become more reflective. He is less a flashy marketing genius than a keen corporate strategist and patient mentor to hundreds of colleagues. Once always on the prowl for the big score, these days Enrico professes as much interest in the singles as the home runs. ''The way you build a brand and create enduring value has more to do with the day-to-day execution by tens of thousands of people on the front line than it does with the brand manager with the hot idea,'' he says now. It's not just the passage of time that has mellowed Enrico. His friends and colleagues trace the catalyzing moment to the early morning hours of Feb. 24, 1990. It was 2 a.m. and Enrico and his wife, Rosemary, were tearing up the dance floor in a nightclub in Turkey. ''It was a Latin band,'' he recalls, ''and they played a mean lambada.'' Suddenly, Enrico became short of breath. His chest began to ache and he broke out in a cold sweat. His colleagues rushed him to the American hospital in Istanbul. ''I was lying on the stretcher and the Turkish doctor said, 'Don't worry. You're going to be all right.' And I said, 'I know. My wife said the same thing.''' The heart attack he suffered was comparatively minor, but it altered Enrico's perspective on life. The episode helped to spark some introspection in a person who had long been consumed by his career. ''It was a remarkable and positive experience,'' says Gerard R. Roche, an Enrico friend and Heidrick & Struggles International Inc. headhunter. ''It has broadened him, made him more reflective, and lent him a human sensitivity that he showed to few people before.'' It's not surprising that the transforming event occurred far from home. From his earliest days, Enrico has had the smalltown boy's yen for adventure. The son of an iron ore worker, Enrico grew up in tiny Chisholm, Minn. As a teen, he pledged to someday visit every country in the world. After attending Babson College near Boston on a scholarship, Enrico volunteered in 1967 for Vietnam, where he dodged mortars to help transport fuel to troops near the demilitarized zone. It was, he once noted, his first lesson ''in delivering precious liquids to consumers.'' He married his high school sweetheart, Rosemary Margo, on an R&R leave in Hawaii in 1969. Two years later, after the service and a brief stint at General Mills Inc., he joined PepsiCo's Frito-Lay Div. From the start, Enrico evoked the indignation of superiors who thought him brash and impudent. James H. O'Neal, production chief for Frito-Lay in the mid-1970s, recalls touring a plant with Enrico, who was then a brand manager. ''All of a sudden, I notice that he is lagging behind, and he has his arm draped around my plant manager,'' says O'Neal. ''He was kind of seducing him to put more flavorings on his brand. He was just more aggressive and more pushy than anybody else.'' Still, by demonstrating a flair for marketing and an ability to get results, he steadily climbed the ranks. In 1983, when Enrico's boss, John Sculley, left for Apple Computer Inc., Enrico became chief executive of Pepsi-Cola's U.S. business. He quickly incensed his new boss. When he signed Michael Jackson in 1983, for example, he failed to either inform or gain the approval of his boss, Victor Bonomo. ''He didn't care for supervision,'' remembers Bonomo, then head of the worldwide beverage group. ''He liked to do his own thing.'' UNCOMMON BOND. Soon, Enrico committed an even bigger faux pas. It was the mid-1980s, and he had invited hundreds of the company's bottlers to a lavish black-tie bash in Manhattan. The evening included dinner at the Waldorf Astoria, followed by a glitzy show at Lincoln Center. Left off the guest list was legendary PepsiCo Chairman and CEO Donald M. Kendall, who heard of the affair from CBS Corp. CEO Thomas Wyman. ''Needless to say, he was not pleased,'' recalls Enrico. But the inevitable dressing down was followed by an invitation from Kendall to meet with him once a week. Thus began an extraordinary mentorship. The private meetings continued for years, allowing the two to forge an uncommon bond that permits Kendall, now 79 and retired as chairman since 1986, to maintain an office on the executive floor, just two doors away from Enrico. ''I ask for his advice many times,'' says Enrico. ''There is not a move I made here that I didn't consult with Don in advance.''

Although Enrico had built his life around a fast-track career, his heart attack led him to start questioning those priorities. Soon after returning to the U.S., Enrico began paging through his calendar of business trips. ''I got sick to my stomach, looking at the things I did,'' he says. ''I would fly to Paris for a day and come back and go to Los Angeles for lunch and return the same day. I thought, 'Here I am in a position to realize one of my childhood dreams, which was to experience the world.' I wasn't experiencing a damn thing.'' Soon, he began building extra hours for himself into his business jaunts. In Austria, he spent an afternoon and early evening strolling the streets of Vienna before meeting colleagues the next day. ''I had been there half a dozen times and yet never saw the city,'' he recalls. Even as Enrico moved up to the top job at Frito-Lay in 1991, he continued to question the basic assumptions of his life and career. Through the years, he had accumulated a small fortune in PepsiCo stock. (His current stock holdings and options are worth more than $80 million.) ''I began to think, well, what's money for?'' he says. ''It was more money than I needed to live on.'' Enrico decided to use his wealth to take his life in a new direction. His first impulse was to become active in community service or to teach, but a colleague suggested that he could just as easily teach inside the company. So after two years at Frito-Lay, Enrico took a 14-month sabbatical. He set up a ''war college'' in 1993 at his retreat in the Cayman Islands and his ranch in Montana. During much of that time, in sessions that began early in the morning and went late into the evening, he mentored and coached the company's most promising executives. His teaching ''sabbatical'' ended in 1995, when then CEO Calloway lured him back into the business to run PepsiCo's troubled fast-food business. Enrico was named CEO of the division, responsible for 29,000 Pizza Hut, Taco Bell, and Kentucky Fried Chicken restaurants. Calloway, diagnosed with prostate cancer in early 1992, had an overwhelming need to bulk up his management team. Undergoing surgery, radiation, and then chemotherapy, Calloway needed a viable successor, and time was running out. Indeed, just months later, Enrico found himself prevailed upon by his friend Calloway and his mentor Kendall to take the top job. While the young, career-obsessed Enrico would have leaped at the opportunity, the more measured Enrico was reluctant. He was only 51, but he had already been chief executive of PepsiCo's three major divisions during his 25-year career at the company. ''It was sort of like running the same show over again, rather than moving on to the next act,'' he says. So both Calloway and Kendall began to work on him. His mentor recalls one late session at Enrico's home in Dallas when he spent hours trying to talk Enrico into the job. ''About 3 in the morning,'' says Kendall, ''he finally came around.'' Enrico says it was not that easy. ''Ultimately, it was circumstance that persuaded me to take the job, not what anyone said. Wayne obviously was in a situation where he couldn't continue to do this, and I owed it to the company to take the job. Nobody told me that, but that was my conclusion.'' On April Fool's Day in 1996, he became CEO. Seven months later, he gained the title of chairman from Calloway, who died in July, 1998, at the age of 62. Enrico's ascension was cheered by investors, who had already become disenchanted with the company's early 1990s fumbles, and employees, who knew and respected Enrico for what he had done over the years. He inherited a mess. Few understood how badly things had gone amiss. Through the four years that Calloway battled cancer, the company had lost its momentum. Pepsi-Cola was steadily losing market share to Coca-Cola. But the deterioration was greatest overseas, where Pepsi had overinvested and overcommitted in a foolish attempt to beat its rival in almost every market. ''You just don't fight hand-to-hand combat against a Coke,'' says James O'Neal, the former CEO of Frito-Lay International. Then, shortly after moving into his new job, Enrico endured a stunning humiliation. In Venezuela, one of the few international markets in which Pepsi had an advantage, the company's bottling partner, Cisneros Group, shifted allegiances to Coke. Virtually overnight, Pepsi lost its 85% market share. Enrico, to this day, bristles at the incident, insisting that Coke vastly overpaid for the bottler in a concerted attempt to wound Pepsi. Enrico ended his first year as CEO having to take an $822 million write-off, the bulk of it to clean up Pepsi's international problems. BATTLE IN THE AISLES. Enrico lost no time in drawing up a battle plan. By shedding restaurants and spinning off bottling operations, he has essentially developed a strategy that centers on the supermarket, a battleground where he has triumphed in the past. The addition of Tropicana, for example, strengthens his position with retailers because of that brand's huge importance. Tropicana executives believe the brand can eclipse both No. 1 Coca-Cola Classic and No. 2 Pepsi-Cola, as the top seller in the nation's supermarkets before the end of this decade. To make sure customers and employees alike got the message, Enrico cleared 21 days of his calendar last year to personally visit with the CEOs of the 25 largest supermarket chains. In each case, he made a powerful economic argument. PepsiCo products account for 3% of the total sales of supermarkets and 20% of the retailers' cash flow. Even

better, the operating margins on Pepsi goods are 9%, compared with a 2% average on everything else, because Pepsi delivers and stocks the shelves itself. The message: Do more business with us, and you'll make more money. The idea behind ''Power of One'' is that by leveraging the synergies of soft drinks and snacks, Pepsi and its retail partners can drive sizable growth. It has been 35 years since Don Kendall and Herman W. Lay sat at a table and sketched out the merger of Pepsi-Cola and Frito-Lay on a yellow legal pad, with no lawyers or investment bankers present. Back then, Pepsi-Cola earned 2.4 times the net profits of Frito-Lay and accounted for roughly 58% of the combined sales. Today, that's reversed, with Frito earning 2.4 times beverages. THIRSTY? While Kendall and Lay did not envision that remarkable reversal of fortune, they did imagine powerful synergies. ''You make them thirsty,'' Kendall told Lay, ''and I'll give them something to drink.'' The deal dealt Pepsi another card in its contest with Coca-Cola, but the card was never fully played. Soon after becoming CEO, however, Enrico revisited the issue. A simple fact intrigued him: Two-thirds of all Frito-Lay consumers drink a Pepsi-made beverage when eating snacks, but only half of them buy the soda and chips together. If Enrico could persuade shoppers to pick up a six-pack of Pepsi along with the Doritos, he was sure he could reel in plenty of customers who were now quenching their thirst with rival drinks. What's more, Frito-Lay could leverage its clout to gain greater shelf space for Pepsi. ''You go to Chile, where Frito-Lay has over 90% of the market, but Pepsi is in lousy shape,'' says Kendall. ''Frito-Lay can help Pepsi change that.'' To make it happen, Enrico appointed Pepsi's first corporate sales executive. Albert P. Carey, a former Procter & Gamble sales manager who had put in 19 years at Frito-Lay, got the job in mid-1998. By working closely with Pepsi's most important supermarket chains, Carey has gained some keen insights. Sifting through data from one chain, for example, he found that sales of carbonated beverages ranged from 2.27% to 5.43% of sales. ''If you could bring the underperforming stores to the average, you could increase sales at this one chain by $6.6 million,'' says Carey. ''Across all of our categories, the opportunity gap was $10.6 million.'' Pepsi suggested adding shelf space and better displays in the poorer performing locations. Almost immediately, volume bumped up by as much as 11%. Persuading a supermarket to simply display snacks with soft drinks can add another 3 to 10 percentage points of growth. Displays that bring the products together at the end of an aisle can give a 3% boost. Last year, these tactics helped Frito-Lay increase its market share by two percentage points, to 56%. Pepsi-Cola's volumes rose 0.6%. Some of Pepsi's rivals, including Coke, benefited from the free advice. ''But if you help the retailer solve a problem,'' says Carey, ''you'll get your fair share of the rewards.'' This is the kind of partnering with customers that General Electric Co.'s John F. Welch Jr. has used to boost profits at GE's medical systems and aircraft engine units. It is also the antithesis of the style that earned a younger Enrico a reputation as master marketer. Still, Enrico has not abandoned his marketer's roots. By reviving the highly effective ''Pepsi Challenge'' campaign of the 1970s, which invites consumers to compare Coke directly to Pepsi, Enrico is setting off a new round in the cola wars. He has recently signed celebrities including singer Faith Hill and baseball stars Ken Griffey Jr. and Sammy Sosa to promote the flagship brand. And he has just forged a promotional deal with Yahoo! Inc. that will be launched in August. ''This is a series of big, bold, and dramatic marketing moves that Roger had long been known for,'' says John D. Sicher, publisher of Beverage Digest. ''You are seeing vintage Roger Enrico again.'' There may be even greater opportunities in the chip business. In the past decade, the international salty snack market has doubled, to more than $20 billion. Yet most markets remain vastly underdeveloped, presenting huge potential. At home, Enrico plans to leverage PepsiCo's vast direct-store-delivery system, which allows Frito-Lay to roll out a new product in 470,000 retail outlets within weeks. Pepsi's recent acquisition of Cracker Jack gives a sense of the possibilities. The classic brand, which had annual sales of $40 million and was owned by Borden Foods Co., hadn't had serious advertising behind it since the late 1970s and had been losing money for five straight years when Pepsi picked it up in 1997. It was a perfect fit. ''We were missing out on 50% of the snacking opportunity because when people snack, they first decide whether to go for a salty treat or a sweet one,'' says Beth Struckell, a Frito-Lay vice-president who championed the acquisition. The product also met the company's ''mindlessly nibbling'' test: ''Once you open the bag,'' smiles Struckell, ''you just keep eating them until they're gone.'' Struckell retained Cracker Jack's iconic box package but also developed 4-ounce bags. In response to consumer complaints, she added 10% more peanuts, upgraded the prizes, and added a Web site. Then the company used its vast Frito-Lay distribution network to roll it out. Cracker Jack turned a profit in its first year, and today racks up nearly $100

million in annual sales from the new four-ounce bag alone. LOCAL WHEELS. Enrico still faces formidable obstacles in building Pepsi's overseas soda business. His strategy now is an admission that in many markets Coke is it. Enrico is placing his biggest bets on developing markets, such as India, China, and Russia. ''The key thing is not to merely plant flags,'' says Peter M. Thompson, CEO of Pepsi-Cola International. ''It's to make sure you build a business, customer by customer, block by block, day by day.'' In India, where per capita soft drink consumption is seven servings a year, vs. more than 700 in the U.S., and where deliveries are often done on three-wheel bicycles, Pepsi finds the most prominent businessman in each town and gives them exclusive distribution rights, tapping their connections to drive growth. Over the past five years, volume has risen at a 26% annual clip. Pepsi has stolen 19 points of market share from Coca-Cola, bringing Pepsi's share to 47%, close to Coke's 52%. Still, Pepsi is unlikely ever to catch up to Coca-Cola overseas. Although Enrico has stabilized Pepsi's international business, its size and scope pales next to Coke's. Last year, operating income at Pepsi-Cola International totaled just $70 million. Return on invested capital was a mere 3% last year--vs. 36% for Frito-Lay. And despite encouraging progress in India and China, neither market is yet profitable for Pepsi. But Enrico's biggest challenge isn't overseas; it's on Wall Street. Internet enthusiasm may have knocked some of the punch out of PepsiCo's stock price, but Enrico bears some responsibility, too. His key maneuvers--ditching fast food, spinning out the bottling group, and acquiring Tropicana--drew less than raves because investors saw each as isolated chess moves, not as elements of a new strategic direction. ''To some degree,'' concedes Enrico, ''that was my fault. It would have been better to do these things more quickly than to let it play out the way it did.'' One of Enrico's top priorities this year is to lure more investors into the stock. PepsiCo is stepping up its presence at investment conferences, and Enrico already has scheduled 20 personal meetings with major institutional funds. ''We have a story to tell, and we have ears willing to listen to it,'' he says. ''I absolutely think the stock is undervalued.'' Even amid these challenges, Enrico has not forgotten the vows he made after his heart attack to reorder his priorities. He's still extremely committed to teaching, for example. The leadership conferences he pioneered during his sabbatical have continued, giving him personal familiarity with his top managers that is rare for a CEO. Nearly 130 executives have been through the programs, including most of PepsiCo's senior management team. Teaching, believes Enrico, is a vital part of the CEO's job, and it's also a payback for the mentoring he received from Kendall and others. Besides, he says, ''it's a heck of a lot of fun to be with young people who are really making things happen.'' The nine participants each bring a major proposal to work on over the course of the week, which also includes one-onone mentoring sessions with Enrico. That gives the CEO a chance to shape the corporation's most important initiatives at their inception. Every participant is invited to call him at any time, without the knowledge of his or her boss, just as Kendall once encouraged him. ''It was a remarkable experience,'' says Struckell, who refined her strategy for Cracker Jack at a session last summer. ''It's as if Roger becomes a coach and consultant, leading you in the right direction.'' More than that, managers get to see the CEO outside the office, in jeans and a flannel shirt. One day, he'll take the group horseback riding or fly-fishing deep in the mountains of Montana. A couple of nights are spent crooning songs like American Pie and My Way, which Enrico is said to deliver in fine Sinatra style. The sambuca flows freely. ''People discover the warm side of Roger there,'' says Indra K. Nooyi, the newly appointed chief financial officer. And Enrico remains interested in using his wealth to accomplish some higher goal. For the past two years, he has worked for a salary of $1 a year, with the proviso that his company donate the $1 million he would otherwise make to a scholarship fund for the children of front-line workers. He still collects a bonus and stock options, but the money he gives has paid the college tuition for 150 students. Meantime, Enrico is still trying to carve out time for himself and his wife. A voracious reader of biographies, he is a public policy buff who says that Henry Kissinger is his ''hero of all heroes.'' He enjoys fishing and scuba diving. Yet his New Year's resolution, to spend more time playing golf, provides a clue that he is still straining to achieve the right balance. ''The bad news is I belong to two clubs and didn't hit a golf ball last year,'' he laughs. ''The good news is that in the previous year I belonged to three clubs.'' Friends say Enrico is an impatient person who gets bored easily. That makes it unlikely that he will last in the job for 10 more years when he turns 65. A possible successor emerged last year, when he named Steven S. Reinemund, a former Marine who successfully led Frito-Lay for eight years, his No. 2 and PepsiCo president. Enrico clearly is thinking beyond his Pepsi career. ''There is going to be an Act Two in my life,'' he insists. ''I don't know when or what, but there is going to be something.'' Until then, expect this cola warrior to keep battling away at the Pepsi Challenge.

http://www.eggstrategy.com Jan 13

Package as Strategy; Or, Why Pepsi is  Smarter than Coke

Pepsi’s new packaging strategy - launching 35 separate graphic designs on their flagship product - is, in a word, BRILLIANT. Why? 1. The human brain craves novelty. It was built that way. We search for things that are new and ignore things that are old. Pepsi (and Coke) have more linear feet of product per store than any other brand. With the same graphics day in and day out, it’s just wallpaper. It goes unnoticed. New designs will capture the consumers eye and draw people into the product. 2. Packaging is your most cost effective advertising. It’s working media. It’s treated as a cost of goods, but in reality, it’s an opportunity to reinforce the brand with every sale. It should be used more strategically, as a way to say who the brand is, to reaffirm personality. Right now, most every manufacturer wastes it. 3. Pepsi’s consumer is young and energetic. They look for things that are dynamic, fun, and different. This strategy is perfectly in tune. 4. A visual image is worth a thousand words. Rather than say who they are, Pepsi is showing it. Too many manufacturers clutter their packages with words, not images or stories. It’s lazy and design firms should do better. These packages say more about the brand - wordlessly - than any copy driven verbal strategy could. Bravo Pepsi. Brilliant! This entry was posted on Saturday, January 13th, 2007 at 11:25 am and is filed under Design. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.