Company Perspectives:
PepsiCo’s overall mission is to increase the value of our shareholder’s investment. We do this through sales growth, cost controls and wise investment of resources. We believe our commercial success depends upon offering quality and value to our consumers and customers; providing products that are safe, wholesome, economically efficient and environmentally sound; and providing a fair return to our investors while adhering to the highest standards of integrity.
Key Dates:
1898: Pharmacist Caleb D. Bradham begins selling a cola beverage called Pepsi-Cola.
1905: Bradham begins establishing a network of bottling franchises.
1923: Bradham’s company goes bankrupt.
1928: Roy C. Megargel reorganizes the firm as the National Pepsi-Cola Company.
1931: Company again goes bankrupt and is resurrected by the president of Loft Inc., Charles G. Guth.
1933: The size of Pepsi bottles is doubled, increasing sales dramatically.
1936: Pepsi-Cola Company becomes a subsidiary of Loft.
1939: First national radio advertising of the Pepsi brand.
1941: Loft and Pepsi-Cola merge, the new firm using the name Pepsi-Cola Company.
1964: Diet Pepsi debuts; Mountain Dew is acquired from Tip Corporation.
1965: Pepsi-Cola merges with Frito-Lay to form PepsiCo, Inc., with the two predecessors becoming divisions.
1967: Frito-Lay introduces Doritos tortilla chips to the national U.S. market.
1977: PepsiCo acquires Taco Bell.
1978: PepsiCo acquires Pizza Hut.
1981: Frito-Lay introduces Tostitos tortilla chips.
1986: The Kentucky Fried Chicken (KFC) chain is acquired.
1997: Taco Bell, Pizza Hut, and KFC are spun off into a new company called Tricon Global Restaurants.
1998: PepsiCo acquires Tropicana Products for $3.3 billion.
1999: Pepsi Bottling Group is spun off to the public, with PepsiCo retaining a 35 percent stake.
2000: PepsiCo reaches an agreement to acquire the Quaker Oats Company for $13.4 billion.
Company History:
PepsiCo, Inc. is one of the world’s top consumer product companies with many of the world’s most important and valuable trademarks. Its Pepsi-Cola Company division is the second largest soft drink business in the world, with a 21 percent share of the carbonated soft drink market worldwide and 29 percent in the United States. Three of its brands–Pepsi-Cola, Mountain Dew, and Diet Pepsi&mdashe among the top ten soft drinks in the U.S. market. The Frito-Lay Company division is by far the world leader in salty snacks, holding a 40 percent market share and an even more staggering 56 percent share of the U.S. market. In the United States, Frito-Lay is nine times the size of its nearest competitor and sells nine of the top ten snack chip brands in the supermarket channel, including Lay’s, Doritos, Tostitos, Ruffles, Fritos, and Chee-tos. Frito-Lay generates more than 60 percent of PepsiCo’s net sales and more than two-thirds of the parent company’s operating profits. The company’s third division, Tropicana Products, Inc., is the world leader in juice sales and holds a dominant 41 percent of the U.S. chilled orange juice market. On a worldwide basis, PepsiCo’s product portfolio includes 16 brands that generate more than $500 million in sales each year, ten of which generate more than $1 billion annually. Overall, PepsiCo garners about 35 percent of its retail sales outside the United States, with Pepsi-Cola brands marketed in about 160 countries, Frito-Lay in more than 40, and Tropicana in approximately 50. As 2001 began, PepsiCo was on the verge of adding to its food and drink empire the brands of the Quaker Oats Company, which include Gatorade sports drink, Quaker oatmeal, and Cap’n Crunch, Life, and other ready-to-eat cereals.
When Caleb D. Bradham concocted a new cola drink in the 1890s, his friends’ enthusiastic response convinced him that he had created a commercially viable product. For 20 years, ‘Doc’ Bradham prospered from his Pepsi-Cola sales. Eventually, he was faced with a dilemma; the crucial decision he made turned out to be the wrong one and he was forced to sell. But his successors fared no better and it was not until the end of the 1930s that Pepsi-Cola again became profitable. Seventy years later, PepsiCo, Inc. was a mammoth multinational supplier of soft drinks, juices, and snack food. PepsiCo’s advance to that level was almost entirely the result of its management style and the phenomenal success of its television advertising.
Ups and Downs in the Early Years
Doc Bradham, like countless other entrepreneurs across the United States, was trying to create a cola drink similar in taste to Coca-Cola, which by 1895 was selling well in every state of the union. On August 28, 1898, at his pharmacy in New Bern, North Carolina, Bradham gave the name Pepsi-Cola to his most popular flavored soda. Formerly known as Brad’s Drink, the new cola beverage was a syrup of sugar, vanilla, oils, cola nuts, and other flavorings diluted in carbonated water. The enterprising pharmacist followed Coca-Cola’s method of selling the concentrate to soda fountains; he mixed the syrup in his drugstore, then shipped it in barrels to the contracted fountain operators who added the soda water. He also bottled and sold the drink himself.
In 1902 Doc Bradham closed his drugstore to devote his attention to the thriving new business. The next year, he patented the Pepsi-Cola trademark, ran his first advertisement in a local paper, and moved the bottling and syrup-making operations to a custom-built factory. Almost 20,000 gallons of Pepsi-Cola syrup were produced in 1904.
Again following the successful methods of the Coca-Cola Company, Bradham began to establish a network of bottling franchises. Entrepreneurs anxious to enter the increasingly popular soft drink business set themselves up as bottlers and contracted with Bradham to buy his syrup and sell nothing but Pepsi. With little cash outlay, Pepsi-Cola reached a much wider market. Bradham’s first two bottling franchises, both in North Carolina, commenced operation in 1905. By 1907, Pepsi-Cola had signed agreements with 40 bottlers; over the next three years, the number grew to 250 and annual production of the syrup exceeded one million gallons.
Pepsi-Cola’s growth continued until World War I, when sugar, then the main ingredient of all flavored sodas, was rationed. Soft drink producers were forced to cut back until sugar rationing ended. The wartime set price of sugar–5.5 cents per pound–rocketed after controls were lifted to as much as 26.5 cents per pound in 1920. Bradham, like his rivals, had to decide whether to halt production and sit tight in the hope that prices would soon drop, or stockpile the precious commodity as a precaution against even higher prices; he chose the latter course. But unfortunately for him the market was saturated by the end of 1920 and sugar prices plunged to a low of two cents per pound.
Bradham never recovered. After several abortive attempts to reorganize, only two of the bottling plants remained open. In a last ditch effort, he enlisted the help of Roy C. Megargel, a Wall Street investment banker. Very few people, however, were willing to invest in the business and it went bankrupt in 1923. The assets were sold and Megargel purchased the company trademark, giving him the rights to the Pepsi-Cola formula. Doc Bradham went back to his drug dispensary and died 11 years later.
Megargel reorganized the firm as the National Pepsi-Cola Company in 1928, but after three years of continuous losses he had to declare bankruptcy. That same year, 1931, Megargel met Charles G. Guth, a somewhat autocratic businessman who had recently taken over as president of Loft Inc., a New York-based candy and fountain store concern. Guth had fallen out with Coca-Cola for refusing the company a wholesaler discount and he was on the lookout for a new soft drink. He signed an agreement with Megargel to resurrect the Pepsi-Cola company, and acquired 80 percent of the new shares, ostensibly for himself. Then, having modified the syrup formula, he canceled Loft’s contract with Coca-Cola and introduced Pepsi-Cola, whose name was often shortened to Pepsi.
Loft’s customers were wary of the brand switch and in the first year of Pepsi sales the company’s soft drink turnover was down by a third. By the end of 1933, Guth bought out Megargel and owned 91 percent of the insolvent company. Resistance to Pepsi in the Loft stores tailed off in 1934, and Guth decided to further improve sales by offering 12-ounce bottles of Pepsi for a nickel–the same price as six ounces of Coke. The Depression-weary people of Baltimore–where the 12-ounce bottles were first introduced–were ready for a bargain and Pepsi-Cola sales increased dramatically.
Guth soon took steps to internationalize Pepsi-Cola, establishing the Pepsi-Cola Company of Canada in 1934 and in the following year forming Compania Pepsi-Cola de Cuba. He also moved the entire American operation to Long Island City, New York, and set up national territorial boundaries for the bottling franchises. In 1936, Pepsi-Cola Ltd. of London commenced business.
Guth’s ownership of the Pepsi-Cola Company was challenged that same year by Loft Inc. In a complex arrangement, Guth had organized Pepsi-Cola as an independent corporation, but he had run it with Loft’s employees and money. After three years of litigation, the court upheld Loft’s contention and Guth had to step down, although he was retained as an adviser. James W. Carkner was elected president of the company, now a subsidiary of Loft Inc., but Carkner was soon replaced by Walter S. Mack, Jr., an executive from the Phoenix Securities Corporation.
Mack established a board of directors with real voting powers to ensure that no one person would be able to wield control as Guth had done. From the start, Mack’s aim was to promote Pepsi to the hilt so that it might replace Coca-Cola as the world’s best-selling soft drink. The advertising agency Mack hired worked wonders. In 1939, a Pepsi radio jingle–the first one to be aired nationally–caught the public’s attention: ‘Pepsi-Cola hits the spot. Twelve full ounces, that’s a lot. Twice as much for a nickel, too. Pepsi-Cola is the drink for you.’ The jingle, sung to the tune of the old British hunting song ‘D’Ye Ken John Peel,’ became an advertising hallmark; no one was more impressed, or concerned, than the executives at Coca-Cola.
In 1940, with foreign expansion continuing strongly, Loft Inc. made plans to merge with its Pepsi-Cola subsidiary. The new firm, formed in 1941, used the name Pepsi-Cola Company since it was so well-known. Pepsi’s stock was listed on the New York Stock Exchange for the first time.
Sugar rationing was even more severe during World War II, but this time the company fared better; indeed, the sugar plantation Pepsi-Cola acquired in Cuba became a most successful investment. But as inflation spiraled in the postwar U.S. economy, sales of soft drinks fell. The public needed time to get used to paying six or seven cents for a bottle of Pepsi which, as they remembered from the jingle, had always been a nickel. Profits in 1948 were down $3.6 million from the year before.
In other respects, 1948 was a notable year. Pepsi moved its corporate headquarters across the East River to midtown Manhattan, and for the first time the drink was sold in cans. The decision to start canning, while absolutely right for Pepsi-Cola and other soft drink companies, upset the franchised bottlers, who had invested heavily in equipment. However, another decision at Pepsi-Cola&mdashø ignore the burgeoning vending machine market because of the necessarily large capital outlay&mdash′oved to be a costly mistake. The company had to learn the hard way that as canned drinks gained a larger share of the market, vending machine sales would become increasingly important.
1950s: The Steele and Crawford Era
Walter Mack was appointed company chairman in 1950, and a former Coca-Cola vice-president of sales, Alfred N. Steele, took over as president and chief executive officer, bringing 15 other Coke executives with him. Steele continued the policy of management decentralization by giving broader powers to regional vice-presidents, and he placed Herbert Barnet in charge of Pepsi’s financial operations. Steele’s outstanding contribution, however, was in marketing. He launched an extensive advertising campaign with the slogan ‘Be Sociable, Have a Pepsi.’ The new television medium provided a perfect forum; Pepsi advertisements presented young Americans drinking ‘The Light Refreshment’ and having fun.
By the time Alfred Steele married movie star Joan Crawford in 1954, a transformation of the company was well underway. Crawford’s adopted daughter, Christina, noted in her best-seller Mommie Dearest: ‘[Steele had] driven Pepsi into national prominence and distribution, second only to his former employer, Coca-Cola. Pepsi was giving Coke a run for its money in every nook and hamlet of America. Al Steele welded a national network of bottlers together, standardized the syrup formula …, brought the distinctive logo into mass consciousness, and was on the brink of going international.’ In fact, Pepsi-Cola International Ltd. was formed shortly after Steele’s marriage.
Joan Crawford became the personification of Pepsi’s new and glamorous image. She invariably kept a bottle of Pepsi at hand during press conferences and mentioned the product at interviews and on talk shows; on occasion she even arranged for Pepsi trucks and vending machines to feature in background shots of her movies. The actress also worked hard to spread the Pepsi word overseas and accompanied her husband, now chairman of the board, on his 1957 tour of Europe and Africa, where bottling plants were being established.
Steele died suddenly of a heart attack in the spring of 1959. Herbert Barnet succeeded him as chairman and Joan Crawford was elected a board member. Pepsi-Cola profits had fallen to a postwar low of $1.3 million in 1950 when Steele joined the company, but with the proliferation of supermarkets during the decade and the developments in overseas business, profits reached $14.2 million in 1960. By that time, young adults had become a major target of soft drink manufacturers and Pepsi’s advertisements were aimed at ‘Those who think young.’
Al Steele and Joan Crawford had been superb cheerleaders, but a stunt pulled in 1959 by Donald M. Kendall, head of Pepsi-Cola International, is still regarded as one of the great coups in the annals of advertising. Kendall attended the Moscow Trade Fair that year and persuaded U.S. Vice-President Richard Nixon to stop by the Pepsi booth with Nikita Khrushchev, the Soviet premier. As the cameras flashed, Khrushchev quenched his thirst with Pepsi and the grinning U.S. Vice-President stood in attendance. The next day, newspapers around the world featured photographs of the happy couple, complete with Pepsi bottle.
1960s and 1970s: The Pepsi Generation, Diversification
By 1963, Kendall was presiding over the Pepsi empire. His rise to the top of the company was legendary. He had been an amateur boxing champion in his youth and joined the company as a production line worker in 1947 after a stint in the U.S. Navy. He was later promoted to syrup sales where it quickly became apparent that he was destined for higher office. Ever pugnacious, Kendall has been described as abrasive and ruthlessly ambitious; beleaguered Pepsi executives secretly referred to him as White Fang. Under his long reign, the company’s fortunes skyrocketed.
Pepsi-Cola’s remarkable successes in the 1960s and 1970s were the result of five distinct policies, all of which Kendall and his crew pursued diligently: advertising on a massive, unprecedented scale; introducing new brands of soft drinks; leading the industry in packaging innovations; expanding overseas; and, through acquisitions, diversifying their product line.
The postwar baby-boomers were in their mid- to late teens by the time Kendall came to power. ‘Pepsi was there,’ states a recent company flyer, ‘to claim these kids for our own.’ These ‘kids’ became the ‘Pepsi Generation.’ In the late 1960s Pepsi was the ‘Taste that beats the others cold.’ Viewers were advised ‘You’ve got a lot to live. Pepsi’s got a lot to give.’ By the early 1970s, the appeal was to ‘Join the Pepsi people, feelin’ free.’ In mid-decade an American catchphrase was given a company twist with ‘Have a Pepsi Day,’ and the 1970s ended on the note ‘Catch the Pepsi Spirit!’
The Pepsi Generation wanted variety and Pepsi was happy to oblige. Company brands introduced in the 1960s included Patio soft drinks, Teem, Tropic Surf, Diet Pepsi–the first nationally distributed diet soda, introduced in 1964–and Mountain Dew, acquired from the Tip Corporation, also in 1964. Pepsi Light, a diet cola with a hint of lemon, made its debut in 1975, and a few years later Pepsi tested the market with Aspen apple soda and On-Tap root beer. The company also introduced greater variety into the packaging of its products. Soon after Kendall’s accession, the 12-ounce bottle was phased out in favor of the 16-ounce size, and in the 1970s Pepsi-Cola became the first American company to introduce one-and-a-half and two-liter bottles; it also began to package its sodas in sturdy, lightweight plastic bottles. By the end of the decade, Pepsi had added 12-pack cans to its growing array of packaging options.
The company’s expansion beyond the soft drink market began in 1965 when Kendall met Herman Lay, the owner of Frito-Lay, at a grocer’s convention. Kendall arranged a merger with this Dallas-based snack food manufacturer and formed PepsiCo, Inc. Herman Lay retired soon thereafter but retained his substantial PepsiCo shareholding. The value of this stock increased dramatically as Frito-Lay products were introduced to Pepsi’s nationwide market. At the time of the merger, key Frito-Lay brands included Fritos corn chips (created in 1932), Lay’s potato chips (1938), Chee-tos cheese-flavored snacks (1948), Ruffles potato chips (1958), and Rold Gold pretzels (acquired by Frito-Lay in 1961). Doritos tortilla chips were introduced nationally in 1967. The addition of Frito-Lay helped PepsiCo achieve $1 billion in sales for the first time in 1970. That same year, the corporation moved into its new world headquarters in Purchase, New York.
During the 1970s, Kendall acquired two well-known fast-food restaurant chains, Taco Bell, in 1977, and Pizza Hut, in 1978; naturally, these new subsidiaries became major outlets for Pepsi products. But Kendall also diversified outside the food and drink industry, bringing North American Van Lines (acquired in 1968), Lee Way Motor Freight, and Wilson Sporting Goods into the PepsiCo empire.
Overseas developments continued apace throughout Kendall’s tenure. Building on his famous Soviet achievement, he negotiated a trade agreement with the U.S.S.R. in 1972; the first Pepsi plant opened there two years later. Gains were also made in the Middle East and Latin America, but Coca-Cola, the major rival, retained its dominant position in Europe and throughout much of Asia.
1980s Highlighted by the Cola Wars
By the time PepsiCo greeted the 1980s with the slogan ‘Pepsi’s got your taste for life!,’ Kendall was busy arranging for China to get that taste too; production began there in 1983. Kendall put his seal of approval on several other major developments in the early 1980s, including the introduction of Pepsi Free, a non-caffeine cola, and Slice, the first widely distributed soft drink to contain real fruit juice (lemon and lime). The latter drink was aimed at the growing 7-Up and Sprite market. Additionally, Diet Pepsi was reformulated using a blend of saccharin and aspartame (NutraSweet). ‘Pepsi Now!’ was the cry of company commercials, and this was interspersed with ‘Taste, Improved by Diet Pepsi.’ On the Frito-Lay side, meantime, the Tostitos brand of crispy round tortilla chips was introduced in 1981.
In 1983 the company claimed a significant share of the fast-food soft drink market when Burger King began selling Pepsi products. A year later, mindful of the industry axiom that there is virtually no limit to the amount a consumer will buy once the decision to buy has been made, PepsiCo introduced the 3-liter container.
By the mid-1980s, the Pepsi Generation was over the hill. Kendall’s ad agency spared no expense in heralding Pepsi as ‘The Choice of a New Generation,’ using the talents of superstar Michael Jackson, singer Lionel Richie, and the Puerto Rican teenage group Menudo. Michael Jackson’s ads were smash hits and enjoyed the highest exposure of any American television commercial to date. The company’s high profile and powerful presence in all of the soft drink markets–direct results of Kendall’s strategies–helped it to weather the somewhat uncertain economic situation of the time.
On only one front had Kendall’s efforts failed to produce satisfactory results. Experience showed that for all its expertise, PepsiCo simply did not have the managerial experience required to run its subsidiaries outside the food and drink industries. A van line, a motor freight concern, and a sporting goods firm were indeed odd companies for a soft drink enterprise; and Kendall auctioned off these strange and ailing bedfellows, vowing never again to go courting in unfamiliar territories.
With his house in excellent order, the PepsiCo mogul began to prepare for his retirement. He had bullied and cajoled a generation of Pepsi executives and guided them ever upward on the steep slopes of Pepsi profits. But he had one last task: to lead PepsiCo to victory in the Cola Wars.
Hostilities commenced soon after the Coca-Cola Company changed its syrup recipe in the summer of 1985 and with much fanfare introduced New Coke. Pepsi, caught napping, claimed that Coca-Cola’s reformulated drink failed to meet with consumer approval and pointed to their own flourishing sales. But serious fans of the original Coke were not about to switch to Pepsi and demanded that their favorite refreshment be restored. When blindfolded, however, it became manifestly apparent that these diehards could rarely tell the difference between Old Coke, New Coke, and Pepsi; indeed, more often than not, they got it wrong. In any event, the Coca-Cola Company acceded to the public clamor for the original Coke and remarketed it as Coca-Cola Classic alongside its new cola.
Some advertising analysts believed that the entire ‘conflict’ was a clever publicity ploy on the part of Coca-Cola to demonstrate the preeminence of its original concoction (‘It’s the Real Thing!’), while introducing a new cola–allegedly a Pepsi taste-alike&mdashø win the hearts of waverers. More interesting perhaps than the possible differences between the colas were the very real differences in people’s reactions. Four discrete fields were identified by Roger Enrico and Jesse Kornbluth in their book, The Other Guy Blinked: How Pepsi Won the Cola Wars: the totally wowed (possibly caffeine-induced); the rather amused; the slightly irritated; and the distinctly bored.
The latter group must have nodded off in front of their television sets when Pepsi took the Cola Wars beyond the firmament. ‘One Giant Sip for Mankind,’ proclaimed the ads as a Pepsi ‘space can’ was opened up aboard the U.S. space shuttle Challenger in 1985. Presumably, had a regular can been used, Pepsi-Cola would have sloshed aimlessly around the gravity-free cabin. This scientific breakthrough, together with the almost obligatory hype and hoopla, and more mundane factors such as the continued expansion in PepsiCo’s outlets, boosted sales to new heights, and Pepsi’s ad agency glittered with accolades. The debate persisted, at least within Coke and Pepsi corporate offices, as to who won the Cola Wars. The answer appeared to be that there were no losers, only winners; but skirmishes would inevitably continue.
Late 1980s and Early 1990s: Focusing on International Growth and Diversification
D. Wayne Calloway replaced Donald M. Kendall as chairman and chief executive officer in 1986. Calloway had been instrumental in the success of Frito-Lay, helping it to become PepsiCo’s most profitable division. The new chairman realized that his flagship Pepsi brand was not likely to win additional market share from Coca-Cola, and focused his efforts on international growth and diversification.
Calloway hoped to build on the phenomenal success of the Slice line of fruit juice beverages, which achieved $1 billion in sales and created a new beverage category within just two years of its 1984 introduction. From 1985 to 1993, PepsiCo introduced, acquired, or formed joint ventures to distribute nine beverages, including Lipton Original Iced Teas, Ocean Spray juices, All Sport drink, H2Oh! sparkling water, Avalon bottled water, and Mug root beer. Many of these products had a ‘New Age’ light and healthy positioning, in line with consumer tastes, and higher net prices. In 1992, PepsiCo introduced Crystal Pepsi, a clear cola that, while still a traditional soda, also tried to capture the momentum of the ‘New Age’ beverage trend.
In the restaurant segment, PepsiCo’s 1986 purchase of Kentucky Fried Chicken (KFC) and 1990 acquisition of the Hot ‘n Now hamburger chain continued its emphasis on value-priced fast foods. But the company strayed slightly from that formula with the 1992 and 1993 purchases of such full-service restaurants as California Pizza Kitchen, which specialized in creative wood-fired pizzas, Chevys, a Mexican-style chain, East Side Mario’s Italian-style offerings, and D’Angelo Sandwich Shops.
Pepsi lost a powerful marketing tool in 1992, when Michael Jackson was accused of child molestation. Although the case was settled out of court, Pepsi dropped its contract with the entertainer. The firm launched its largest promotion ever in May 1992 with the ‘Gotta Have It’ card, which offered discounts on the products of marketing partners Reebok sporting goods, Continental Airlines, and the MCI telephone long distance company. The company also launched a new marketing (or, as the company phrased it, ‘product quality’) initiative early in 1994, when it announced that packaged carbonated soft drink products sold in the United States would voluntarily be marked with a ‘Best if Consumed By’ date.
Although Pepsi had commenced international expansion during the 1950s, it had long trailed Coca-Cola’s dramatic and overwhelming conquest of international markets. In 1990, CEO Calloway pledged up to $1 billion for overseas development, with the goal of increasing international volume 150 percent by 1995. At that time, Coke held 50 percent of the European soft drink market, while Pepsi claimed a meager ten percent. But Pepsi’s advantage was that it could compete in other, less saturated segments. The company’s biggest challenge to expanding its restaurant division was affordability. PepsiCo noted that, while it took the average U.S. worker just 15 minutes to earn enough to enjoy a meal in one of the firm’s restaurants, it would take an Australian 25 minutes to achieve a similar goal. Pepsi still had other options, however. In 1992, for example, the company forged a joint venture with General Mills called Snack Ventures Europe which emerged as the largest firm in the $17 billion market. By 1993, PepsiCo had invested over $5 billion in international businesses, and its international sales comprised 27 percent, or $6.71 billion, of total annual sales.
In January 1992, Calloway was credited by Business Week magazine with emerging from the long shadow cast by his predecessor ‘to put together five impressive years of 20 percent compound earnings growth, doubling sales and nearly tripling the company’s value on the stock market.’ Calloway also worked to reshape PepsiCo’s corporate culture by fostering personal responsibility and a decentralized, flexible management style.
Mid-to-Late 1990s: The Enrico Restructuring
Calloway, who was battling prostate cancer, retired as CEO in April 1996 and was replaced by Roger A. Enrico, who became chairman as well later in the year (Calloway died in July 1998). Since joining Frito-Lay’s marketing department in 1971, Enrico had stints heading up both Pepsi-Cola and Frito-Lay before becoming head of the restaurants division in 1994. He engineered a quick turnaround of the struggling chains by changing the overall strategy, for example adopting more franchising of units rather than company ownership. Under Enrico, the marketing of new concepts was also emphasized, with one notable success being the introduction of stuffed-crust pizza at Pizza Hut.
After taking over leadership of PepsiCo, Enrico quickly faced major problems in the overseas beverages operations, including big losses that were posted by its large Latin American bottler and the defection of its Venezuelan partner to Coca-Cola. Pepsico ended up taking $576 million in special charges related to international writeoffs and restructuring, and its international arm posted a huge operating loss of $846 million, depressing 1996 profits. Among the moves initiated to turn around the international beverage operations, which faced brutal competition from the entrenched and better organized Coca-Cola, was to increase emphasis on emerging markets, such as India, China, Eastern Europe, and Russia, where Coke had a less formidable presence, and to rely less on bottling joint ventures and more on Pepsi- or franchise-owned bottling operations.
Another area of concern was the restaurant division, which had consistently been the PepsiCo laggard in terms of performance. Enrico concluded that in order to revitalize the beverage division and to take advantage of the surging Frito-Lay, which already accounted for 43 percent of PepsiCo’s operating profits, the restaurants had to go. Hot ‘n Now and the casual dining chains were soon sold off, and in January 1997 PepsiCo announced that it would spin off its three fast-food chains into a separate publicly traded company. The spinoff was completed in October 1997 with the formation of Tricon Global Restaurants, Inc., consisting of the Taco Bell, Pizza Hut, and KFC chains. The exit from restaurants removed one obstacle facing Pepsi in its battle with Coke: that most large fast-food chains had been reluctant to carry Pepsi beverages, not wanting to support the parent of a major competitor. Consequently, Coke held a huge market share advantage over Pepsi in the fast-food channel. Pepsi subsequently made some inroads, for example, in 1999 sealing a ten-year deal with the 11,500-plus-outlet Subway chain.
Enrico placed more emphasis, however, on building sales of Pepsi in its core supermarket channel. In this regard, he launched an initiative called ‘Power of One’ that aimed to take advantage of the synergies between Frito-Lay’s salty snacks and the beverages of Pepsi-Cola. This strategy involved persuading grocery retailers to move soft drinks next to snacks, the pitch being that such a placement would increase supermarket sales. In the process, PepsiCo would gain sales of both snacks and beverages while Coca-Cola could only benefit in the latter area. Power of One harkened back to the original rationale for the merger of Pepsi-Cola and Frito-Lay. At the time, the head of Pepsi, Kendall, had told Frito-Lay’s leader, Herman W. Lay: ‘You make them thirsty, and I’ll give them something to drink.’ The promise of this seemingly ideal marriage had never really been achieved, however, until the Power of One campaign, which in 1999 helped increase Frito-Lay’s market share by two percentage points and boosted Pepsi’s volume by 0.6 percent.
In the meantime, Enrico was active on a number of other fronts. The company in 1997 nationally launched the Aquafina bottled water brand, which quickly gained the number one position in a fast-growing sector. In a move into the nonsalty snack category, Frito-Lay acquired the venerable Cracker Jack brand that year, and subsequently bolstered the brand through renewed advertising, a new four-ounce-bag package, the addition of more peanuts, the inclusion of better prizes, and the strength of Frito-Lay’s vast distribution network. In August 1998 PepsiCo opened up another front in its ongoing war with Coca-Cola by acquiring juice-maker Tropicana Products, Inc. from the Seagram Company, Ltd. for $3.3 billion in cash–the largest acquisition in PepsiCo history. Coca-Cola had been the owner of Tropicana’s arch-rival, Minute Maid, since 1960, but Tropicana was the clear world juice leader, led by the flagship Tropicana Pure Premium brand. Tropicana had a dominating 41 percent share of the fast-growing chilled orange juice market in the United States. The brand was also attractive for its growth potential; not only were sales of juice growing at a much faster rate than the stagnating carbonated beverage sector, there was also great potential for brand growth overseas. Psychologically, the acquisition also provided PepsiCo with something it very much needed: it could boast of holding at least dominant position over Coca-Cola.
In 1999 PepsiCo divested itself of another low-margin, capital-intensive business when it spun off Pepsi Bottling Group, the largest Pepsi bottler in the world, to the public in a $2.3 billion IPO. PepsiCo retained a 35 percent stake. PepsiCo was now focused exclusively on the less capital-intensive businesses of beverages and snack foods.
On the beverage side, Enrico, who had gained a reputation as a master marketer, spearheaded a bolder advertising strategy for the flagship Pepsi brand. In 1999, Pepsi-Cola was the exclusive global beverage partner for the movie blockbuster Star Wars, Episode 1: The Phantom Menace. The company also revived the old ‘Pepsi Challenge’ campaign of the 1970s with the new Pepsi One diet drink facing off against Diet Coke. Pepsi’s ‘Joy of Cola’ advertising campaign was gaining accolades and in 2000 captured renewed attention following the signing of a string of celebrities to endorsement deals, including singer Faith Hill and baseball stars Sammy Sosa and Ken Griffey, Jr. Pepsi also greatly increased the number of vending machines it had planted around the United States, making a renewed push to gain on Coke in another area where the arch-enemy had long dominated.
By the end of 1999, after three and one-half years at the helm, Enrico had clearly turned PepsiCo into a stronger, much more focused, and better performing firm. Although revenues were more than one-third lower due to the divestments, earnings were higher by more than $100 million. Operating margins had increased from ten percent to 15 percent, while return on invested capital grew from 15 percent to 20 percent. Net debt had been slashed from $8 billion to $2 billion. During 1999, Steve Reinemund was named president and COO of PepsiCo. Reinemund had headed up Pizza Hut from 1986 to 1992 then was placed in charge of Frito-Lay. In the latter position, he oversaw a division whose sales increased ten percent per year on average and whose profits doubled. During his tenure, Frito-Lay’s share of the U.S. salty snack sector jumped from 40 to 60 percent.
Turning Acquisitive in the Early 21st Century
In October 2000 Enrico announced that he intended to vacate his position as CEO by the end of 2001 and his position as chairman by year-end 2002. Reinemund was named the heir apparent. Also that month, PepsiCo reached an agreement to acquire a majority stake in South Beach Beverage Company, maker of the SoBe brand. Popular with young consumers, the SoBe drink line featured herbal ingredients and was the fastest growing brand in the burgeoning noncarbonated alternative beverage sector.
An even more tempting target soon attracted PepsiCo’s attention: the powerhouse Gatorade brand owned by the Quaker Oats Company. Gatorade held an astounding 83.6 percent of the U.S. retail market for sports drinks and was the world leader in that segment with annual sales of about $2 billion. PepsiCo entered into talks with Quaker about acquiring the company for about $14 billion in stock, but by early November the two sides had failed to reach an agreement. Coca-Cola and Groupe Danone quickly came forward to discuss acquiring Quaker. Coke came exceedingly close to signing a $15.75 billion takeover agreement, but the company’s board pulled the plug on the deal at the last minute. Danone soon bowed out as well. At that point, PepsiCo reentered the picture, and in early December the firm announced that it agreed to acquire Quaker Oats for $13.4 billion in stock. This appeared to be quite a coup for PepsiCo as it would not only bring on board the valuable Gatorade brand and make PepsiCo the clear leader in the fast-growing noncarbonated beverage category, it would also add Quaker’s small but growing snack business, which included granola and other bars as well as rice cakes. Quaker’s non-snack food brands–which included the flagship Quaker oatmeal, Life and Cap’n Crunch cereals, Rice a Roni, and Aunt Jemima syrup–did not fit as neatly into the PepsiCo portfolio but were highly profitable and could eventually be divested if desired. In conjunction with the acquisition announcement, Enrico said that upon completion of the merger, he and the head of Quaker, Robert S. Morrison, would become vice-chairmen of PepsiCo, Morrison would also remain chairman, president, and CEO of Quaker, and Reinemund would become chairman and CEO of PepsiCo, thereby accelerating the management transition. At that same time, PepsiCo’s CFO, Indra Nooyi, who was the highest ranking Indian-born woman in corporate America, would become president and CFO. It seemed likely that this new management team would take PepsiCo to new heights in the early 21st century and that the company would continue to be a more and more formidable challenger to arch-rival Coca-Cola.
Principal Divisions: Frito-Lay Company; Pepsi-Cola Company; Tropicana Products, Inc.
Principal Competitors: Borden, Inc.; Cadbury Schweppes plc; Campbell Soup Company; Chiquita Brands International, Inc.; The Coca-Cola Company; ConAgra Foods, Inc.; Cott Corporation; Groupe Danone; General Mills, Inc.; Golden Enterprises, Inc.; Keebler Foods Company; Kraft Foods, Inc.; Nestlé S.A.; Ocean Spray Cranberries, Inc.; The Procter & Gamble Company.
