Business
Can Indra Nooyi Revive Pepsico
In one of its biggest new product launches in years, PepsiCo recently unveiled Pepsi NEXT — a mid-calorie beverage that contains 60% less sugar than regular Pepsi-Cola. The soda, which comes in Pepsi’s trademark peppy blue can, is accompanied by an aggressive ad campaign targeting calorie-conscious customers who in recent years have replaced carbonated soft drinks with teas, flavored waters and sports drinks. The company calls Pepsi NEXT a “game-changer in the cola category” and has bestowed a hopeful tagline: “Drink It to Believe It.”
The question is: Will Wall Street?
It’s been a rough few years for PepsiCo. Indra Nooyi, chairman and chief executive officer, has diligently tried to transform the company from a purveyor of sugar-laden bubbly beverages and salty snacks, into one that has healthier and more wholesome offerings. But performance has — pardon the pun — fizzled. Shares of PepsiCo have barely budged during her six-year tenure, while the stock price of rival Coca-Cola has nearly doubled in that time. Perhaps most embarrassing for the once stalwart competitor in the cola wars, its flagship brand, Pepsi, no longer claims second place in market share of the carbonated soft drink market. In 2010, Diet Coke took over the number two spot and has remained there.
Investors are impatient. Some accuse Nooyi of focusing too intensely on her nutrition strategy while overlooking PepsiCo’s North American soft drink business. Earlier this month, the company announced management changes intended to restore their confidence in the company: John Compton, who most recently ran PepsiCo’s highly successful Frito-Lay business in the Americas, was named president, while Brian Cornell, a PepsiCo veteran, has been wooed back from running the Sam’s Club chain for Wal-Mart Stores. He will fill Compton’s previous position. The restructuring not only gives PepsiCo’s board some options for potential successors to Nooyi, but is also a clear statement that the company is attempting to return to its profitable past.
“Based on the management changes, it appears that the company will be back to emphasizing its sugary beverages and snack foods,” says Jason Schloetzer, a professor of accounting at Georgetown University’s McDonough School of Business. “This is kind of like Pepsi saying to its investors, ‘We understand we were very profitable in these areas, and now this is where we are going to refocus our energy.’… It’s hard to shake the past — particularly when the past was more profitable.”
The renewed focus on high-margin drinks and snacks may assuage investor concerns for now, but experts caution against trading a solid, long-term strategic repositioning for a bit of short-term success: Nooyi’s goal of reinventing PepsiCo’s product line is sensible, but real and lasting change takes time. To increase market share and revive earnings, experts suggest, she needs to spend more money on marketing top beverage brands — a move that is already in the works — and to put the right people in charge of those divisions. Nooyi also must do a better job of managing Wall Street expectations and courting institutional investors who care about sustainability and will give her more time and leeway to achieve her goals.
‘Performance with Purpose’
A native of Madras, India, Nooyi joined PepsiCo in 1994 as the company’s chief strategist. Seeing a bleak future for fast food, she pushed the company to make some bold moves: In 1997, PepsiCo created a spin-off firm (now called Yum! Brands) to unload KFC, Pizza Hut and Taco Bell. The following year, Nooyi was promoted to chief financial officer and helped engineer a $3 billion acquisition of Tropicana. In 2001, Nooyi — who has an MBA from Yale — co-orchestrated a $14 billion takeover of Quaker Oats, which makes Gatorade. PepsiCo’s earnings skyrocketed, and Nooyi became a force in the corporate world. In 2005, Forbes magazine ranked her the 11th most powerful woman in business. She became PepsiCo’s first female CEO in 2006.
Her strategy — to more than double PepsiCo’s revenue from nutritional drinks and snacks to $30 billion by 2020 — is no doubt ambitious. Through senior level appointments and internal initiatives, she has pursued her cause. She enlisted Derek Yach, a former World Health Organization official, as senior vice president of global health and agricultural policy. Under Nooyi’s watch, the company also started working with farmers and scientists in developing countries, like Ethiopia, on sustainable growing techniques. In 2009, PepsiCo rolled out compostable bags made from biodegradable plant material for one of its chip brands. (The bags were eventually scrapped because customers thought they were too noisy.)
Nooyi has also worked to reformulate PepsiCo’s existing products, and has made creative acquisitions to boost the nutritional quality of its offerings. The company has reduced the fat, and taken out some of the sugar in many of its mainstream products, and it has added whole grains, fruits and vegetables to some of its snacks. The company has also come up with entirely new products that are, at least arguably, healthier — Pepsi NEXT, which contains high-fructose corn syrup and artificial sweeteners, has 60 calories to regular Pepsi’s 100. In 2010, PepsiCo acquired a majority stake in Russian dairy Wimm-Bill-Dann to give it more of a presence in yogurts and grain-enriched dairy products.
In many ways, Nooyi’s strategy is aligned with the times. With 34% of adults in the U.S. classified as obese, and nearly one in three children considered overweight, the media — and indeed many Americans — are paying closer attention to the importance of healthy eating. It is a trend that has gotten the better of some businesses. For example, Hostess, the privately held company known for indulgent pleasures including Twinkies and Drake’s snack cakes, filed for bankruptcy in January.
What’s more, corporate social responsibility — once just a catchy phrase — has become an increasingly relevant issue for companies and consumers alike. According to a recent survey by public relations firm Burson-Marsteller, more than 75% of consumers say that social responsibility is an important factor in their purchase decisions, and 70% say they are willing to pay a premium for products from a socially responsible company.
“More companies and consumers are paying attention to greenness and sustainability,” notes Georgetown McDonough’s Schloetzer, who is an expert on corporate governance. “Companies are thinking about how their operations affect the end-to-end supply chain and are considering the recyclability of their packaging materials. It’s an inventive way to run a business. As an impartial observer, it’s perhaps noble for Nooyi to try to transform a large company in this manner.”
Michael Useem, a Wharton management professor and director of the Center for Leadership and Change Management, says Nooyi represents a new breed of corporate leadership. In a cover story for U.S. News and World Report on “America’s Best Leaders” in 2008, he wrote that Nooyi “is attempting to move beyond the historic trade-off between profits and people. Captured in her artful mantra — ‘performance with purpose’ — she wants to give Wall Street what it wants but also, the planet what it needs.”
Shortchanging Core Brands?
Unfortunately for Nooyi, Wall Street is not getting what it wants. Last month, PepsiCo warned that its profit would drop 5% this year. Revenue at its Americas beverage unit — which includes Pepsi, Mountain Dew, Gatorade, Tropicana and Lipton and accounts for about a third of PepsiCo’s annual revenue — was flat. Shares of PepsiCo are down about 2% for the past two years, while the S&P is up about 20% over that time period. In spite of this, Nooyi received her first salary bump in five years as CEO last year. Her total compensation was $17.1 million, up 6% from 2010, according to a regulatory filing.
David Reibstein, professor of marketing at Wharton, says that much of Nooyi’s problem is that she was trying to do too much too soon. “To a large degree, Nooyi is very progressive in her thinking,” he states. “She has a far-reaching vision of what she is trying to do. The obligation to be responsive to your shareholders and to also be thinking about societal and environmental impacts are [good goals], but you need to be able to get there from the here and now. It’s going to take a considerable amount of effort over a sustained amount of time.”
Critics charge that Nooyi has allowed the firm’s core brands — namely beverages in North America — to languish. “Taking the central focus off your core brands can be problematic,” says Charles Taylor, professor of marketing at the Villanova University School of Business. “When you’re building a new line of business, or doing brand extensions, the risk is high, especially compared to keeping your focus on brands with very high equity that have been effective for you for many years. I wouldn’t say [core brands] have been neglected, but they haven’t been as aggressively marketed.”
In 2010, for instance, PepsiCo elected not to advertise during the Super Bowl telecast, which is always one of the most-watched television events of the year. As an alternative, the company in January of that year debuted The Pepsi Refresh Project, a social media campaign where customers proposed community service ideas to invigorate and revive their neighborhoods. The company spent in excess of $20 million on the effort. In November of that year, Advertising Age ran a story proclaiming that The Refresh Project “doesn’t seem to have had a major influence on the brand’s bottom line.” It’s impossible to draw a direct correlation, but 2010 was also the year that Diet Coke overtook Pepsi in market share.
Coca-Cola, of course, is a formidable competitor. The company has been lauded for making smart, calculated marketing choices. Its heavy investment in advertising in China during the Beijing Olympics is one example. A full year before the Games, Coca-Cola advertised on thousands of Chinese billboards and bus shelters with a media campaign highlighting the country’s homegrown athletes. Today, Coca-Cola holds about 17% of the Chinese beverage market, while PepsiCo has a 6% share, according to Euromonitor.
Back in 2002, Coca-Cola made another good bet by sponsoring reality-TV talent contest “American Idol” for less than $10 million. The 12-week television program captured 23 million viewers for its finale, prompting USA Today to run the headline: “Real winner of ‘American Idol’: Coke.” The show has since become a ratings juggernaut. PepsiCo, which passed on the opportunity to sponsor “Idol,” now sponsors “The X Factor,” another singing competition, spending up to $60 million for the sponsorship of the show, according to Adweek.
Cultivating a New Pepsi Generation
In spite of these problems, PepsiCo remains a strong brand. “Your average loyal Pepsi drinker isn’t aware of the efforts to move toward nutritious foods, and Pepsi has not done anything that [has caused] long-term damage to the brand,” says Taylor. “Pepsi is still considered by Interbrand as one of the top brands in the world.” (For the record, PepsiCo stands at number 22 on Interbrand’s ranking, while Coca-Cola has been named the world’s most valuable brand for the past 12 years.)
PepsiCo has its work cut out for it., however. Already plans are taking shape to boost brand awareness: In February, the company ran its first Super Bowl TV commercial for Pepsi in three years. Nooyi also recently announced plans to increase PepsiCo’s marketing budget by as much as $600 million this year, which represents about a 15% increase over last year. Most of the new spending will be dedicated to the U.S. beverage business. The firm also plans to launch its first-ever global marketing campaign for Pepsi.
Nooyi has also made some strategic management changes that demonstrate her commitment to PepsiCo’s beverages division. In September, Albert Carey, a PepsiCo veteran and head of the company’s smaller, but more profitable, Frito-Lay North America snacks unit, took over its Americas beverages unit. Carey succeeded Eric Foss and Massimo d’Amore, who co-ran the business. Foss left PepsiCo in December, while d’Amore was essentially demoted; he still runs the Latin American beverage business, but reports to Carey.
Nooyi’s strategy to reinvent PepsiCo’s product line has proven tough to execute because changing customer appetites is not easy. “You may have a vision for what the market will be wanting, but it doesn’t mean it wants it now,” says Wharton’s Reibstein. “You can’t leave your customers behind.” An effort by McDonald’s to introduce “good for you” menu items serves as a cautionary tale. Take the McLean Deluxe, which it marketed in 1991 as a heart-healthy alternative to other hamburgers. The burger had 310 calories and only nine grams of fat. “A healthy breakthrough for the American public,” lauded a New York Times editorial. But customers complained it lacked taste. In 1996, the company removed it from the menu.
“McDonald’s has introduced some healthier foods over the years, and it has had some success here and there. But the majority of people are still buying Big Macs,” notes Taylor. “For the most part, consumers are set in their ways. Getting consumers to eat healthier food is going to take at least a generation — even in spite of best efforts by companies.”
This does not mean Nooyi should abandon her plans, observers say. Rather, she needs to develop a strategy that better balances the short term with the long term, according to Yoram (Jerry) Wind, Wharton marketing professor and director of the SEI Center for Advanced Studies in Management. “Companies can be socially responsible, provide more nutritional and healthier products and still be profitable, but it requires careful management of board and Wall Street expectations,” he says.
A deft touch as a manager — and perhaps different investors altogether — are also needed, he adds, noting that Nooyi should put more effort into courting institutional investors who value sustainability and who will give her more latitude to achieve the company’s overarching goals. “There are opportunities for creative approaches here. She should show them that she has a plan to achieve financial objectives … and still be socially responsible,” he says. “It is doable.”
Whether Pepsi NEXT is the next big thing in cola, or whether it goes the way of the McLean Deluxe, Wind suggests that Nooyi’s pursuit of aligning agriculture and nutrition is sound. “Maximizing long-term shareholder value and addressing some of society’s biggest problems, such as obesity, nutrition and health, is the right kind of strategy.”