BUSINESSWEEK ONLINE : APRIL 10, 2000 ISSUE
COVER STORY "The Sweet Spot of Convenient Food and Beverages" In a Q&A, PepsiCo's Enrico talks about Coke, the Power of One strategy, and more Since becoming chairman and chief executive of PepsiCo four years ago, Roger Enrico has led a major transformation of the consumer-products giant. He sold off the company's massive fast-food operations, a division that owned KFC (formerly Kentucky Fried Chicken), Taco Bell, and Pizza Hut. He spun out Pepsi's capital-intensive bottling operations. And he acquired leading juice producer Tropicana. In a series of interviews with Business Week Senior Writer John A. Byrne, Enrico spoke about the change in strategy at PepsiCo and other key issues. Edited excerpts follow: Q: You've made some big strategic moves as CEO, and the first of them was to cast off PepsiCo's fast-food business. How did you come to that decision? Was it a mistake for PepsiCo to be in the business of Pizza Hut and Taco Bell and KFC? A: Clearly, you can't say it was a total failure for PepsiCo to be in the restaurant business. That would be completely wrong. The things that were important to those businesses when PepsiCo got in, PepsiCo had an ability to contribute: cash, because you were in the build-out of the industry, and negative cash flow. We had lots of cash. The quality of the people in the business 25 years ago isn't anything like it is today. We could provide that same people standard and process -- that was important synergy. And the third one was marketing, because you had to build these brands. When we bought Pizza Hut, it wasn't a very big business. When we bought Taco Bell, it was this tiny business. Shakey's was bigger than Pizza Hut when we bought it. But now we were faced with a different strategic situation. The business was built out for the most part. The business didn't need negative cash flow. It has positive cash flow so it didn't need cash, and the caliber of people in the business was a helluva lot better in 1995 than it was in 1975. So we didn't stand alone in terms of capability. What was going to be important going forward was the operating side of the business, the customer service, the quality of the product, the value equation. Those things really needed a restaurant culture and processes. They had nothing to do with Pepsi-Cola or Frito-Lay. I felt we did not appreciate those differences adequately. Those differences were significant. You can't have two different cultures in a corporation. One culture has to be dominant. The Frito-Pepsi culture is very similar. Our culture was not conducive to what you needed to win in restaurants. It was a good business for us right up until the late '80s, when the industry was faced with overcapacity, with too many units, and demand was slowing down. And we got into casual dining just as demand almost collapsed. Some of those things have been corrected. Q: Do you think Wall Street saw the spin-off of the restaurants, the IPO of the bottling group, and the acquisition of Tropicana as an overarching strategy or merely a bunch of isolated moves that confused them? A: Probably because we didn't articulate a strategy that [explained our decisions], we did confuse them. To some degree, that was my fault. If I had to do it over again, I would have come to these conclusions more quickly. Spin off the restaurants. IPO the bottling. Buy Tropicana. That was opportunistic. It had to be for sale. And I would have articulated these strategies we were going to embark on. Instead, so as not to be disruptive, we pooh-poohed the notion that we would do these things. But we had not decided to do them at the time. It would have been better had I decided these things more quickly and started with a very quick agenda rather than let it play out the way it did. I also felt it was important to have some success behind us. It probably caused me to procrastinate. If I went out and said, this was the strategy and here's why, I could have generated just as much support. But it would have been a lot to digest. The problem was, that if you articulated the strategy and then took a year to do it, you could have a disaster on your hands. As it was, we were very nervous. It took nine months to do the spin-off of the restaurants because of IRS rules. It was hard enough then to keep it together. Q: With the restructuring behind you, some critics feel that Pepsi failed to take advantage of Coca-Cola's fumbles in recent months. Do you think the company failed to benefit from those missteps? A: Let's segment that in at least two buckets here. In terms of the Belgian quality thing [when Coke had to recall product due to contamination], I'm sure someone said, "We need some product." And we were certainly willing to deliver it. But we consciously gave instructions that we were not going to capitalize on it or put a PR spin on it. It would be counterproductive. You don't challenge food-safety issues. In terms of competitive issues, I'd say we are going to benefit. Those are substantive issues. Coke may be looking at those as a PR problem, but in my view, these are substantive issues of the way they behave, they way they go to market, and the way they are dealing. We are not going to have a tilted playing field, at least where the law provides us protection. I'll pursue those damn things to the last. I love the competition. I expect it to be intense. But it needs to be legal. Q: What are the company's key challenges? A: We started the restructuring with two things in mind: One is to create consistency of performance, because we think shareholders value that. And the second thing is sustainability of marketplace performance. Maybe I have those two reversed. I think we have done that. I'm prepared to say we have accomplished those objectives, albeit it's O.K. if people say they want to see a few more quarters go by before we buy into that. We clearly have strengthened the company financially. Despite the fact that our restructuring resulted in a third less sales, we have higher profits. Our margins are higher. Our return on investment is higher, and I think our cash flow in '99 will be a record -- even compared to when we had the bottling and restaurant businesses. We are focused on packaged goods, and we are on the sweet spot of convenient food and beverages. I think we are a premier global consumer products company. What we need to worry about is exploiting the obvious opportunities that are out there, staying focused on the prize, enhancing the innovation capability of this company. We've got good mid-single-digit, top-line growth from our present businesses. That would give us good double-digit, bottom-line growth. Right now, [PepsiCo President] Steve [Reinemund] and I are trying to figure out how to enhance the innovation approach to get stronger top-line growth. I can't tell you the answer yet, but we've got plenty of obvious things in brands, channels, and geographies to grow the business.... It's innovation. It's leveraging our operating capabilities. It's not just the store-door system. It's improving productivity. The exciting thing at Frito-Lay is the idea of productivity for growth, not just productivity for bottom-line growth. The prepick idea not just saves money, it also creates new avenues of growth. Q: What do you worry about? A: What I worry the most about is, when will the financial market recognize that we are there? Right now, I worry more about the stock price than I should. And [I worry more about] investor perceptions of this company than I should. Some of that is the whole sector issue: The average consumer-product company lost a quarter of its market value last year. That doesn't make me feel any good. That is what I am worried about, and I don't like worrying about it. But you know I don't worry a lot. Even when things looked the absolute darkest, when it looked like we had an international soft-drink business that collapsed, taking huge write-offs, having a lot of people changes -- things looked pretty dark in 1996. But I said to myself, "The day before I knew about this and the day after I found out about this, what has changed? You have the same powerful brands you had the day before. You're still the most important supplier in the U.S. grocery business just like we were before. The opportunities in China, India, and Russia haven't gone away. We had the same great people, and we had this cash flow. So what am I to worry about?" I took this methodically, I tried to build it back brick-by-brick, put a guy like Craig Weatherup [former CEO of Pepsi-Cola North America] on it. And I said, "Three years from now, we'll have a great Pepsi-Cola International." And I think we do. For the first time in my experience, I feel a great deal of pride over PCI. Q: The Maxwell figures came out recently for 1999, and they showed that Pepsi didn't gain market share over Coke, despite Coke's problems of late. Does it bother you that Pepsi was flat? A: What concerns me more than our market share holding steady, after having increased the year before, was that the market growth rate slowed down from three-ish to a little bit better than flat. Clearly, it's understandable what caused that slowdown. The market was booming at well above the 3% rate before the pricing started taking place. There is no question that pricing slowed down the growth of the market. Now this is not a bad thing in and of itself, because the industry needed to get its pricing in line with reality. This is, I hope, the last element of a strategy embarked upon by our competitor to dominate the business that has totally failed. They seem to have recognized that themselves. In that sense, it's a good thing. I fully expect that the market will rebound once we get through these price increases. Coca-Cola was flat out trying to put us out of business. They had an objective to achieve a 50% share by the year 2000. And they had gained a fair amount of share in the early 1990s, but obviously they didn't come even close to a 50% share. I can remember the first year I took over from John Sculley at Pepsi-Cola USA. I remember reading all these analyst reports saying that the soft-drink market was going to have a tough time growing at the rate it had been growing. That was 1983. You know, between 1983 and 1999, if we had two or three years where the growth rate was near 1%, that would be a lot. In that 17 year timeframe, we probably had two or three years [in which the growth rate was either flat or 1%], and all the rest of the years were 3%-plus. America's love affair with soft drinks, whether carbonated or noncarbonated, isn't going to end any time soon. The largest category of liquid refreshment beverages, which we do play in, that growth isn't going to end soon. People have been questioning Pepsi's ability to compete against the larger competitor ever since I can remember, and our ability isn't going to end any time soon. I look at these things over a longer perspective and say soft drinks is a great business. It is tremendously profitable, and it can generate good growth. The demographics and lifestyles are still in our favor, and they are likely to continue to be so for a long time to come. Q: What do you have to do to get the basic Pepsi business to hum? A: It's marketing, but in the broader sense. It's not only about advertising and promotion. It is about the push side, execution at retail. And it's the same old fundamental principles: availability, availability, availability. They haven't changed any. Availability is good. Cold availability is three times as good. Those fundamentals haven't changed at all. Do we need to get better at it? Sure, we've got to get a lot better. I expect that in the latter half of this year, the soft-drink market will begin growing at its historical rate. If that doesn't happen, that will be a big surprise to me. And if it doesn't happen, we'll do what we have to do to adjust to it. I don't think this pricing pendulum can push too far over this way. We are correcting the lack of pricing and price declines of the past, but because we have been successful in correcting those wrongs doesn't mean we ought to keep increasing the price. Frankly, I think we're there. Further rates of price increases like those we saw in the past 12 months would not be justifiable. Q: Last year, I understand you spent a lot of time in so-called top-to-top meetings with the chief executives of the largest supermarket chains. What did you learn from those visits? A: The reception was terrific. Part of the reason is because Al Carey is leading our sales and retailer strategies for this company, and he is among the most respected persons in the grocery-products industry. What was surprising to me was the unanimity and the passion the retailers had behind the Power of One [the idea of leveraging all of the key brands under the Pepsi umbrella to drive sales volume]. If I could sum up their attitude, it was, "It's about time. We love it, and we want to know more about how we can increase the sales and profitability of the category through this joint merchandising." Second thing, I would say, is what's going to be a premium as retailers continue to consolidate is not the gloom and doom that some analysts might think of as some power play between manufacturers and retailers.... But what retailers are demanding going forward are two things: First of all, not to waste any money in the supply chain.... And equally, if not more important, they want us to work with them to provide the kind of consumer insights that will help them succeed with their customers.... And they believe we have an enormous amount to contribute there.... The third thing was a consistent message from the retailers: As they consolidate, their tolerance for the diversity of the bottling system and the complexity of doing business with us because of it will become less and less. While they appreciate the local-marketing capability that bottlers offer, what they don't appreciate is the complexity of billing, the complexity of different prices [and] different offerings. Just the paperwork of it all. If there is anything that they are focused on, it's getting the back office consolidated first.... I look for this era of grocery retail consolidation to be one where companies like ours can enhance their value to their customers and do even better than we've done in the past.... That is what category management is all about. Some people think category management is all about selling your brand against the other guy's brand. That might be important, but that is not category management. Category management is helping your customer grow the category's sales and profits. If you do that well, the assumption is he will treat you very nicely, thank you very much. So you don't have to go in and force the situation. And frankly, if you look at the statistics, the chains in which Pepsi is the category captain grow their soft-drink category much faster than the chains in which Coke is the category captain.... Why is it? Because the attitude at Coke was, "Bury Pepsi." And that overwhelmed everything. They didn't have the desire to do good category management. They had the desire to bury Pepsi. That is probably why we are category captains in twice as many chains as they are. Q: Was there a return on your time? A: Yes, because it reinforced a fundamental strategy. The investment we've made in intellectual capability to do category management and the investment in the Power of One, and the investment to build our selling capability are important. I came away from those 25 meetings absolutely convinced that these were the right strategies for us. For that reason alone, it was worthwhile for me. I'd like to think we sold a little bit when we were out there and contributed something to our customers as well. Q: When Herman Lay and Don Kendall put together the merger [between PepsiCo and Frito-Lay], they envisioned great synergy between soft drinks and snacks. "You make them thirsty," Kendall said to Lay, "and I'll sell them Pepsi." Yet that potential was never fully realized. Why did it take so long to get around to starting this? A: Why didn't that get traction immediately or in the ensuing 30 years? I'm not sure it had anything to do with the restaurants. That certainly caused the leadership at corporate to think more differently than just how do you marry Frito and Pepsi. I would say that it was more likely that, as they got into the two businesses, they saw so many opportunities for improvement within the businesses themselves that the joint merchandising stuff didn't get to the priority list. [Former Pepsi President Andy] Pearson, Kendall, and Lay thought it was far more important for corporate to take a backseat role and reinforce the division's ownership of the businesses and their ability to have their own agenda than to have an imposed agenda of synergy imposed between the two divisions. This is just my hypothesis. Having been there at Frito-Lay, they brought an important synergy from Pepsi. Pepsi was given Frito-Lay's operations and selling mentality and financial discipline, and they gave Frito Pepsi's marketing and relation thinking. Maybe those were the best practices they could share between those two businesses. So there was great autonomy but fundamental principles that corporate imposed on those businesses: high standards on people, a performance-oriented culture, marketing pizzazz, the operating disciplines. Those things Pearson and Kendall would talk about at Frito in much the same language as they spoke about it at Pepsi. Because both businesses were similar in the way they went to market, and both were, from the consumer standpoint, luxuries, not necessities. They could apply some of these fundamental principles to both and let people implement them in their own way. When it came time for me to sit in here, O.K., I believed it was a great merger, but it was almost a cyber-merger as opposed to hard things. The people pieces and the leadership piece were done. Now was the time, in my mind, to start really bringing these things together and to leverage this Power of One. Where I got the idea from was Dayton Hudson, because this is what Bob Ulrich did when he became CEO of Dayton Hudson. He had three concepts: Mervyns, Target, and the Marshall Field and Dayton Hudson department stores. The Power of One was his phrase, and I even got permission from him to use it. I'm on his board. When I saw Bob begin to drive this power of one concept...he applied it to Dayton Hudson with fabulous results. The people there were energized by it, and I thought, "This is the way to go." Q: Your supermarket visits drove home the Power to One concept last year. This year, you seem focused on delivering the message to the financial community. How are you going to do that? A: That is more a function of Steve [Reinemund] coming on board as COO than it is a shift of priorities. Steve is going to continue those visits to the retailer and lead the customer agenda at PepsiCo with Al [Carey] working for him. I am taking on a new role of trying to drive the investor agenda. What I think we're going to do is take the same approach. We have a story to tell and we have ears to listen to it. We're going to go out and talk more to the buy side. We want to make sure we understand them and what they are looking for as investors. Hopefully, there is a match. I think what we'll find is the message of sticking with our knitting, focus, financial discipline, growing the top line while improving our financial returns is what they want. And those are already the things we have signed on for. Q: How exactly will you do that? A: I will do a number of things. We will step up our presence at the big conferences. We usually do a couple of year. I think we'll do five this year. These are the ones sponsored by the Prudentials and the Bernsteins of the world. On top of that, we already have about 20 individual institutional investor appointments between now and the end of June. We'll probably do more in the back half of the year. We want to get the message out that the restructuring is over, so now the transparency of our data is there. I want them to understand who we are and what we are trying to accomplish. I will go to all of them. Q: You're obviously doing this because you're disappointed in the stock price, right? A: I absolutely think the stock in this company is undervalued. And I want to make sure that people are making their valuation judgments on the facts and on the new Pepsi and not on suppositions from the old Pepsi. I'm not sure I can convince people to change their sector allocations from the Internet to companies like ours. I think a lot of people are going to get burned big time on these ridiculously valued companies. And when that happens, I hope they don't get scared and rush their money out of the stock market but that they put it in more substantive investments like Pepsi. Q: Of course, another key reason why Pepsi's stock hasn't moved much is worry over the entire food sector. Analysts are concerned about the impact retailer consolidation will have on manufacturers. They worry about what kind of increased clout fewer retailers will have to squeeze the margins of food companies. They've seen what Wal-Mart and Home Depot have done. But there are also people out there who believe that brands have lost their ability to command as high a premium as they have in the past. What's your take on that? A: I don't see any evidence of that. There was a time in the late '80s when people thought brands could price forever. They talked about pricing power and pricing freedom, and everyone jumped on that wagon and they priced like there was no tomorrow. There is no question that that era ended a while back. It couldn't last forever. Eventually, you'd sell one package of Cheerios for $2 billion. It wasn't going to last. And the cereal industry is a good example. That did not occur in the soft-drink business, because we were about making our systems more efficient. Even today, with the pricing that has taken place in the past year, I think you can still buy a two-liter bottle of Pepsi for the same price or lower than you could in 1980. And I am not adjusting for inflation. So soft drinks did not go on a pricing binge. Now, Frito-Lay did for a while in the 1980s, which is what I went down to correct in 1990. Frito had been taking pricing consistently at fairly significant rates, and they were losing market share. We corrected that in 1990, and there has been a great balance ever since. I understand why people look at the food companies as having relatively slow unit growth with not much more pricing power, that is, the ability to price above cost, and as an industry that did a pretty good job taking out cost in the 1990s. So they are wondering how much more cost can be taken out. It's not just all about the money being sucked to the Internet. It's about some fundamental of the food business. In a number of cases, those are probably correct analyses. We are in the part of the food and beverage businesses that a) has not had those ills by and large, that b) still has good unit growth, and c) still has significant productivity opportunities. You know what's happening at Frito, but you also have the consolidation going on the soft-drink bottling side. And unlike most food companies in the U.S., we are a global play. So we've got a different story to tell. Q: What's your view of how the New Economy is reshaping the Old? A: Every time I think it's overhyped and baloney, someone says, "Well here's another thing you can do on the Net" that I never thought of. And I say that's brilliant. The Net will be as ubiquitous as the telephone, if not more so. That in and of itself creates enormous opportunities, not all of which are obvious at the moment. At least not to me. I don't happen to think e-retailing is one of them. It is an opportunity, but I don't think it is one of the big opportunities. I think it will be a minor sideshow, relative to the other things that will happen on the Net over time. Anything that is selling and transmitting information, like E*Trade, and that's how the transaction gets done, great. It will probably have a 99% share of all that stuff, because it's a much more efficient way of doing things. An extraordinary high percentage of e-shopping is Christmas and gifts. On Target.com, some 45% of all the transactions are gift certificates. What is a gift certificate except a piece of information? You could e-mail it. That kind of retailing is likely to survive. When you get into the cost-cube question of the item. CDs are probably great, because there is little cube postage relative to the value of the CD. On the other end, cars are probably great because the shipping costs are low relative to the value of the transaction. But all the stuff in between, like groceries, I don't see as anything more than a small niche business. Q: What are the implications for you and PepsiCo? A: In e-retailing, there will be groceries. That is a new channel, so they are new customers. I don't think it will be very big, but we don't care. We want to do business with them. Maybe the Priceline thing will succeed in commoditizing everything. We have to be conscious of that and how you might deal with that kind of a channel. You have now at least the technical possibility of database one-on-one marketing, because your distribution costs are next to nothing. Whether people want that, whether you can get over the privacy concerns, those are different questions. But at least it's now technically and economically possible. E-couponing is a possibility. I think it will change marketing. On the B-to-B stuff, it will completely change everything. Our whole supply chain. The way we do business with everybody. It's already doing that. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					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? INTERACT E-Mail to Business Week Online

Copyright 2000-2009, by The McGraw-Hill Companies Inc. All rights reserved. Terms of Use   Privacy Notice