PepsiCo Inc. (PEP
) may not have made a big splash with new soft drinks this year, but the Purchase (N.Y.) food conglomerate continues to pump out new products and reap the cost-cutting benefits of its 2001 merger with the Quaker Oats. In the 2003 BW50 list of best-performing companies, PepsiCo is at 22nd spot, a gain from its 39th position last year. BusinessWeek Associate Editor Diane Brady recently spoke with PepsiCo's CEO Steven S. Reinemund about the company's growth prospects in the current environment. Edited excerpts of their conversation follow:
Q: How much pricing power do you feel you have in this environment?
A: I don't know many people in this marketplace who feel they have pricing power. The key is to selectively add new products. If pricing power comes from anywhere, it comes from innovation. And in any industry, innovation should equate with the ability to build revenue.
Q: Does all of your innovation come from new products -- which could mean saturation at some point?
A: Innovation comes in many different forms. As a consumer-products company, we most often focus on the product itself. But we're always looking at ways to add value to the customers. That can mean new packaging or distribution. We're not just focused on the products.
Q: How much of your growth is coming from "healthful" foods, vs. your traditional offerings?
A: What we want to do is make sure that we present the consumer with a portfolio of opportunities. Any one consumer has different needs at different times of the day. We want to make sure that we cover all those needs -- both within the consumer and across consumers.
There's a growing interest in "better for you" products, especially with people like myself: aging baby boomers who want to take their habits with them. In Frito-Lay, for example, the "better for you" products are growing substantially faster -- at least twice as fast as the general brands. Of course, it's coming off a much lower base.
We're clearly not putting our eggs in one basket, however. We can focus our energies across brands. Doritos is a huge brand. We have great growth out of baked Doritos, but that doesn't mean [we can afford to not think about anything else].
Q: You've said that your health-insurance and pension costs are increasing. Is that a problem?
A: Clearly, medical benefits are going to continue rising at a rate faster than inflation over the next couple of years. With our pension, we're in a pretty good position. We're fully funded. The costs are going up but obviously not enough to derail us.
Q: What's your outlook for this year? Is there any risk of another recession?
A: It's a tough environment to make forecasts about the economy. Until the war is resolved, it's going to be tough to have a really good glance at the economy.
We have already had substantial hits to our Middle East business. Last year, it was down 10% to 15%, but we're rolling over that now nicely. The impact depends on how long the war goes on. Our bottling businesses are all owned by locals. I can't believe the war itself will have much impact on the domestic economy, although that could change under different scenarios.
Q: You recently said that you're going to stop giving specific guidance on earnings. Why did you do that, and why now?
A: We did it at a time when we were comfortable about our business. We got ourselves into a habit of getting far too detailed into the business. It was really not productive. We were not giving people more insight into our brands or our strategy. The purpose for making the announcement when we did was that we had a chance to tell people where we were going and show them how strong our businesses were.
Q: Would you have done it if Coca Cola (KO
) hadn't already decided to do the same thing?
A: I'm not naïve enough to think that we do this out of context, but in this particular situation, the fact that Coke did it had no impact on our decision. Everyone is looking at issues of corporate governance right now. There was no direct link. They chose the timing that was right for them.
Q: Do you think there's any risk that all this attention on corporate governance will make it harder for U.S. companies to grow?
A: It's something we all have to be concerned about. We can't let the pendulum swing too far the other way. We should be concerned about a continued maniacal focus on rules at the expense of good ethical principles. If it continues and people get maniacally focused on setting rules, it could have an impact.
Q: You credit the Quaker acquisition with helping you to really trim costs and build your product line. Are there any other gaps that you might look to fill with an acquisition right now?
A: We're in a really good position. We're fishing in the right place. Convenience food and beverages are the right spot to be in the industry. We really don't have an overriding need to do another merger or acquisition right now. Clearly, if we find one that fits, we'll do it. But Quaker worked not just because of the products but because of the people and the culture.
Q: What keeps you up at night? Any worries or concerns about the business?
A: I sleep pretty well at night, though I don't sleep very long. We've got to continue to focus on innovation, and that depends on getting the right people and the right leadership. If we can do that, we'll continue to be successful.
MARCH 24, 2003
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