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Online Extra: PepsiCo: "Getting into Niches"


Steven S. Reinemund, PepsiCo.'s (PEP) chairman and chief executive, should be a scared man. Traditional soft-drink sales can't soar much more, and the low-carb craze could wreak havoc on the humble potato chip. But Reinemund, whose empire includes Tropicana, Gatorade, Quaker, Frito-Lay, and Pepsi products, sees only opportunity amid

growing interest in healthy foods and increased market fragmentation.

The PepsiCo chief, whose company is No. 44 in the latest BusinessWeek 50 rankings of the top-performing companies, recently spoke with BusinessWeek Associate Editor Diane Brady about his views on tapping consumer trends. Following are edited excerpts of their conversation:

Q: Interestingly, a lot of the companies on our list are doing well in areas that one might think of as slow growth -- such as coffee or, in your case, soda and chips. How do you

get people to keep buying?

A: Innovation is what consumers are looking for, particularly in the small, routine things of their life. They want a little bit of excitement and some new ideas. That's what

has driven our business, both in the U.S. and outside. Last year, we probably had our best innovation pipeline. Value is always critical, although I don't think it's the major driving

force, and quality is a given. Those are necessary -- but not sufficient.

Q: How important is traditional advertising vs. other forms of communications?

A: Building brands is all about making sure consumers have them top of mind. Certainly, there are more options today beyond advertising than there were five years ago. We think

that high-visibility programming is still something that consumers are attuned to. We advertised during the Super Bowl, for example. There just isn't any substitute for those

venues.

Q: So it's not a case of trying to create an experience around a potato chip?

A: I'm not sure how real that is, although I know people talk about it.

Q: Where do you get the most growth -- from selling more products to existing customers? Or are you trying to forge a deeper relationship with the customers you have?

A: You have to forge that deeper relationship. You have to keep the customers that you have in your base following you through their life cycle. What we've really been focusing on

is getting into niches -- ethnic niches, demographic niches -- with products, communications, and availability that we may have not had before.

In terms of product development, we've focused a lot of attention on the Hispanic and African-American communities. Then we make those products available in the markets where

those consumers shop and communicate to them with messages that are relevant to their lives.

Q: The marketing pitch is easy to understand. How do you actually change the product?

A: Last year, we had major growth in Frito Lay behind a product called Guacamole chips. It hit the mainstream, but it was originally designed for the Hispanic community. In Pepsi

Cola, we had Code Red, which was really developed for urban youth. And we're doing extensions of Mountain Dew, which had historically been a suburban youth phenomenon, to make

it more relevant to urban youth.

One of the things we'll do this year with Frito is bring in products from our Mexican operation. We have the largest cookie company in Mexico, as well as Sabritas, our salty snack. We're bringing those products in, primarily for the Hispanic market.

Q: One area that intrigues me is the demand for bottled water. How is Aquafina doing in regions like Europe?

A: What we're trying to do with our portfolio in beverages is to look at each market and decide the best way to play. It's no secret that in the international business, we're not the major player. So it's important for us to focus on our carbonated soft drinks and [make sure] that we fill in our portfolio appropriately for the different countries.

We have a very successful water business in Thailand, for example. The water business in Europe is pretty well developed, and there are major players there. There are opportunities

to introduce water in places like Spain, but we're going to do that where it makes sense.

There are areas where there's demand but, because of our competitive position, it's less advantageous for us to go there. We're really looking at the consumers' needs, the

competitive situation, and we're going from there.

Q: There has been a lot made in recent years about health and wellness, yet the bulk of your business remains in, as you call it, the "Fun-for-You" segment. What does that say?

A: It depends on how you define it. We're working hard at helping consumers understand how to make choices, in terms of nutritional value. We're going to come up with a good portfolio of nutritional variety. In that, you may find products that are low in calories, low in sodium, low in carbs, and things like that. Individual consumers have individual needs.

About 37% of our products fall into that category today -- the nutritional variety category.

It's difficult to define because it depends on what aspect of nutritional variety you're looking at. It may have low calories, for example, but what about sodium? Of course, we want to grow our entire portfolio.

Q: Is the Atkins craze making a dent in your business?

A: I wouldn't say it's a dent. I would call it an opportunity. We're coming out with products this year in almost all of our categories that address the carbohydrate issue. For

us, it's a chance to get consumers in our categories who may not be there today. The Fritos Edge products are on the market today, and we're ramping up production of that. We should

have national distribution of that in May.

Q: So what are the big challenges for you?

A: We're looking at a lot of the challenges as opportunities. For example, getting more diversity in the workplace has been good for our business. We're making better decisions because we have a more diverse workforce. At least one point of our U.S. growth last year came from better diversity. We have more people who understand the communities we want to serve.

People also worry about the health and wellness push. Frankly, I see it as a huge opportunity. If we can develop new products that fill that niche -- and may even have better margins -- that's great for us. And in this environment, it's a plus to have a set of values. People associated with you want to know: What do you stand for?


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