As Pepsi struggles to regain market share, Indra Nooyi s job is on the line

Good for you, not for shareholders

Mar 17th 2012 | from the print edition

IN OCTOBER 1996 the cover of Fortune magazine showed Roger Enrico, then the

chief executive of PepsiCo, trapped in a Coke bottle under the headline How

Coke is kicking Pepsi s can . Ten years later, just after Pepsi had surpassed

Coca-Cola in market capitalisation for the first time in their 108-year

rivalry, the same magazine ran another big story on the cola giants. It

admitted that it was wrong to have declared Pepsi defeated and lauded it as one

of America s best-run companies.

Fast forward another six years and Coke is again kicking Pepsi s can. Both are

losing cola drinkers in America as consumers switch from fizzy, sugary drinks

to healthier water, tea, juices and sports drinks. But whereas Coca-Cola has

lost on average 2% a year in like-for-like volume of fizzy drinks in America

since 2004, Pepsi has lost 3% (see chart), according to Sanford C. Bernstein,

an investment bank. That means its American drinks business has shrunk by about

20%. Coke s Simply juices and its lower-priced Minute Maid are taking share

from the fruity concoctions of Pepsi s Tropicana. And Coke s sports drink,

Powerade, is knocking spots off Gatorade, Pepsi s brew for athletes.

Faced with mounting investor dissatisfaction about Pepsi s stagnant share

price, the food-and-drinks giant recently embarked on an effort to relaunch the

company. On February 9th the group announced that it was cutting 8,700 jobs, or

3% of its workforce. Having underinvested in its flagship beverage brands for

years, it is increasing investment in marketing and advertising by $500m-600m.

It has some catching-up to do: at the end of 2010 Pepsi spent 3.3% of sales on

advertising compared with 8.3% of sales at Coca-Cola, according to Judy Hong,

who follows drinks makers for Goldman Sachs.

Pepsi is also pinning its hope on the launch across America on March 26th of

Pepsi Next, a new soda sweetened with both high-fructose syrup and artificial

sweeteners which has 60% less sugar than classic Pepsi. Angelique Krembs of

Pepsi says the new drink is aimed at consumers who are keen to imbibe less

sugar with their cola but dislike the taste of diet drinks. She splits this

mostly male group in two: dualists , who switch between regular and diet (and

sometimes mix the two), and resistants , who never touch either.

Repeat performance

Will Pepsi s reset be enough to win over investors? Pepsi Next is dividing

opinions. We have seen this movie before, says Mark Swartzberg, a drinks

analyst at Stifel Nicolaus, a bank. In 2004 Pepsi launched Pepsi Edge, a

mid-calorie soda, which Coca-Cola matched with a new mid-calorie brew called

C2. Both disappeared from the shelves after a few years.

Is Nooyi ready to move on?

Pepsi s boss, Indra Nooyi, is seeking to revive the company s core business

while continuing her ambitious drive to transform the company into a maker of

healthier drinks and snacks, and a better corporate citizen. In the past few

years Ms Nooyi has spent disproportionate time and effort on promoting products

that Pepsi calls good for you (oatmeal, fruit juices and sports drinks),

which make up about 20% of its sales. She is aiming nearly to triple the

revenue of nutritious products, to $30 billion, by 2020.

Ms Nooyi has also devoted resources to cultivating a corporate image focused on

global social responsibility. In 2010 Pepsi skipped soda ads at the Super Bowl,

launching instead a $20m online competition for the nomination of worthy causes

that Pepsi might finance. The Refresh Project succeeded in gathering 80m online

votes and helped numerous homeless shelters and orphanages. But it did not sell

much soda, which is why Pepsi went back to its usual ads at the 2011 Super

Bowl.

It will take time for the revised strategy to bear fruit, as it did for

Coca-Cola when it reset its course in the late 2000s after a series of

management and marketing mishaps. Coke s bosses now feel they are on the right

track with its offering of fizzy drinks, vitamin water, juice, coffee and tea.

They think they are giving health-conscious customers sufficient choice. Of the

3,500 drinks Coke sells worldwide, more than 800 are zero- or low-calorie.

If Ms Nooyi s relaunch does not work Pepsi may get a new chief executive. The

company seems to be preparing for a possible change at the top. On March 12th

it revamped its management structure, poaching back Brian Cornell a former

Pepsi man who went on to run the Sam s Club division of Walmart to head Pepsi s

Americas Foods snacks division. It put John Compton, the current head of

Americas Foods, in charge of all the company s global groups, making him an

heir apparent in the newly created role of president. Another possible crown

prince is Zein Abdalla, boss of Pepsi s European business.

Ms Nooyi may leave before she is pushed out. She is one of the contenders for

the top job at the World Bank. Though she says she loves her job, she has

talked in the past of her desire to spend some of her career in public service.

And the World Bank may suit her zeal to do good on a global scale rather more

comfortably than the maker of popular but largely fatty, salty and sugary

foodstuffs.

from the print edition | Business