Pepsi Gets Back In The Game

By Frank Gibney Jr./Purchase

Coca-cola officials have often been asked about their 100-year rivalry with Pepsi-Cola, and they usually respond diplomatically, claiming to benefit from having a competitor that has seemingly fought them to a standstill for every drop of business worldwide. "If Pepsi didn't exist, we'd have to invent it," is the generous reply.

And now we know why. Over the past five years the Atlanta goliath has used Pepsi as a punching bag, kicking its can from Turkestan to Tallahassee and creating vast amounts of wealth for shareholders in the process. Who wouldn't want a foe like that? By the time Roger Enrico walked into the chief executive's suite at PepsiCo headquarters in Purchase, N.Y., three years ago, the company's performance had detached itself from its image as a vaunted marketing maverick that launched the cola wars in the '80s. The numbers tell all: in the U.S., Pepsi sells a single soda for every three Cokes. The troops were as confused and demoralized as Enrico had seen in his 27 years with the company--"shell-shocked," says Phil Marineau, who arrived in 1997 as president of Pepsi-Cola.

So Enrico the old cola warrior is rewriting the rules of engagement. When you see Pepsi advertising on the air, it will still be in Coke's face, although perhaps not as relentlessly as before. Take its "Joy of Cola" campaign, in which the cherubic Hallie Eisenberg lip-synchs voice-overs from celebrities--including Marlon Brando as Don Corleone--to demand Pepsi over you-know-what. Yet it's a much broader, less edgy approach than the company's Generation Next theme, whose message excluded much of the audience. The company has also launched a new beverage, Pepsi One, to keep hammering away at Diet Coke.

But in many respects Pepsi is getting real about what it can accomplish. On the ground, the goal is to be in your face, not Coke's, and steadily increase Pepsi's presence by gaining a restaurant account here, an extra foot of shelf space there. For Pepsi, a company whose culture has always thrived on big-idea, renegade thinking, this is much humbler stuff. But, asks Marineau, "how do you become a Pepsi loyalist if you can't get it?"

To execute this plan, Enrico has recently completed a sweeping reorganization. In the past two years, he has pulled PepsiCo out of the restaurant business, jettisoning fast-food chains, including Pizza Hut, Taco Bell and Kentucky Fried Chicken, which had combined sales of $11 billion. The profits were tasty, but the capital required to build restaurants was giving Pepsi heartburn. Last month the company spun off its main $7 billion bottling operation into an independent public company, something Coke did years ago to create Coca-Cola Enterprises. The soda business actually has two components, the first of which, making and marketing cola concentrate, is very profitable. Mixing that concentrate with carbonated water, putting it in bottles and getting it to you is another capital-intensive business that Pepsi decided to do without.

The spin-off will leave Pepsi's concentrate and bottling setup looking a lot more like Coke's. "It's a better mousetrap," Enrico concedes with a grin. "And there's no pride in this, so why not do it ourselves?" To add to his new mix, Enrico last August spent $3.3 billion on America's leading premium juicemaker, Tropicana. Last year PepsiCo had total sales of $22.3 billion.

Enrico's revolution has already put Pepsi in a position where it can hurt Coke. For the first time in years, the Big Red growth machine is double-clutching, feeling the dark side of globalization in places like Brazil, its third largest market, where the recent devaluation hurt business severely. Coke's sales are also weak across Asia, and the company's huge investment in Russia is underwater. Pepsi needs to make a dent in Coke away from home, because the Atlantans derive most of their profits outside the U.S., where Coke outsells Pepsi 5 to 1.

At home, Pepsi's restructuring--and the cash thrown off by the IPO--allows it to take dead aim at Coke's near monopoly in fountain soda sales. It's a hugely important part of the business. Pepsi holds its own in grocery and discount stores, but the fountain business gushes profits for Coke. Now, free of the restaurant business ("Why buy from one of your competitors?" Coke sales reps used to be able to say to fast-food operators), Pepsi can become more effective. Even if the campaign doesn't win many big accounts--it did win Bojangles and Pizza Inn recently--it could force Coke's costs up 30% to 40% this year, according to analysts. Last week, for instance, Coke retained its business with Burger King, but the victory might yield lower profits because of the added concessions Coke had to make. Pepsi is also throwing money at vending operations, after ignoring the sector for years. The company says it has increased the number of machines 240% since 1997.

Enrico is also enlisting a powerful ally in this campaign--Frito-Lay, the Dallas-based subsidiary that is to snacks what Coke is to sodas. Frito accounts for two-thirds of Pepsi's sales and profits, and it is one of the most efficient companies in the world at getting products to retail via its truck routes. In the past, Pepsi did little to leverage Frito's commanding position as America's premier snack company. Now it intends to use Frito's muscle as a wedge for all PepsiCo products.

In the aisles, the new PepsiCo is trying to combine sodas and snacks in lavish displays at supermarkets and convenience stores. In targeting consumers, what Pepsi calls the "Power of One" makes perfect sense: it's all about making sure that everybody who buys a salty bag of Tostitos or Lay's potato chips has to think twice before passing up that thirst-quenching bottle of Pepsi or Mountain Dew across the aisle.

In the back offices of supermarkets and discount stores, Pepsi is waging another kind of war, pitching itself not just as a supplier but also as a partner in a highly competitive business. Combined, Pepsi, Frito-Lay and Tropicana account for $11 billion in retail sales at supermarkets--hefty numbers that Coke can't match. "We represent up to 13% of their profits," says PepsiCo's new senior vice president for sales and marketing, Al Carey. Last month Carey accompanied Enrico and the presidents of Pepsi, Frito and Tropicana on a historic first joint call on a major retailer to remind the customer of those figures.

For Enrico, the re-engineering of PepsiCo could be the crowning achievement of a career filled with magic acts. The 54-year-old chairman started as an associate product manager for Frito-Lay and became president of Pepsi-Cola at 39. In the 1980s he became famous as the cola warrior who beat Coke and bragged about it. As its president in the 1990s he rejuvenated Frito-Lay. Then he turned around the restaurant division before deciding it was too expensive to keep. "Nobody can bulls___ Roger, because he knows every one of our businesses cold," says Indra Nooyi, the company's chief strategist. Enrico has spent a long time picking those businesses apart and relearning them, in order to completely reshape them.

What Enrico discovered was that forging a new PepsiCo meant changing a corporate culture that was in love with itself. Pepsi has always attracted some of America's hottest executive talent, and it let these managers run their businesses. In a world where scale matters, such freedom has a price. "Frankly, we had a long-standing culture of autonomous business units," says Frito-Lay CEO Steve Reinemund. So while managers were ricocheting off each other in search of their next promotion, or chasing new restaurant chains or joint ventures in far-flung parts of the world, Coke stuck with the game it knew, steadily increasing the stakes along the way with billions of dollars of investment in soft drinks, nothing else. "The bet had been made, and we didn't raise or call it," says Enrico. "We didn't even play."

Enrico is not about to let the company's egos get ahead of its capabilities again. "I started out here [as CEO] with a sense of the limitations, not just opportunities," he muses. He put a stop to the management churn by recentralizing control and altering compensation schemes, offering incentives to managers to get the job done, not just look for the next one. Says Enrico: "I want to make sure that we walk the talk around here, not just on philosophy, but on implementation."

The stiffest test for that culture may be in its overseas operations. Not four months after he took over the top job, his largest bottler in Venezuela--run by an old friend--defected to Coke. It was the most public failure of what what insiders referred to as the "$5 billion house of cards," Pepsi-Cola International. PCI's ambitious, much publicized campaign to stake claims everywhere from Moscow hospitals to Burma came undone in a cascade of bankrupt joint-venture bottling partners and questionable acquisitions that took Pepsi into dozens of businesses that had nothing to do with cola. The result in 1995, for instance: Coke made $3.5 billion overseas; Pepsi had an operating loss of $652 million.

Enrico and his lieutenants learned two lessons from the PCI debacle. One was that the business had to be simplified. The other was that no single manager was hot enough to run his or her operation without full disclosure. "This is about boring consistency," says Peter Thompson, who took over PCI in 1996. "We've moved from individual heroics and silver-bullet management to building capable teams." Thompson is reconstructing the 18,000-employee international operation "brick by brick."

The strategy is beginning to get results. More Pepsi was sold overseas last year than in the U.S., and volumes are growing steadily--faster in 1999 than Coke's.

Pepsi hopes to make its greatest gains in the U.S. this summer, when it unleashes a marketing blitz tied to the Star Wars prequel The Phantom Menace. Pepsi will spend around $2 billion exercising its exclusive boasting rights to America's favorite slice of fantasyland. There will be collectible Pepsi cans emblazoned with Star Wars characters and gold "Yoda" cans of Mountain Dew, not to mention surprises in bags of Frito snacks.

The Force may be with him, but some cynics out there think Enrico and Pepsi have lost the cola wars for good. One line of reasoning is that Coke is simply too big to topple. Coke, for instance, has added 8 billion cases of sales in 10 years, according to CEO Douglas Ivester. Others say that Enrico's deliberate strategy is tantamount to declaring defeat. Says Tom Pirko, president of consulting firm Bevmark: "Pepsi has put its tail between its legs and withdrawn."

That makes Enrico bristle. "Anyone who thinks we've reduced our commitment to the soft-drink business simply isn't getting the message," he says. Enrico warned his top managers in a recent strategy session not to think things at PepsiCo are going to be predictable. And deep down, Pepsi's cola warriors may never lose their thirst for battle. "We are going to take back what is rightfully ours," says Nooyi, the strategist. Let the games begin again.