FMCG

by Greg Thain

  Mack approached small radio stations, which were grateful to get any advertising sales. He started spending. Within two weeks the results were promising enough to take to other stations. By the end of 1941 it had been broadcast 300,000 times across nearly 500 stations. The jingle not only built sales, but also began a unique personality for the brand. Mack built on this by abandoning the old beer bottles and adopting a unique Pepsi bottle. This became famous for its baked-on label: it was designed by the man responsible for the interior of Tiffany’s Fifth Avenue store.

  The move to build uniqueness into the brand was not before time. Pepsi-Cola’s value positioning would soon begin to dissolve. The price of sugar shot up after the Second World War. This put tremendous strain on Pepsi’s price positioning: Coke was big enough to absorb the increases for far longer than Pepsi. And to maintain such a discounted value proposition long term, you needed to be the lowest cost producer. Pepsi was not, and they could hold the line no longer than 1948. They tested putting the price up to 6 cents, and launched a smaller 8oz., bottle for 5 cents. Both bombed. Sales growth completely stalled, which prompted a cabal of disgruntled bottlers to force Mack out and introduce another strongman who would shake things up.

  Next in line was Alfred N. Steele. He saw straight away Pepsi’s value positioning was doomed. It was seen as quirky and cheeky, the cheap cola you served to your kids and their friends. Mindful of his predecessor’s fate, he also realised that the bottler network - a rougher, tougher bunch than Coke3’s - needed hauling back onboard the good ship Pepsi. Steele, the ultimate schmoozer, promised the bottlers if they followed him he would ‘take them out of their Fords and put them in Cadillacs’. Cocke bottlers spent their lives on the golf course. Too used to having no direct competition, they were flabby and lazy, he told them. They’re there for the taking,

  For Pepsi to take on Coke, it had to match Coke standards. When the selling point had been twice as much for the same price, no one had paid much attention to product consistency. Pepsi varied in taste between different bottlers and even different production runs. That, Steele said, had to change. He sent mobile laboratories around the country. If bottlers couldn’t get the product right, they had no place in Pepsi’s system. Steele hired ex-Coke employees in droves. With the ability to deliver a consistent product, he could build a national brand, differentiated along dimensions other than price. The chosen dimensions were packaging, product and target market.

  As above, the flabby Coke bottling system was highly resistant to investment and change. Steele saw that his rival could always be out-innovated on packaging. So during the 1950s, Pepsi introduced a range of sizes that met different needs. For example, the 26oz Hostess bottle in 1955 was loved by the rapidly expanding grocery chains, which Coke were slow to embrace. On the product side, Steele also saw two vulnerabilities in Coke’s overwhelming strength. First, the brand was targeted to absolutely everyone, i.e. no one in particular, and secondly it was tied to the same recipe. Coke couldn’t change its product to appeal to specific segments of the buying population and wouldn’t introduce variants that could do the same job. So the Pepsi management reached for the nuclear button: they reformulated their product with the specific aim of making it more appealing to women. Prompted also by the high cost of sugar, Pepsi adopted a lighter taste with fewer calories. Their advertising emphasised benefits such as looking smart, keeping up-to-date and being fair and debonair. Previously a copycat of Coke, Pepsi now had a differentiated product in a range that sold in the prime trade channel for reaching women - grocery stores. Pepsi had achieved a cohesive, segmentation-based approach to the market, allowing their price to creep up towards that of Coke. Steele’s marriage to movie star Joan Crawford, who was immediately dragooned into brand spokesperson, accentuated the difference between modern Pepsi and staid old Cocke. Pepsi couldn’t beat Coke overall, but they could beat them with women.

  The results of this approach were outstanding. By the time Steele died in 1959, Pepsi’s sales had tripled while the market only increased by 30%. The company’s profits increased five-fold while Coke’s only doubled. Steele had also ramped up Pepsi’s overseas operations, going from three concentrate plants located abroad to twelve. The bottlers were not only driving around in Cadillacs, they believed where the company was going. They were also contributing an unheard of two-thirds of the total Pepsi advertising budget. Having Joan Crawford come open your new bottling line in the middle of nowhere did wonders for bottler commitment and morale.

  The key to the Pepsi strategy was always to keep one step ahead of Coke - to do what they couldn’t, or wouldn’t do. While Coke had Eisenhower as its man in Washington, Pepsi signed up Richard Nixon. He helped engineer the publicity coup of having Nikita Khrushchev drink a Pepsi when Nixon visited Moscow. When diet drinks became a realistic possibility for mainstream companies, Pepsi was first out of the gate with Diet Pepsi. And as the grocery chains continued an inexorable growth, Pepsi brought out new sizes and plenty of promotions. But the making of the Pepsi brand came from what seems in hindsight an almost inevitable evolution of Steele’s approach. From targeting women to the Pepsi Generation, Pepsi was already in the right territory, but the genius was to take a demographic positioning - moms with young kids – and turn it into an attitudinal positioning: people who think young, who look forward, who are positive, curious and want more out of life. The first manifestation of this thinking came in 1961 with a campaign which carried the punch line Think Young. It reached fruition two years later with the slogan, Come alive – You’re in the Pepsi Generation. This was perfect for the times and was everything Coke was not.

  Pepsi-Cola was used to having dynamic, forceful leaders. After something of an interregnum, order was restored in 1963 with the appointment of Donald M. Kendall. He had worked his way up from a lowly fountain salesman and was Pepsi through and through. Kendall would lead the company into its modern manifestation as not just an American drinks brand, but also a global food and beverage company.

  How Did They Build The Modern Company?

  Kendall did not wait long in flagging up that things were changing. Within a year of his appointment, Pepsi made its first acquisition, that of the small Virginia-based Tip Corporation and its brand, Mountain Dew. The management mantra of the 1960s was diversification and the corporate vehicle of choice was the multi-category conglomerate. Pepsi, as a highly focused soft drinks company with high margins, was a tempting target. Kendall was keen to remain master of his own fate but hampered by the fact Pepsi was too small to make major acquisitions of its own. So he engineered a merger in 1965 with another company also keen to keep out of conglomerate clutches: Frito-Lay.

  Frito-Lay was itself the product of a 1961 merger between the Frito Company and the H.W. Lay Company. Herman W. Lay became chairman of the newly created PepsiCo Inc. with Kendall as president and CEO. The new company had sales of just over $500 million, made up of around one-third snacks sales and two-thirds beverages. The merger had a lot of logic:

  · Both companies did most of their business with the same customers – grocery chains

  · Both product sectors used a system of direct store delivery by their own or their bottlers’ trucks

  · Salty snacks made you thirsty: soft drinks quenched thirst

  Even though the two companies essentially operated as separate divisions of PepsiCo, the deal attracted the ire of the Federal Trade Commission. The regulator was suspicious that their combined might would create unfair competition in the snack food business, particularly in the buying of advertising. A compromise was finally agreed in 1968: PepsiCo would not buy and run ads for each division back-to-back, and would not acquire another beverage or snack food company for the next ten years. So, with no acquisition prospects within their existing categories, the company sought to expand beyond snacks and beverages. In 1964 Kendall had established the Pepsi-Cola Equipment Corporation, to lease vending machines and trucks to bottlers. This sideline became so profitable that the company
deepened its trucking activities, progressively buying trucking and transportation companies. An abortive bid was made for the Miller Brewing Co. and in 1970 Pepsi spread even further afield by purchasing Wilson Sporting Goods, makers of tennis rackets and golf balls among other sporting paraphernalia.

  While the snacks side of the business stuck to its knitting by introducing Doritos in 1966, mistakes began to be made on the core Pepsi USA business. Kendall was now at one step remove, focused on building the company’s international presence (see below). In the meantime, mainstream Pepsi became envious of a successful milk-based brand called Yoo-Hoo, and set about developing a challenger called Devil Shake. They discovered too late that the Yoo-Hoo Chocolate Beverage Corporation held the rights to the only technology at the time, which could give the product a decent shelf life. Pepsi had to write off $5 million development costs. Even worse was the 1967 decision to move away from the Pepsi Generation-themed advertising. The reversion to the more product-oriented Taste That Beats the Others Cold (Pepsi Pours It On) was a mistake only corrected after two years of flat sales.

  The early 1970s saw strategic thrusts which quickly doubled the size of PepsiCo from the high of $1 billion annual sales reached in 1970. The sales powerhouse of the 1970s would be the massive expansion of the Frito-Lay direct store delivery system. This opened a new manufacturing plant every year as it extended its reach to over 700,000 sales calls a week in over 300,000 stores. Deliverymen had the scope to put Frito-Lay products front and centre of every snack display. On the Pepsi side, the emphasis switched from innovating new brands (most of which had flopped), and back to what had helped build the brand - innovating packaging formats. This culminated in the industry’s first two-litre bottle in 1974. The mantra of the drinks division became one of marketing package and price ahead of taste and flavour, and exploiting the greater flexibility of their bottling system. As grocery stores were getting ever larger, there was more shelving to be occupied; so more sizes were welcomed with open arms. From October 1971 Pepsi gained market share for seventy-two consecutive months, and pulled level with Coke in grocery stores. It was an impressive achievement.

  However, Pepsi wasn’t doing well everywhere. In Texas it had a pathetic 6% market share and was a distant number three behind Coke and the home-grown Dr Pepper brand. Local bottlers found the Pepsi Generation thematic advertising useless against entrenched competitors and demanded head office help. An executive was sent and concurred with the local view that, outsold eight-to-one as they were, they needed an ad campaign with real balls. Moving the sales needle meant risk-taking. Seeking to understand the appeal of Dr. Pepper, the executive conducted taste tests of the three brands. He was amazed to find that Pepsi consistently outscored Coke. Even more amazing was the fact that neither Coke nor Pepsi’s head offices had ever conducted blind taste tests of the two brands, presumably because they are never bought blind (this is the main argument against blind taste tests). Hence was born the Pepsi Challenge.

  More acquisitions later in the 1970s changed PepsiCo’s make-up. While Pepsi was consistently gaining on Coke in the grocery chains where all brands were stocked, it had made little to no headway in Quick Service Restaurants (QSRs). There only one cola would be served, which was invariably Coke. Kendall’s answer harked back to Charles Guth’s style - to buy the restaurant chains and kick Coke out. They acquired Taco Bell in 1977 and Pizza Hut a year later. When combined with the meteoric progress of the snacks division - Frito-Lay sales had increased six-fold since the 1965 merger - over 60% of company sales were now coming from categories other than beverages. The next year, international sales of snacks were greater than had been Frito-Lay’s entire sales at the merger.

  By 1981, PepsiCo was a $7 billion a year company and the clear number one in take-home sales of cola. Their fountain business, which had been given a shot in the arm with the acquisitions of Taco Bell and Pizza Hut, improved further when Burger King also decided to switch from Coke to Pepsi. Then, in 1986, PepsiCo acquired KFC. The company solidified around three divisions: soft drinks, snack foods and restaurants, selling off the transportation and sporting goods companies in 1984. But the big Pepsi event of the early to mid-1980s was not something PepsiCo did, Coca-Cola. At last, old-fashioned, conservative Coke responded to a whole series of Pepsi moves over time. The something was New Coke.

  It’s not often in business your competitor makes a move you thought they would never or should never do. When it happens, what counts is how quickly and forcefully you respond. Pepsi-Cola had been steadily gaining on Coke from 1977 to 1982, partially thanks to the national rollout of the Pepsi Challenge, but progress had slowed. So Pepsi turned up the heat. Pepsi Free, the caffeine-free cola introduced to challenge the newly launched diet Coke, exceeded all expectations - shipping 150 million cases in its first year. Also in 1983, Pepsi signalled a move away from the Pepsi Challenge. That November, it signed the biggest advertising contract in history: $5 million. Michael Jackson would appear in two commercials to add a new level of awareness to the resurrected Choice of a New Generation advertising theme. The launching of a gut-busting 3-litre bottle in May 1984 once again broke new ground. There was a lot going on with Pepsi, and Coke was left trailing.

  Coca-Cola got new leadership. The long-time president Robert W. Woodruff had had a strategy of ‘do today what we did yesterday only better’. As Pepsi was changing everything all the time, Woodruff’s strategy was deemed old-hat and misplaced. A new president, Roberto Goizueta, was given the mission of shaking up Coca-Cola to increase its fizz. What better way to start than slaughter the most sacred of cows – the secret formula locked in the Atlanta bank vault. On April 19, 1985, Coca-Cola committed a major blunder: indicating they would make a major announcement the following Tuesday. Forewarned Pepsi executives could scarcely believe their luck when they got hold of a smuggled preview six-pack of the new flavour. They had three days to craft a response. They declared a company-wide holiday. They booked a full-page ad in The New York Times trumpeting that Pepsi-Cola had won the cola wars. They fed questions that the press could throw at the hapless Goizueta. Coke’s biggest moment for a hundred years had been turned into Pepsi’s best haul of favourable PR in its history. That was the disastrous something that Coca-Cola did.

  Coke eventually announced ‘discovering’ this new, even better Coke formula while developing Diet Coca. This sounded less plausible, and a lot less interesting, than the idea, followed by the plain fact, that Pepsi had psyched them out and Coke had pressed the panic button. The consumer response, as we all know, was to desert the Coke brand in droves. Brand share fell off a cliff and within three months the old recipe was back, escorted by the distinctly implausible claim that the fiasco had been a success by reawakening the consumers’ love for Coke.

  Pepsi did the better of the two in 1985 by growing 5%, increasing to 7% in the first quarter of 1986. It had been a masterful performance by Pepsi management. They even developed their own version of original Coke to launch - Savannah Cola. Pepsi only pulled back when they realised bulk buying of spent coca leaves (used in the Coke formula) would alert Coke’s executives, who could then bring back Classic Coke sooner than they did.

  Following this triumph, corporate attention once again turned to M&A activities, and a huge move to bolster its soft drinks division. PepsiCo arranged to buy Seven-Up from Philip Morris for $380. PepsiCo were buying America’s third-largest soft drinks brand. This alone added seven share points to the company, and took them within striking distance of Coke. They would also have got a very strong international organisation plus almost an entire new bottling network (as only 20% of Seven-Up bottlers also bottled Pepsi).

  Unfortunately, the Federal Trade Commission voted unanimously to oppose the deal. PepsiCo were left to buy the international unit of Seven-Up Co. for $246 million in cash. In 1987, PepsiCo’s total sales of over $11 billion were almost 50% greater than those of The Coca-Cola Company and twenty-two times greater than the year PepsiCo had been formed.
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br />   The early 1990s saw PepsiCo broaden its beverages product range by latching onto emerging trends. A range of ready-to-drink teas developed in tandem with Thomas J. Lipton was launched in 1992, followed a year later by the test marketing of Aquafina water and the overseas launch of Pepsi Max. Frito-Lay continued to extend its DSD system, with new offerings such as Wavy Lays Original and Au Gratin flavours. On the restaurants side, East Side Mario’s was acquired along with the D’Angelo Sandwich Shops chain. In 1994, following the success of the Lipton deal, new partnerships were agreed with Starbucks to develop ready-to-drink coffee beverages, and with Proctor & Gamble to use the Citrus Hill trademark.

  By 1996 sales had reached $20 billion. The national rollout of Aquafina and the purchase of the Cracker Jack snack brand added more. A year later, the top-line took a hit as the restaurants division was spun off as Tricon Global Restaurants Inc. - soon to be renamed Yum! and locked into a lifetime contract to sell Pepsi beverage brands). The money from the spin-off was almost immediately put to good use with the acquisition of Tropicana (at $3.3 billion, the largest in PepsiCo’s history). Pepsi’s Tropicana could take the orange juice fight to Coca-Cola’s Minute Maid. PepsiCo was now such a large beverages and snacks company that it contributed more to the 1998 sales growth of America’s supermarkets, mass merchandisers and drug stores than any other packaged goods company.

  The 21st-century began with more of the same. The Pepsi Challenge was revived, and a host of new products in fast-growing categories introduced. The standout development was a $13 billion share swap merger - a takeover in all but name - with The Quaker Oats Company, primarily for its Gatorade brand. Gatorade had a massive 84% share of the sports drink category that PepsiCo had tried and failed to crack. PepsiCo rounded out its beverage portfolio by purchasing a majority stake in the South Beach Beverage Company, for its SoBe brand. By 2003, PepsiCo was the fourth-largest food and beverage company in the world, behind Nestlé, Kraft and Unilever.