The Pepsi-Cola Story

Summer of 1898, a young pharmacist Caleb Bradham looking for ways to attract people to his pharmacy invented the beverage now known around the world as Pepsi-Cola. After the first advertisement the sales of the new soft drink began to go up. Knowing the importance of good distribution system Pepsi was one of the first to switch from horse drawn transport to motor vehicles. Throughout its existence Pepsi adjusted its marketing strategies trying to keep up with the social and economic conditions of its consumers. During the Great Depression and continuing into the World War II Pepsi emphasized the low prices of the drink knowing that people had narrowed their budgets. In the mid. 1950s the emphasis fell on Pepsi being a lifestyle accompaniment. The breakthrough move by Pepsi was made in the late 1950s to capture the market of new generation of baby boomers. Its best known advertisement slogans such as "You're in the Pepsi Generation", "Have a Pepsi day" or "You've got a lot to live, Pepsi's got a lot to give" set a new standard for advertising. To dominate in a soft drink category Pepsi, after 65 years of selling only Pepsi-Cola, introduced new products: "Mountain Dew and Diet Pepsi." To capture the completely new market of X-ers, throughout 1980s and 1990s Pepsi's commercials featured superstars, supermodels, actors and sport stars. In the mid. 1980s Pepsi-Cola declared a victory in the cola wars.

Keeping Pepsi-Cola as its cash cow presidents of Pepsi-Cola decided to back up their positions by investing in a fast food restaurants and snack industry. In 1965 the new PepsiCo resulted from the merger of Pepsi-Cola and Frito Lay's, Inc.. Pepsi-Cola stuff knew that in order to survive in the direct competition with giants like Coca-Cola they will have to come up with more innovative products. Pepsi-Cola Company now accounts for 25% of the world's soft drinks with more than 70% of its sales coming from North America . In the beverage category Pepsi-Cola Company had some losses but are thinking of restructuring their strategies to create a new and even more dominant beverage company. Frito-Lay Company is the most successful snack chip company on Earth with 5 of its products leading the world snack chip market. Frito-Lay leads the market with a greatest margin of lead from the closest competitor. By 1996 Frito-Lay operated in 39 countries what means that there is a long way to go. With over 30,000 restaurants, PepsiCo has more restaurants than any other company in the world. Today the new PepsiCo has grown to be one of the largest consumer products companies in the world with its best known brands such as "Pizza Hut, KFC, Taco Bell, Frito Lay and Lay's Potato Chips."

Knowing how important innovations are to the constantly changing environment in which consumers become more spoiled than ever, PepsiCo as always chooses the right strategy. Starting in the mid 1960s when Pepsi-Cola came up with its "Mountain Dew" the company saw the birth of an additional cash cow whose benefits it still enjoys. To appeal to the enormous variety of tastes in the early 1990s, Pepsi-Cola came up with the caffeine free versions of Pepsi, Diet Pepsi and Mountain Dew. Later they introduced the "Slice" to expand Pepsi's soft drink portfolio. Through a partnership with the Thomas J. Lipton Company, Pepsi is the leading marketer of ready-to-drink iced teas. To get its leading share in the single serve juice market Pepsi created partnership with the Ocean Spray. Today, producing a wide variety of beverages Pepsi-Cola Company continues to come up with new products to satisfy the needs of its customers around the world. In France for example, Pepsi-Cola changes the taste of its main brand of cola and repackages the product with new design. (Advertising Age) In the US Pepsi-Cola is currently introducing its "Aquafina" brand of bottled water. The idea of bottled water came up when the researchers found that the baby-boomers are changing their preferences from sweet, carbonated drinks. Discovering that the company might lose its share of $3.6 billion from the domestic bottled water market Pepsi-Cola speeded up the introduction of their brand to beat Coca-Cola's late reaction to invade the bottled water market. ( USA Today) Also finding out that customers seek some changes in the products they are used to, Pepsi-Cola Company is looking forward to changing the can graphics on some of its products. (Product Alert)

In the snack business Frito-Lay, which formerly produced only one category of snacks, now makes and markets snack foods for every style and snacking preference. To react to the latest researches, Frito-Lay is introducing more varieties of its "Doritos sandwich crackers" in a ready to eat packages of six. The latest was the "Nacho Cheesier" kind. Also they are introducing more varieties of "Chee-tos Sandwich Crackers", their "Peter Pan Sandwich Crackers" with cheese peanut butter and Big Grab Potato Chips with Pepper Grill Tangy BBQ. (Product Alert)

PepsiCo's president believes that the size will help them provide very reasonable prices through mass production. The economies of scale is and has always been one of the most important factors why big companies are able to better satisfy their customers. During the Great Depression and continuing into World War II Pepsi-Cola managed to stay in business only after they introduced the new Pepsi's pricing advantage "Twice as much for a nickel" which later was adopted by all the major cola companies. To be able to provide the "twice as much" deal Pepsi bought sugar plantations in Cuba . To offer the best prices to its consumers Pepsi-Cola engaged into practice of buying the bottling companies, the latest were bought in Vaipur and Bangalore with the outstanding production speed. The latest move by Pepsi-Cola to cut their costs and to transfer savings to its customers was their tasting along with some other big manufacturers of the new "Scan Based Trading System." The new system is supposed to drastically cut the transportation and storing charges and eliminate the chances of selling outdated products. (Supermarket News)

Keeping in mind the importance of the excellent distribution system, Pepsi had been one of the first companies in the United States to switch from horse drawn transport to motor vehicles. Currently Pepsi is one of the best, with serving over a million retail customers. Even though Pepsi-Cola and Frito-Lay have a good distribution system they are currently in the process of testing the new "Scan Based Trading System" which is a new model for handling direct store delivered products. The system is expected to cut supply costs and build sales trough improved stock positioning. (Supermarket News)

PepsiCo is considered one of the world's premier marketers. Their advertising is legendary. Throughout the years Pepsi's presidents believed that advertising could be the cornerstone of soft drink marketing. In 1938 Pepsi's "twice as much for a nickel" deal was presented in a first ever advertising jingle. The jingle played and was heard coast to coast on network radio, making broadcast and advertising history. Later Pepsi-Cola captured the new generation of baby-boomers by calling them "The Pepsi Generation."

And finally Pepsi-Cola reached the so-called generation X by featuring Superstar Michael Jackson, supermodel Cindy Crawford and the big basketball star Shaquille O'Neal. A good example for the 1996 was the Pepsi Stuff promotion that helped Pepsi-Cola to outperform its competitors during the summer and the company's Olympics Sponsorship that reminded people that the old Pepsi is still there. Advertising has always been the primary element for Pepsi and today the big investment that they are making is a cross-promotion of the big Japanese re-release of Star Wars movie trilogy. Also the pepsi.com, the official web site of the PepsiCo Inc. will promote the new movie "The Peacemaker" that is expected to be a big hit. (Adweek Southwest) Least but not last one of the latest decisions made by Pepsi's marketers is to sponsor the new B3 games for Extreme Sports created by ESPN. The product to be advertised during those games will be the "AllSport" drink. (Advertising Age)

To run the restaurant chain PepsiCo are creating Tricon Global Restaurants. The estimated revenue of Tricon is expected to reach 10 billion dollars and it will become the second largest company in the world.

NON-ALCOHOLIC BEVERAGE INDUSTRY

In 1996, the American nonalcoholic beverage marked totaled approximately $78 billions in retail sales, up healthy 6 % from last year's level. According to Beverage world magazine, leading the growth in absolute terms was the soft drinks category, which added $52.14 billion in sales.(Foods & Non-Alcoholic Beverages, p.12) The fastest growing product category were fruit beverages, represented by Coke's Sprite, Pepsi's Mountain Dew, and Cadbury Schweppes' Seven-UP The market share of various non-alcoholic beverages in 1996 were as follows:

In 1996, Coke was again the overall leader in the global and US markets, accounted for more than 42 % of sales domestically, followed by PepsiCo with 31 %. These companies are fully taking advantage of higher growth in non-cola drinks. In addition to Sprite, Coke is planning to introduce Surge, a "fully loaded citrus cola".(Sanborn, p. 1538) Surge will be positioned as a direct competitor of Mountain Dew with above-average caffeine level and will be marketed at the 12 to 21-year-old market.

Growth in new products, so-called "alternative beverages", has slowed. The largest of these, by far, are the ready-to-drink teas. But, while Snapple is dramatically losing its market share, Pepsi's Lipton Brisk and Coke's Nestea have been showing healthy gains for two years in a row. Among sports beverages, Quaker Oats' Gatorade is still a clear leader, but both Pepsi with All Sport and Coke with POWERaDe have strong positions too. (Sanborn, p.1538)

What drives demand for non-alcoholic beverages as well as snack foods, lion share of which is made by PepsiCo?

1. Population. With population growth in the United Stets rising at an annual rate only about 1 %, the American market is quite mature. However, the different picture is seen overseas. According to the U.S. Department of Commerce, the world's developing countries will grow much more rapidly in the future than developed countries. In 1990, 80 % of world's population was located in so-called " Third World ", and by 2002 the number is expected to advance to 85 %. No wonder that the American companies have made rapid expansions abroad in recent years. ( U.S. Dept. Of Commerce Website).

2. Economy. The robust U.S. economy, which resulted in higher disposable income levels, has helped branded beverages to gain market share at the expense of lower priced private-labeled drinks that were popular during last recession.

3. Innovative marketing. Food and beverage companies create excitement for their products by adding or emphasizing each products benefits, such as healthiness in the cases

of diet and caffeine-free drinks, snacks.

4. Global political environment. Sweeping political changes in former Eastern Block nations opened enormous markets for the U.S. beverage and food companies. For the first time in history, Coke was able to sell its soda in the former USSR and now have equal with PepsiCo market share in these countries. PepsiCo Europe is a market leader in snack sales, leaving behind such powerhouses as Nestle and Cadbury.

It's worth mentioning here, that the industry enjoy positive image in public opinion, thanks in part to its very effective response to environmental concerns. According to the American Soft Drink Industry Association, soft drink containers are by far the most recycled package in the country due to effective, broad-based recycling infrastructure supported by a network of approximately 6,000 curbside recycling programs, an even greater number of neighborhood "drop-off" recycling centers and buy-back locations scattered throughout the country. (The NSDA Website) Soft drink companies sponsor many charitable organizations, such as United Way and United Negro College Fund, making sure the public is informed about their good deeds.

INTERNATIONAL OPERATIONS

PepsiCo, one of the leading global marketers, derives nearly 30 % of its sales from overseas. It is clearly a market leader in snack foods in China , South America, and Eastern Europe . (Pepsico Profile at Baseline Website). The company demonstrated the ability to open new market even behind the "Iron Curtain", when it agreed to exchange is soft drinks for Russian Vodka, the largest barter operation in World's trade history. PepsiCo is known for its adaptability to local cultures and tastes. The good example here is the company's acquisition of Polish confectionery and snack giant Wedel, where it left almost all top positions for experienced local executives, hired Warsaw ad agency, and never attempted to drastically change Wedel's product portfolio. Instead, PepsiCo has chosen to gradually introduced some packaging innovations, so that Polish consumers would still be able to recognize and accept Wedel's products as their own. This strategy help Pepsi to become the number 1 in this market, beating the behemoth Nestle in its own backyard.

All said, in 1996, for the first time in many years the results of Pepsi's international operations were in red ink. What happened? Because of the economic decline in South and Latin America , particularly in Mexico , sales volume of PepsiCo products have declined dramatically. Eternal competitor Coca-Cola launched full-fledge assault on Pepsi's leadership position in former Soviet Block, grabbed even more market share in China and India . Restaurant operations, which are being spined-off-off this year, were losing money almost everywhere due to fierce competition from McDonald's and other global fast-food chains. (PepsiCo Annual Report)

Historically PepsiCo was much more financially involved in international bottling and production than Coke and as a result took dramatic losses as many of its partners have had financial problems in South America and South Africa . In addition, the long-time Pepsi bottler in Venezuela unexpectedly switched to Coca-Cola. (PepsiCo Website).

In aggregate, during 1996, PepsiCo had to write down the carrying value of more than $400 milling in foreign distribution assets.

PESICO: LOOKING AHEAD

Despite somewhat mixed results on international arena and slowing growth in the U.S. , PepsiCo's outlook for the future remains bright due to comprehensive restructuring program and continuing favorable gemographic and economic trends around the globe.

The company's management intends to achieve sustainable, consistent 15% growth in profits.

This strategy include spin-off of low-margin and marketing intensive restaurant business.

This is being done to sharply focus financial and management resources on core businesses: soda and snacks. In beverages, for example, the lions share of Pepsi's marketing dollars and management attention will go to high-potential markets where no company dominates like China , India and Russia and to markets where Pepsi lead or is a strong number two. This goes as far as complete discontinuation of marketing efforts in countries like South Africa and Venezuela .

This will enable PepsiCo to streamline manufacturing, selling and distribution, infrastructure development; and marketing and new product research and development. The power of the entire corporation be behind a few very big initiatives that can really add to the bottom line. Numerically, these restructuring moves are designed to reduce operating costs by more than $100 millions a year. (PesiCo Annual Report).

Also, PepsiCo goes after Coke's distribution model by making their bottling operations a separate division. This lead to speculation that eventually bottling will be spin off creating a company similar to Coca-Cola Enterprises. (WSJ Press Digest).

PepsiCo is strengthening its marketing efforts on international as well as domestic arenas. It was just announced that it will become a global supplier of Time Warner Theaters and the global sponsor of Russian and Polish soccer teams. (Kommersant, p.A5, PepsiCo Website)

All these steps do look very promising. And, assuming flawless execution of them, the prospects for PepsiCo beverage and snacks operation are bright.