PepsiCo's overall mission is
to increase the value of our shareholder's investment. We do this through sales
growth, cost controls and wise investment of resources. We believe our
commercial success depends upon offering quality and value to our consumers and
customers; providing products that are safe, wholesome, economically efficient
and environmentally sound; and providing a fair return to our investors while
adhering to the highest standards of integrity.
History of PepsiCo, Inc.
PepsiCo, Inc. is one of the
world's top consumer product companies with many of the world's most important
and valuable trademarks. Its Pepsi-Cola Company division is the second largest
soft drink business in the world, with a 21 percent share of the carbonated
soft drink market worldwide and 29 percent in the United States. Three of its
brands--Pepsi-Cola, Mountain Dew, and Diet Pepsi among the top ten soft drinks
in the U.S. market. The Frito-Lay Company division is by far the world leader
in salty snacks, holding a 40 percent market share and an even more staggering
56 percent share of the U.S. market. In the United States, Frito-Lay is nine
times the size of its nearest competitor and sells nine of the top ten snack
chip brands in the supermarket channel, including Lay's, Doritos, Tostitos,
Ruffles, Fritos, and Chee-tos. Frito-Lay generates more than 60 percent of
PepsiCo's net sales and more than two-thirds of the parent company's operating
profits. The company's third division, Tropicana Products, Inc., is the world
leader in juice sales and holds a dominant 41 percent of the U.S. chilled
orange juice market. On a worldwide basis, PepsiCo's product portfolio includes
16 brands that generate more than $500 million in sales each year, ten of which
generate more than $1 billion annually. Overall, PepsiCo garners about 35
percent of its retail sales outside the United States, with Pepsi-Cola brands
marketed in about 160 countries, Frito-Lay in more than 40, and Tropicana in
approximately 50. As 2001 began, PepsiCo was on the verge of adding to its food
and drink empire the brands of the Quaker Oats Company, which include Gatorade
sports drink, Quaker oatmeal, and Cap'n Crunch, Life, and other ready-to-eat
cereals.
When Caleb D. Bradham
concocted a new cola drink in the 1890s, his friends' enthusiastic response
convinced him that he had created a commercially viable product. For 20 years,
'Doc' Bradham prospered from his Pepsi-Cola sales. Eventually, he was faced
with a dilemma; the crucial decision he made turned out to be the wrong one and
he was forced to sell. But his successors fared no better and it was not until
the end of the 1930s that Pepsi-Cola again became profitable. Seventy years
later, PepsiCo, Inc. was a mammoth multinational supplier of soft drinks,
juices, and snack food. PepsiCo's advance to that level was almost entirely the
result of its management style and the phenomenal success of its television
advertising.
Ups and Downs in the Early Years
Doc Bradham, like countless
other entrepreneurs across the United States, was trying to create a cola drink
similar in taste to Coca-Cola, which by 1895 was selling well in every state of
the union. On August 28, 1898, at his pharmacy in New Bern, North Carolina,
Bradham gave the name Pepsi-Cola to his most popular flavored soda. Formerly
known as Brad's Drink, the new cola beverage was a syrup of sugar, vanilla,
oils, cola nuts, and other flavorings diluted in carbonated water. The
enterprising pharmacist followed Coca-Cola's method of selling the concentrate
to soda fountains; he mixed the syrup in his drugstore, then shipped it in
barrels to the contracted fountain operators who added the soda water. He also
bottled and sold the drink himself.
In 1902 Doc Bradham closed his drugstore to devote his attention to the thriving new business. The next year, he patented the Pepsi-Cola trademark, ran his first advertisement in a local paper, and moved the bottling and syrup-making operations to a custom-built factory. Almost 20,000 gallons of Pepsi-Cola syrup were produced in 1904.
Again following the successful methods of the Coca-Cola Company, Bradham began to establish a network of bottling franchises. Entrepreneurs anxious to enter the increasingly popular soft drink business set themselves up as bottlers and contracted with Bradham to buy his syrup and sell nothing but Pepsi. With little cash outlay, Pepsi-Cola reached a much wider market. Bradham's first two bottling franchises, both in North Carolina, commenced operation in 1905. By 1907, Pepsi-Cola had signed agreements with 40 bottlers; over the next three years, the number grew to 250 and annual production of the syrup exceeded one million gallons.Pepsi-Cola's growth continued
until World War I, when sugar, then the main ingredient of all flavored sodas,
was rationed. Soft drink producers were forced to cut back until sugar
rationing ended. The wartime set price of sugar--5.5 cents per pound--rocketed
after controls were lifted to as much as 26.5 cents per pound in 1920. Bradham,
like his rivals, had to decide whether to halt production and sit tight in the
hope that prices would soon drop, or stockpile the precious commodity as a
precaution against even higher prices; he chose the latter course. But unfortunately
for him the market was saturated by the end of 1920 and sugar prices plunged to
a low of two cents per pound.
Megargel reorganized the firm
as the National Pepsi-Cola Company in 1928, but after three years of continuous
losses he had to declare bankruptcy. That same year, 1931, Megargel met Charles
G. Guth, a somewhat autocratic businessman who had recently taken over as
president of Loft Inc., a New York-based candy and fountain store concern. Guth
had fallen out with Coca-Cola for refusing the company a wholesaler discount
and he was on the lookout for a new soft drink. He signed an agreement with
Megargel to resurrect the Pepsi-Cola company, and acquired 80 percent of the
new shares, ostensibly for himself. Then, having modified the syrup formula, he
canceled Loft's contract with Coca-Cola and introduced Pepsi-Cola, whose name
was often shortened to Pepsi.
Loft's customers were wary of
the brand switch and in the first year of Pepsi sales the company's soft drink
turnover was down by a third. By the end of 1933, Guth bought out Megargel and
owned 91 percent of the insolvent company. Resistance to Pepsi in the Loft
stores tailed off in 1934, and Guth decided to further improve sales by
offering 12-ounce bottles of Pepsi for a nickel--the same price as six ounces
of Coke. The Depression-weary people of Baltimore--where the 12-ounce bottles
were first introduced--were ready for a bargain and Pepsi-Cola sales increased
dramatically.
Guth soon took steps to internationalize Pepsi-Cola, establishing the Pepsi-Cola Company of Canada in 1934 and in the following year forming Compania Pepsi-Cola de Cuba. He also moved the entire American operation to Long Island City, New York, and set up national territorial boundaries for the bottling franchises. In 1936, Pepsi-Cola Ltd. of London commenced business.
Guth's ownership of the Pepsi-Cola Company was challenged that same year by Loft Inc. In a complex arrangement, Guth had organized Pepsi-Cola as an independent corporation, but he had run it with Loft's employees and money. After three years of litigation, the court upheld Loft's contention and Guth had to step down, although he was retained as an adviser. James W. Carkner was elected president of the company, now a subsidiary of Loft Inc., but Carkner was soon replaced by Walter S. Mack, Jr., an executive from the Phoenix Securities Corporation.
Mack established a board of
directors with real voting powers to ensure that no one person would be able to
wield control as Guth had done. From the start, Mack's aim was to promote Pepsi
to the hilt so that it might replace Coca-Cola as the world's best-selling soft
drink. The advertising agency Mack hired worked wonders. In 1939, a Pepsi radio
jingle--the first one to be aired nationally--caught the public's attention: 'Pepsi-Cola
hits the spot. Twelve full ounces, that's a lot. Twice as much for a nickel,
too. Pepsi-Cola is the drink for you.' The jingle, sung to the tune of the
old British hunting song 'D'Ye Ken John Peel,' became an advertising
hallmark; no one was more impressed, or concerned, than the executives at
Coca-Cola.
In 1940, with foreign
expansion continuing strongly, Loft Inc. made plans to merge with its
Pepsi-Cola subsidiary. The new firm, formed in 1941, used the name Pepsi-Cola
Company since it was so well-known. Pepsi's stock was listed on the New York
Stock Exchange for the first time.
Sugar rationing was even more
severe during World War II, but this time the company fared better; indeed, the
sugar plantation Pepsi-Cola acquired in Cuba became a most successful
investment. But as inflation spiraled in the postwar U.S. economy, sales of
soft drinks fell. The public needed time to get used to paying six or seven
cents for a bottle of Pepsi which, as they remembered from the jingle, had
always been a nickel. Profits in 1948 were down $3.6 million from the year
before.
In other respects, 1948 was a
notable year. Pepsi moved its corporate headquarters across the East River to
midtown Manhattan, and for the first time the drink was sold in cans. The
decision to start canning, while absolutely right for Pepsi-Cola and other soft
drink companies, upset the franchised bottlers, who had invested heavily in
equipment. However, another decision at Pepsi-Cola ignore the burgeoning
vending machine market because of the necessarily large capital outlay moved to
be a costly mistake. The company had to learn the hard way that as canned
drinks gained a larger share of the market, vending machine sales would become
increasingly important.
The Pepsi Generation,
Diversification
By 1963, Kendall was
presiding over the Pepsi Empire. His rise to the top of the company was
legendary. He had been an amateur boxing champion in his youth and joined the
company as a production line worker in 1947 after a stint in the U.S. Navy. He
was later promoted to syrup sales where it quickly became apparent that he was
destined for higher office. Ever pugnacious, Kendall has been described as
abrasive and ruthlessly ambitious; beleaguered Pepsi executives secretly referred
to him as White Fang. Under his long reign, the company's fortunes skyrocketed.
Pepsi-Cola's remarkable
successes in the 1960s and 1970s were the result of five distinct policies, all
of which Kendall and his crew pursued diligently: advertising on a massive,
unprecedented scale; introducing new brands of soft drinks; leading the
industry in packaging innovations; expanding overseas; and, through
acquisitions, diversifying their product line.
The postwar baby-boomers were
in their mid- to late teens by the time Kendall came to power. 'Pepsi was
there,' states a recent company flyer, 'to claim these kids for our own.' These
'kids' became the 'Pepsi Generation.' In the late 1960s Pepsi was the 'Taste
that beats the others cold.' Viewers were advised 'You've got a lot to live.
Pepsi's got a lot to give.' By the early 1970s, the appeal was to 'Join
the Pepsi people, feeling' free.' In mid-decade an American catchphrase was
given a company twist with 'Have a Pepsi Day,' and the 1970s ended on the note 'Catch
the Pepsi Spirit!'
The Pepsi Generation wanted variety and Pepsi was happy to oblige. Company brands introduced in the 1960s included Patio soft drinks, Teem, Tropic Surf, Diet Pepsi--the first nationally distributed diet soda, introduced in 1964--and Mountain Dew, acquired from the Tip Corporation, also in 1964. Pepsi Light, a diet cola with a hint of lemon, made its debut in 1975, and a few years later Pepsi tested the market with Aspen apple soda and On-Tap root beer. The company also introduced greater variety into the packaging of its products. Soon after Kendall's accession, the 12-ounce bottle was phased out in favor of the 16-ounce size, and in the 1970s Pepsi-Cola became the first American company to introduce one-and-a-half and two-liter bottles; it also began to package its sodas in sturdy, lightweight plastic bottles. By the end of the decade, Pepsi had added 12-pack cans to its growing array of packaging options.
Overseas developments continued apace throughout Kendall's tenure. Building on his famous Soviet achievement, he negotiated a trade agreement with the U.S.S.R. in 1972; the first Pepsi plant opened there two years later. Gains were also made in the Middle East and Latin America, but Coca-Cola, the major rival, retained its dominant position in Europe and throughout much of Asia.Highlighted by the Cola Wars
By the time PepsiCo greeted
the 1980s with the slogan 'Pepsi's got your taste for life,' Kendall was
busy arranging for China to get that taste too; production began there in 1983.
Kendall put his seal of approval on several other major developments in the
early 1980s, including the introduction of Pepsi Free, a non-caffeine cola, and
Slice, the first widely distributed soft drink to contain real fruit juice
(lemon and lime). The latter drink was aimed at the growing 7-Up and Sprite market.
Additionally, Diet Pepsi was reformulated using a blend of saccharin and
aspartame (NutraSweet). 'Pepsi Now!' was the cry of company commercials,
and this was interspersed with 'Taste, Improved by Diet Pepsi.' On the
Frito-Lay side, meantime, the Tostitos brand of crispy round tortilla chips was
introduced in 1981.
In 1983 the company claimed a
significant share of the fast-food soft drink market when Burger King began
selling Pepsi products. A year later, mindful of the industry axiom that there
is virtually no limit to the amount a consumer will buy once the decision to
buy has been made, PepsiCo introduced the 3-liter container.
By the mid-1980s, the Pepsi
Generation was over the hill. Kendall's ad agency spared no expense in
heralding Pepsi as 'The Choice of a New Generation,' using the talents of
superstar Michael Jackson, singer Lionel Richie, and the Puerto Rican teenage
group Menudo. Michael Jackson's ads were smash hits and enjoyed the highest
exposure of any American television commercial to date. The company's high
profile and powerful presence in all of the soft drink markets--direct results
of Kendall's strategies--helped it to weather the somewhat uncertain economic
situation of the time.
On only one front had
Kendall's efforts failed to produce satisfactory results. Experience showed
that for all its expertise, PepsiCo simply did not have the managerial
experience required to run its subsidiaries outside the food and drink
industries. A van line, a motor freight concern, and a sporting goods firm were
indeed odd companies for a soft drink enterprise; and Kendall auctioned off
these strange and ailing bedfellows, vowing never again to go courting in
unfamiliar territories.
With his house in excellent order, the PepsiCo mogul began to prepare for his retirement. He had bullied and cajoled a generation of Pepsi executives and guided them ever upward on the steep slopes of Pepsi profits. But he had one last task: to lead PepsiCo to victory in the Cola Wars.
Hostilities commenced soon after the Coca-Cola Company changed its syrup recipe in the summer of 1985 and with much fanfare introduced New Coke. Pepsi, caught napping, claimed that Coca-Cola's reformulated drink failed to meet with consumer approval and pointed to their own flourishing sales. But serious fans of the original Coke were not about to switch to Pepsi and demanded that their favorite refreshment be restored. When blindfolded, however, it became manifestly apparent that these diehards could rarely tell the difference between Old Coke, New Coke, and Pepsi; indeed, more often than not, they got it wrong. In any event, the Coca-Cola Company acceded to the public clamor for the original Coke and remarketed it as Coca-Cola Classic alongside its new cola.Some advertising analysts
believed that the entire 'conflict' was a clever publicity ploy on the
part of Coca-Cola to demonstrate the preeminence of its original concoction (‘it’s
the Real Thing!'), while introducing a new cola--allegedly a Pepsi taste-alike
win the hearts of waverers. More interesting perhaps than the possible
differences between the colas were the very real differences in people's
reactions. Four discrete fields were identified by Roger Enrico and Jesse
Kornbluth in their book, The Other Guy
Blinked: How Pepsi Won the Cola Wars: the totally wowed
(possibly caffeine-induced); the rather amused; the slightly irritated; and the
distinctly bored.
The latter group must have
nodded off in front of their television sets when Pepsi took the Cola Wars
beyond the firmament. 'One Giant Sip for Mankind,' proclaimed the ads as a
Pepsi 'space can' was opened up aboard the U.S. space shuttle Challenger in 1985. Presumably, had a
regular can been used, Pepsi-Cola would have sloshed aimlessly around the
gravity-free cabin. This scientific breakthrough, together with the almost
obligatory hype and hoopla, and more mundane factors such as the continued
expansion in PepsiCo's outlets, boosted sales to new heights, and Pepsi's ad
agency glittered with accolades. The debate persisted, at least within Coke and
Pepsi corporate offices, as to who won the Cola Wars. The answer appeared to be
that there were no losers, only winners; but skirmishes would inevitably
continue.
Focusing on International Growth and
Diversification
D. Wayne Calloway replaced Donald M. Kendall as chairman and chief executive officer in 1986. Calloway had been instrumental in the success of Frito-Lay, helping it to become PepsiCo's most profitable division. The new chairman realized that his flagship Pepsi brand was not likely to win additional market share from Coca-Cola, and focused his efforts on international growth and diversification.
Calloway hoped to build on the phenomenal success of the Slice line of fruit juice beverages, which achieved $1 billion in sales and created a new beverage category within just two years of its 1984 introduction. From 1985 to 1993, PepsiCo introduced, acquired, or formed joint ventures to distribute nine beverages, including Lipton Original Iced Teas, Ocean Spray juices, All Sport drink, H2Oh! Sparkling water, Avalon bottled water, and Mug root beer. Many of these products had a 'New Age' light and healthy positioning, in line with consumer tastes, and higher net prices. In 1992, PepsiCo introduced Crystal Pepsi, a clear cola that, while still a traditional soda, also tried to capture the momentum of the 'New Age' beverage trend.In the restaurant segment,
PepsiCo's 1986 purchase of Kentucky Fried Chicken (KFC) and 1990 acquisition of
the Hot 'n Now hamburger chain continued its emphasis on value-priced fast
foods. But the company strayed slightly from that formula with the 1992 and
1993 purchases of such full-service restaurants as California Pizza Kitchen,
which specialized in creative wood-fired pizzas, Chevys, a Mexican-style chain,
East Side Mario's Italian-style offerings, and D'Angelo Sandwich Shops.
Pepsi lost a powerful
marketing tool in 1992, when Michael Jackson was accused of child molestation.
Although the case was settled out of court, Pepsi dropped its contract with the
entertainer. The firm launched its largest promotion ever in May 1992 with the 'Gotta
Have It' card, which offered discounts on the products of marketing
partners Reebok sporting goods, Continental Airlines, and the MCI telephone
long distance company. The company also launched a new marketing (or, as the
company phrased it, 'product quality') initiative early in 1994, when it
announced that packaged carbonated soft drink products sold in the United
States would voluntarily be marked with a 'Best if Consumed By' date.
Although Pepsi had commenced international expansion during the 1950s, it had long trailed Coca-Cola's dramatic and overwhelming conquest of international markets. In 1990, CEO Calloway pledged up to $1 billion for overseas development, with the goal of increasing international volume 150 percent by 1995. At that time, Coke held 50 percent of the European soft drink market, while Pepsi claimed a meager ten percent. But Pepsi's advantage was that it could compete in other, less saturated segments. The company's biggest challenge to expanding its restaurant division was affordability. PepsiCo noted that, while it took the average U.S. worker just 15 minutes to earn enough to enjoy a meal in one of the firm's restaurants, it would take an Australian 25 minutes to achieve a similar goal. Pepsi still had other options, however. In 1992, for example, the company forged a joint venture with General Mills called Snack Ventures Europe which emerged as the largest firm in the $17 billion market. By 1993, PepsiCo had invested over $5 billion in international businesses, and its international sales comprised 27 percent, or $6.71 billion, of total annual sales.
In January 1992, Calloway was credited by Business Week magazine with emerging from the long shadow cast by his predecessor 'to put together five impressive years of 20 percent compound earnings growth, doubling sales and nearly tripling the company's value on the stock market.' Calloway also worked to reshape PepsiCo's corporate culture by fostering personal responsibility and a decentralized, flexible management style.Turning Acquisitive in the Early 21st
Century
In October 2000 Enrico announced that he intended to vacate his position as CEO by the end of 2001 and his position as chairman by year-end 2002. Reinemund was named the heir apparent. Also that month, PepsiCo reached an agreement to acquire a majority stake in South Beach Beverage Company, maker of the SoBe brand. Popular with young consumers, the SoBe drink line featured herbal ingredients and was the fastest growing brand in the burgeoning noncarbonated alternative beverage sector.
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