How PepsiCo Lost The Cola War – Listen To Your Customers!

In 2007, Indra Nooyi assumed the position of CEO at PepsiCo. It was the recognition for an outstanding career and the reward for her hard work.

In her new position, she wanted to trim PepsiCo for the future. Leaving behind “sugary soft drinks” and “fatty snacks“, she wanted to create a health-oriented food and beverage company matching the lifestyle of modern shoppers.

Nevertheless, the restructuring process antagonized high-ranked employees and upset stock owners as Coca-Cola took a clear lead in the cola war.

What went wrong?

Born 1955 in Madras, India, Nooyi majored in Physics, Chemistry and Mathematics and received a MBA in 1976. She started as product manager at Johnson & Johnson India and Mettur Beardsell. Two years later she began a Master’s degree in Public and Private Management at Yale School of Management. Upon graduation, she joined Boston Consulting Group before working for Motorola and ABB.

In 1994, Nooyi joined PepsiCo where she was named CFO in 2001. She strongly influenced the company’s global strategy and initiated the major restructuring process. In 2007 then, she assumed the position of CEO. She became the most powerful female business leader in the United States leading one of the world’s biggest food and beverage companies.

But Nooyi didn’t receive any favors. Instead, she is ambitious and worked hard to get to the very top. Yet, she also knew the rules of the game and how to play her cards right. She felt superior towards others and didn’t shy away from rivals. She was convinced that only she could trim PepsiCo for the future and didn’t even worry too long about critique from investors. According to a recent Manager Magazin article she said: “If you do not care for anything else than putting limits to the company to achieve double-digit growth, I am the wrong person for the job“.

Her goal was bigger, more idealistic. Nooyi wanted to fight obesity while solving environmental problems. She wanted to turn PepsiCo into a health-oriented food and beverage giant similar to Nestlé and Danone. The company sold its stakes in fast-food chains such as Pizza Hut, Kentucky Fried Chicken and Taco Bell. On the other hand, PepsiCo acquired the fruit juice brand Tropicana and Quaker Oats (cereals and sports drink brand Gatorade). But sales on cereals stagnated while the company lost market share in the juice segment. Moreover, most new product launches failed.

And even worse, PepsiCo‘s historic rival Coca-Cola achieved consistent results during the same period. While PepsiCo cut marketing investment on its main brands to finance healthier alternatives, Coca-Cola maintained marketing investment in proportion to a brand’s revenues. At the same time, they fostered their low-calorie beverages Coca-Cola Light and Coca-Cola Zero.

Pepsi Cola‘s ratio of marketing expenditures to revenues dropped from initial 8% to 3% in recent years. For the Super Bowl Final 2010, which attracts some 100 million spectators, PepsiCo decided for the first time in 20 years not to produce an ad.

Instead, the company relied on social networks and investments in charities. For example, the food and beverage giant hired former WHO director Derek Yach as a spokesperson who launched prestigious projects lacking the business perspective (i.e. chickpea plantations in Ethiopia).

For the first time in its history, PepsiCo achieved a higher market value than its main rival in 2005. Some 7 years later, after sales of the company’s core brands slashed, Coca-Cola‘s market value exceeds PepsiCo´s in more than 60%. PepsiCo neglected its core business, soft drinks and snacks which generate 80% of the company’s revenues, for too long. The company lost its number two position in cola sales to  Coca-Cola Light. Stock owners are disappointed and the top management seems to be divided.

By mid-2010, Nooyi had to retreat from the restructuring process. The company went through a profound revision of its strategy and it was decided to return to PepsiCo‘s core business, beverages and snacks. Developing healthier brands was not a priority anymore.

Currently, the company is undertaking a painful restructuring process. 8,700 employees are expected to lose their jobs, the organizational structure will be trimmed and investment on brands will be linked directly to its revenues again. Nooyi’s internal rivals also used the chance to position themselves and to promote resistance against the company’s CEO.

Yet, Nooyi doesn’t have to fear future. Her impressive and outstanding career won’t end here. It was said, Barack Obama offered her the position of Head of Department of Commerce a few years ago. She was also on the list of top candidates for the president at the World Bank. Same for her home country India where she could occupy top position in politics or business as well.

But what can we learn from Nooyi’s failed restructuring of PepsiCo?

Nooyi wanted to reposition the company as a health-oriented food and beverage company similar to Nestlé and Danone. Nevertheless, she lost sight of the company’s loyal customers. She neglected brands which had a healthy profit stream to invest in new brands which ultimately failed. She wanted to change the long-established image of the brand to prepare the company for the future. Yet, nobody knows today what the future will look like and if growth rates of healthier food and beverage alternatives will continue their positive trend.

PepsiCo‘s arch rival Coca-Cola took another, more successful, approach: Developing healthier options while maintaining its core brands strong. Affluent well-educated shoppers in deed might increasingly opt for healthier beverage and snacks options. Nevertheless, colas won´t just disappear as millions of customers every single day make it the number one soft drink over and over again.

Hence, before changing your company’s strategic orientation, listen to your loyal customers. Losing them might be a too high price to pay!

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To those who enjoyed this post, we also recommend our article “Why Shopper Marketing matters – The tragic end of a German drugstore giant”.

Or read “How to become the world’s social brand – Gatorade’s Mission Control”.

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Sources:

Biography

http://en.wikipedia.org/wiki/Indra_Nooyi

PepsiCo´s restructuring process & performance

http://www.manager-magazin.de/magazin/artikel/0,2828,837386,00.html

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