Pepsi Gets Back In The Game

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.