Does Pepsi Have Too Many Products?

They got the wrong one, baby. Wrong taste. Wrong name. Wrong packaging and advertising, too. But Craig E. Weatherup, chief executive of Pepsi-Cola North America, isn't ready to call it quits yet on Crystal Pepsi, the company's year-old stab at creating a clear cola. In late March, the domestic soft-drink unit of PepsiCo Inc. will relaunch the product with new ads, new packaging, and, most important, a new taste. "It will still be Crystal," Weatherup says. "And it will still be clear."

But it won't be Crystal Pepsi anymore--just "Crystal, from the makers of Pepsi." And gone will be the hints of cinnamon, ginger, and pepper that gave Crystal Pepsi its peculiar noncola flavor. Instead, Crystal will be reincarnated as "a citrus cola." Translation: Crystal will represent Pepsi's latest effort to blunt Sprite and Seven-Up.

Will it fly? Weatherup himself isn't entirely sure. In its first year, Crystal Pepsi won just 1.1% of the $48 billion U.S. soft-drink market--only half what Pepsi had projected. "I'm more than a little disappointed," the affable cola warrior says. "We were not able to satisfy people's taste." Still, he doesn't rule out throwing in the towel if Crystal doesn't do better this time around.

Crystal Pepsi's woes underscore the risks in the slow-growth soft-drink business these days. The beverage battle isn't a simple, one-on-one cola war anymore. Instead, it has become a complex contest spread over multiple fronts with many competitors. For the past three years, Pepsi has been at the forefront, with an ambitious multibrand strategy that has led it into everything from fruit juices to iced tea to sports drinks. It has made some inroads. Pepsi's iced tea, a joint venture with Unilever PLC's Lipton division, is jockeying Snapple for leadership of the $1 billion tea market. The payoff: PepsiCo announced on Feb. 1 that earnings for its U.S. beverage division jumped 17%, to $937 million in 1993. Increased efficiencies from a restructuring and reduced packaging costs helped earnings. But domestic beverage sales also rose 8%, thanks mostly to the new products.

NEW LIFE. But underneath that effervescent surface, bottlers and beverage-industry consultants are beginning to see cause for concern. They worry that the flurry of new products has diverted Pepsi's attention from the mother brands. Pepsi and Diet Pepsi still account for 60% of the soft-drink unit's domestic operating earnings, says Andrew Conway, a beverage analyst at Salomon Brothers Inc. But both the cola brands lost market share in supermarkets last year, according to Jesse Meyers, editor of Beverage Digest (table). Archrival Coca-Cola Corp.'s Coke Classic, in contrast, increased its share. Diet Coke slipped--but Diet Coke didn't have an ad campaign for nine months last year.

Despite the strong overall sales results, the erosion of Pepsi's flagship brands makes some investors nervous. "I wouldn't want this to turn into a Marlboro situation, where the share deteriorates to the point where they have to do something urgent and desperate," says Mel Hughes, an analyst at Stein Roe & Farnham Inc., which owned 3.1 million shares of PepsiCo as of September.

And now is no time to be ignoring colas, because the market has been showing signs of new life after years of sluggish growth. Supermarket volume for all colas increased 4.4% in 1993, according to Beverage Digest. With the stakes rising and the cola wars heating up, Pepsi's marketers must show that they can reenergize the core cola brands even while exploiting various niche markets. "Last year, they put too much effort on Crystal and not enough on Pepsi," says James C. Lee Jr., chairman of Buffalo Rock Co. in Birmingham, Ala., a Pepsi bottler. "I want to see them concentrate more on regular Pepsi and Mountain Dew--the things we built our business on."

Meantime, archrival Coca-Cola has been concentrating plenty. Having shaken up its ad-agency roster and marketing department, Coke is beginning to flex its muscles. Last month, Diet Coke got new ads. During Super Bowl week, Coke hooked up with regional cable-TV networks to air Coca-Cola BIG TV, an ad-supported block of game-related programs. Coke Classic and Diet Coke will have a major presence in the Winter Olympics. And Coke is gearing up heavy consumer promotions for the summer soft-drink season.

TEA FOR TWO. Weatherup allows that the multibrand strategy has distracted the company. "Our people can only execute so many things," he says. "If they're building extra Crystal displays, they can't build as many Pepsi displays." But he says that the company's results show that the basic strategy is still sound. Pepsi's year-old joint venture with Lipton to distribute bottles and cans of iced teas helped fuel the healthy sales growth in 1993. For the 52 weeks ended Sept. 11, Pepsi-Lipton had captured 23% of supermarket iced-tea sales, according to Nielsen Marketing Research. The brand has catapulted to near the top of the $1 billion iced-tea market, which has been growing at a rapid pace.

It's too early to tell whether Pepsi will enjoy similar success in sports drinks, where it's going up against Quaker Oats Co.'s Gatorade. Weatherup says he wants Pepsi's entry, All Sport, to get a 20% share of the $900 million market. But he has a long way to go. All Sport is only available in 25% of the U.S. Weatherup says the brand's share has doubled since last year, and he will "resolve in a couple of months" whether it will roll nationwide. Still, for the 12 months ending October, 1993, All Sport generated just $6.5 million in supermarket sales, according to Nielsen.

Pepsi is also rolling out Ocean Spray lemonade and testing a carbonated juice, Splash, as part of a joint venture with Ocean Spray Cranberries Inc. In 1993, roughly two-thirds of Pepsi's volume growth came from noncarbonated beverages, says Conway, the Salomon Brothers analyst. "That could be distracting them," he says. But long term, it should be "very profitable."

LAPSED FANS. Even so, he says, such new ventures still represent only a $290 million-a-year business for Pepsi--whose domestic beverage sales are $5.9 billion. And many Madison Avenue sources think that core cola business is overdue for a big ad idea. It has been four years since Diet Pepsi launched the "You got the right one" campaign with Ray Charles. Longtime ad agency BBDO Worldwide Inc. is working on new copy for Pepsi and Diet Pepsi. Its Super Bowl ads--which featured Cindy Crawford, chimps, and a mock Woodstock revival--got mixed reviews. And it has been years since Pepsi electrified the ad world with its star-studded "choice of a new generation" campaign.

Weatherup says he is happy with BBDO. But he says that more must be done to bring back cola drinkers who have drifted away to new-age drinks. "We have to bring something to the table to stimulate the category," he says. He has high hopes for using freshness dates to spur diet soda sales. And he is enthusiastic about new packaging ideas such as the Big Slam, a liter bottle with a wide mouth--and the Cube, an easy-to-carry, cube-shaped, 24-can pack.

Tinkering with products old and new is nothing unusual in the syrup-and-fizz biz. Weatherup points out that Pepsi spent years trying to perfect Mountain Dew, which claimed 2.9% of supermarket soft-drink sales in 1993. Other Pepsi products--Jake's, Pepsi Light, and Pepsi a.m.--went through several mutations before being shelved for good. But Crystal's weak performance may be sending a different signal. Tom Pirko, a beverage consultant who has worked for Pepsi, thinks Pepsi may have misinterpreted the 1990s zeitgeist. "Crystal had all these good values--it was purity without caffeine or color," Pirko says. "But when you look at the '90s more carefully, people are still loading up on fat, sugar, and caffeine." In other words, some of Pepsi's best assets may be those old-fashioned colas.

      BRAND           1993 SHARE*      CHANGE
      PEPSI                14.3%      -0.4
      DIET PEPSI            5.3       -0.3
      CRYSTAL PEPSI         1.1         NA
      COKE CLASSIC         15.2       +0.2
      DIET COKE             7.3       -0.2
      *Share numbers represent cola sales at supermarkets with at least $4 million in sales. Numbers are for 12 months ending Dec. 25, 1993
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