Pepsi Co's New Formula Part 1
Pepsi Co's New Formula Part 1
On a recent wintry evening, Roger A. Enrico is in front of 50 of his company's most talented executives. They are at PepsiCo's headquarters in Purchase, N.Y., a massive campus dotted with sculptures by Alexander Calder and Henry Moore, to hear one of the last great warriors of the cola wars. Enrico, 55, who once wanted to be an actor, understands that great marketing is pure theater. In his 29 years at PepsiCo, he has staged some of marketing's most spectacular productions.
Tonight, as he strides to a lectern in his dark suit and white shirt, he does not disappoint. "Coke's leadership tried to put us out of business," he says flatly. "But we did not look for a temporary boost or a short-term gain despite the self-destructive business philosophy by our major competitor. We've been honed by fire."
Enrico, who reluctantly succeeded the cancer-stricken Wayne Calloway as CEO in 1996, vividly describes the company's progress. But now, he says, Pepsi must show Wall Street that it can deliver superior performance quarter after quarter. "You can do this," Enrico assures the crowd. "You have greatness in you, and you can give that greatness to your colleagues. You can make us the fastest-growing, the most profitable best of the best. I'll settle for nothing less from this team. You, my friends, can take it to the top." Fiery applause erupts. The executives stand. Clearly, Enrico, who made his name as a maverick marketer in the '90s, still has the touch. Smiling, he walks back to his dinner salad, satisfied with his performance.
If only Wall Street would notice. At the dawn of the New Economy, when dot-com startups are the new Nifty Fifty, investors have paid scant attention to Enrico's four-year transformation of the packaged-foods giant. He jettisoned the company's slow-growing fast-food chains. He spun off Pepsi's capital-intensive bottling operations into an independent public company. He spent $3.3 billion to acquire Tropicana, the leading orange juice brand. For the first time in decades, the company is focused on just two things, packaged foods and drinks, in a trio of well-known businesses: Frito-Lay snacks, Pepsi-Cola beverages, and Tropicana juices.
Perhaps the most dramatic change at Pepsi is that these days, soda and juice run a distant second to the big engine that now drives PepsiCo: snack foods, in which the company enjoys near-total dominance. Although PepsiCo's identity is still tied to soft drinks, that business now accounts for only a quarter of sales. Frito-Lay, which controls two-fifths of the world market for salty snacks, generated more than 71% of PepsiCo's profits in the fourth quarter.
By almost every financial measure, PepsiCo is in better shape than it was in 1996, when one wag noted that "Coke was kicking Pepsi's can." Although its $20.4 billion in sales is now a third lower, the company's net is higher by more than $100 million, at $2.1 billion last year. Operating margins have risen to 15% from 10%, while the return on invested capital has jumped to 20% from 15%.
Pepsi's position in the marketplace has strengthened, too. For the first time in its history, it boasts two of the top three U.S. soft-drink brands on store shelves. Pepsi-Cola is still second to Coca-Cola, but last fall Pepsi's Mountain Dew edged out Diet Coke for third place. Pepsi's Aquafina bottled water is the No. 1 brand in that fast-growing category, while its Lipton's Iced Tea brand boasts a 16-point share lead over Coca-Cola's Nestea. Tropicana Pure Premium, the nation's top-selling orange juice, surpassed Campbell Soup as the third-largest grocery brand in late January.
TOUGH JOB. So how did Enrico bring about these changes? The cola warrior took a hard look at Pepsi's businesses and, unswayed by history or emotion, made strategic decisions to focus on the areas where the company could dominate. Overseas, that meant giving up the self-defeating strategy of going head to head with Coke in every market and instead concentrating on emerging markets that were still up for grabs. "We kept beating our heads in markets that Coke won 20 years ago," says Enrico. "That is a very difficult proposition."
At home, Enrico has used that discipline to concentrate on grocery sales, always Pepsi's greatest strength. Taken together, Frito-Lay, Pepsi-Cola, and Tropicana make the company the second-biggest source of sales for supermarkets, behind only Philip Morris Cos.' Kraft Foods Inc. Enrico is using that clout to finally unlock the promise that drove Pepsi and Frito-Lay to merge in the first place. By moving Pepsi drinks next to Frito-Lay chips on store shelves, Enrico has increased the odds that when shoppers pick up soda and chips, the soda is a Pepsi. Called "Power of One," the strategy is disarmingly simple--but it's something Pepsi has been unable to execute in the 30-odd years since the two companies were united.
But Enrico's biggest challenge has proven the most intractable. Despite improved performance, Pepsi's stock seems as stale as a bag of old potato chips. It has gone nowhere for three straight years. Even the well-publicized miscues of Pepsi's nemesis in Atlanta haven't brought any fizz to Pepsi's shares. Enrico blames a slump in food stocks and the flight of money to high tech. After all, he notes, Pepsi has met or exceeded Wall Street's expectations for four straight quarters, and 22 of 23 analysts who follow PepsiCo rate the stock a buy or higher. Yet the company's shares trade in the low 30s, barely four bucks above the price when Enrico took over. "It's the old economy/new economy thing that's holding the stock back," says George E. Thompson, a Prudential Securities analyst.
Sitting in his spacious office, Enrico is clearly frustrated. "As an investor, I would not put a dime in any of these overinflated companies," says Enrico, whose only child, Aaron, now works for a dot-com in Los Angeles. "I think a lot of people are going to get burned big time, and when that happens I hope they don't get scared and rush their money out of the stock market. I hope they put it in more substantive investments, like Pepsi."
FADED GLORY. In a period when big brands have lost clout, that doesn't seem likely. Even venerable names, from Procter & Gamble to Gillette, are trading near their 52-week lows. Like his counterparts at those other packaged-goods giants, Enrico is struggling to get top-line growth of 6% or 7%. That's not enticing to investors infatuated with outfits that double in size every two years. Even Coke's recent spate of public-relations blunders and management tumult have offered few opportunities. When tainted sodas in Belgium set off an anti-Coke backlash last year, Pepsi could only watch. "Our market share in Belgium is so small that if we had a chance to gain anything more than two-tenths of a share point, we probably would run out of capacity," Enrico says.
Still, if anyone can restore PepsiCo to its glory days of the 1980s, it might well be Enrico, a man whose personal transformation has been almost as dramatic as that of the company he leads. Enrico made his name as head of the U.S. soda business in the '80s. Back then, he was a master of the grand gesture. In 1983, Enrico paid $5 million to entice pop icon Michael Jackson--then at the apex of his career--to make a Pepsi commercial. After Coke's botched introduction of New Coke, he dashed off a brash--and embarrassingly premature--memoir called The Other Guy Blinked: How Pepsi Won the Cola Wars.
But now, 14 years later, the swagger and flamboyance have been tempered. Enrico, the onetime impatient egoist, has become more reflective. He is less a flashy marketing genius than a keen corporate strategist and patient mentor to hundreds of colleagues. Once always on the prowl for the big score, these days Enrico professes as much interest in the singles as the home runs. "The way you build a brand and create enduring value has more to do with the day-to-day execution by tens of thousands of people on the front line than it does with the brand manager with the hot idea," he says now.
It's not just the passage of time that has mellowed Enrico. His friends and colleagues trace the catalyzing moment to the early morning hours of Feb. 24, 1990. It was 2 a.m. and Enrico and his wife, Rosemary, were tearing up the dance floor in a nightclub in Turkey. "It was a Latin band," he recalls, "and they played a mean lambada." Suddenly, Enrico became short of breath. His chest began to ache and he broke out in a cold sweat. His colleagues rushed him to the American hospital in Istanbul. "I was lying on the stretcher and the Turkish doctor said, `Don't worry. You're going to be all right.' And I said, `I know. My wife said the same thing."'
The heart attack he suffered was comparatively minor, but it altered Enrico's perspective on life. The episode helped to spark some introspection in a person who had long been consumed by his career. "It was a remarkable and positive experience," says Gerard R. Roche, an Enrico friend and Heidrick & Struggles International Inc. headhunter. "It has broadened him, made him more reflective, and lent him a human sensitivity that he showed to few people before."
It's not surprising that the transforming event occurred far from home. From his earliest days, Enrico has had the small-town boy's yen for adventure. The son of an iron ore worker, Enrico grew up in tiny Chisholm, Minn. As a teen, he pledged to someday visit every country in the world. After attending Babson College near Boston on a scholarship, Enrico volunteered in 1967 for Vietnam, where he dodged mortars to help transport fuel to troops near the demilitarized zone. It was, he once noted, his first lesson "in delivering precious liquids to consumers." He married his high school sweetheart, Rosemary Margo, on an R&R leave in Hawaii in 1969.
Two years later, after the service and a brief stint at General Mills Inc., he joined PepsiCo's Frito-Lay Div. From the start, Enrico evoked the indignation of superiors who thought him brash and impudent. James H. O'Neal, production chief for Frito-Lay in the mid-1970s, recalls touring a plant with Enrico, who was then a brand manager. "All of a sudden, I notice that he is lagging behind, and he has his arm draped around my plant manager," says O'Neal. "He was kind of seducing him to put more flavorings on his brand. He was just more aggressive and more pushy than anybody else."
Still, by demonstrating a flair for marketing and an ability to get results, he steadily climbed the ranks. In 1983, when Enrico's boss, John Sculley, left for Apple Computer Inc., Enrico became chief executive of Pepsi-Cola's U.S. business. He quickly incensed his new boss. When he signed Michael Jackson in 1983, for example, he failed to either inform or gain the approval of his boss, Victor Bonomo. "He didn't care for supervision," remembers Bonomo, then head of the worldwide beverage group. "He liked to do his own thing."
UNCOMMON BOND. Soon, Enrico committed an even bigger faux pas. It was the mid-1980s, and he had invited hundreds of the company's bottlers to a lavish black-tie bash in Manhattan. The evening included dinner at the Waldorf Astoria, followed by a glitzy show at Lincoln Center. Left off the guest list was legendary PepsiCo Chairman and CEO Donald M. Kendall, who heard of the affair from CBS Corp. CEO Thomas Wyman. "Needless to say, he was not pleased," recalls Enrico. But the inevitable dressing down was followed by an invitation from Kendall to meet with him once a week.
Thus began an extraordinary mentorship. The private meetings continued for years, allowing the two to forge an uncommon bond that permits Kendall, now 79 and retired as chairman since 1986, to maintain an office on the executive floor, just two doors away from Enrico. "I ask for his advice many times," says Enrico. "There is not a move I made here that I didn't consult with Don in advance."
Although Enrico had built his life around a fast-track career, his heart attack led him to start questioning those priorities. Soon after returning to the U.S., Enrico began paging through his calendar of business trips. "I got sick to my stomach, looking at the things I did," he says. "I would fly to Paris for a day and come back and go to Los Angeles for lunch and return the same day. I thought, `Here I am in a position to realize one of my childhood dreams, which was to experience the world.' I wasn't experiencing a damn thing." Soon, he began building extra hours for himself into his business jaunts. In Austria, he spent an afternoon and early evening strolling the streets of Vienna before meeting colleagues the next day. "I had been there half a dozen times and yet never saw the city," he recalls.
Even as Enrico moved up to the top job at Frito-Lay in 1991, he continued to question the basic assumptions of his life and career. Through the years, he had accumulated a small fortune in PepsiCo stock. (His current stock holdings and options are worth more than $80 million.) "I began to think, well, what's money for?" he says. "It was more money than I needed to live on." Enrico decided to use his wealth to take his life in a new direction. His first impulse was to become active in community service or to teach, but a colleague suggested that he could just as easily teach inside the company. So after two years at Frito-Lay, Enrico took a 14-month sabbatical. He set up a "war college" in 1993 at his retreat in the Cayman Islands and his ranch in Montana. During much of that time, in sessions that began early in the morning and went late into the evening, he mentored and coached the company's most promising executives.
His teaching "sabbatical" ended in 1995, when then CEO Calloway lured him back into the business to run PepsiCo's troubled fast-food business. Enrico was named CEO of the division, responsible for 29,000 Pizza Hut, Taco Bell, and Kentucky Fried Chicken restaurants. Calloway, diagnosed with prostate cancer in early 1992, had an overwhelming need to bulk up his management team. Undergoing surgery, radiation, and then chemotherapy, Calloway needed a viable successor, and time was running out.
Indeed, just months later, Enrico found himself prevailed upon by his friend Calloway and his mentor Kendall to take the top job. While the young, career-obsessed Enrico would have leaped at the opportunity, the more measured Enrico was reluctant. He was only 51, but he had already been chief executive of PepsiCo's three major divisions during his 25-year career at the company. "It was sort of like running the same show over again, rather than moving on to the next act," he says.
So both Calloway and Kendall began to work on him. His mentor recalls one late session at Enrico's home in Dallas when he spent hours trying to talk Enrico into the job. "About 3 in the morning," says Kendall, "he finally came around." Enrico says it was not that easy. "Ultimately, it was circumstance that persuaded me to take the job, not what anyone said. Wayne obviously was in a situation where he couldn't continue to do this, and I owed it to the company to take the job. Nobody told me that, but that was my conclusion."
On April Fool's Day in 1996, he became CEO. Seven months later, he gained the title of chairman from Calloway, who died in July, 1998, at the age of 62. Enrico's ascension was cheered by investors, who had already become disenchanted with the company's early 1990s fumbles, and employees, who knew and respected Enrico for what he had done over the years.
He inherited a mess. Few understood how badly things had gone amiss. Through the four years that Calloway battled cancer, the company had lost its momentum. Pepsi-Cola was steadily losing market share to Coca-Cola. But the deterioration was greatest overseas, where Pepsi had overinvested and overcommitted in a foolish attempt to beat its rival in almost every market. "You just don't fight hand-to-hand combat against a Coke," says James O'Neal, the former CEO of Frito-Lay International.
Then, shortly after moving into his new job, Enrico endured a stunning humiliation. In Venezuela, one of the few international markets in which Pepsi had an advantage, the company's bottling partner, Cisneros Group, shifted allegiances to Coke. Virtually overnight, Pepsi lost its 85% market share. Enrico, to this day, bristles at the incident, insisting that Coke vastly overpaid for the bottler in a concerted attempt to wound Pepsi. Enrico ended his first year as CEO having to take an $822 million write-off, the bulk of it to clean up Pepsi's international problems.
Continued in Part 2