Pepsi's Thousand And One Noshes

How it deftly adapts products to changing consumer tastes

Few companies seem as pained by the thought of missing a customer as PepsiCo (PEP ). Every year, the food and beverage giant adds more than 200 product variations to its vast global portfolio -- which ranges from Quaker Soy Crisps to Gatorade Xtremo Thirst Quencher. Steven S. Reinemund, chairman and chief executive officer, believes that constant quest for change, more than even quality and value, is what has driven the Purchase (N.Y.) company to consistent double-digit earnings growth. As Reinemund has put it: "Innovation is what consumers are looking for, particularly in the small, routine things of their life."

What distinguishes PepsiCo from some competitors is an intense lack of sentimentality about its principal brands. Sure, it continues to hawk core products such as Pepsi cola and Lay's potato chips, adding flavors and doing targeted marketing campaigns every year to jazz up consumer interest. But Reinemund & Co. seem far more obsessed with understanding and catering to changing tastes than in trying to shape them. To capitalize on the growing market for New Age herbally enhanced beverages, for example, the company acquired SoBe Beverages for $370 million in 2001. Since then, the company has extended the brand with such offerings as the energy drink SoBe No Fear, SoBe Synergy targeted at the school-aged market with 50% juice, and SoBe Fuerte, aimed at the Hispanic market.


PepsiCo's huge Frito-Lay division, which dominates 60% of the U.S. chip market and had $9.1 billion in revenues last year, has been equally adept at coming up with products to reflect changing tastes and demographics. Even amid the low-carb craze, it racked up 4% volume growth last year, thanks to new flavors and healthier ingredients. "They have an exceptional ability to face the facts and adapt products to them," says UBS Investment Bank (UBS ) analyst Caroline Levy. Such innovation is a big reason PepsiCo sales jumped 7% last year, to $27 billion, while earnings grew 19%, to $3.6 billion -- numbers that rated the No. 44 spot on BusinessWeek's (MHP ) list of the 50 best-performing large public companies.

Just like its parent, Frito-Lay is fanatical about attempting to find opportunity in peril. Worried about obesity? Frito-Lay has come up with several low-fat chips and led the pack in removing all trans fats from its brands, which include Lay's, Ruffles, and Doritos. Looking for healthier snacks? Frito introduced a line of natural and organic chips in 2003, and in June it rolls out low-carb Doritos, Cheetos, and Tostitos. Frito-Lay also caters to ethnic and geographic markets -- even hawking a Tastes of Canada chip north of the border, with flavors such as pizza or sea salt and pepper.

In one of its more daring moves, the company reached south of the border two years ago to bring in four popular brands from its $1 billion Mexican subsidiary, Sabritas. The motive was to win over the foreign-born segment of the 46 million-strong Hispanic market that wasn't warming to Latin-flavored versions of Lay's and Doritos chips. As Frito-Lay North America Chief Marketing Officer Stephen Quinn explains: "They were looking for authentic flavors but didn't expect to see them on those brands." The risk of importing foreign brands was that they might cannibalize Frito-Lay's core U.S. lines. So the company limited the distribution of products like Sabritones chile and lime puffed wheat snacks to smaller mom-and-pop retail operations in Mexican-dominated areas.

The gamble paid off. Despite no advertising and minimal distribution, U.S. sales of Sabritas brands are expected to exceed $100 million this year -- double what they generated in 2002. Sabritas can now be found in markets covering roughly one-third of the U.S. population, up from 10% coverage two years ago. "Bringing in a brand that already has an emotional bond with those consumers makes sense," says Florida State University communication professor Felipe Korzenny. Because the brands were marketed as an ethnic specialty rather than as a Frito-Lay line extension, they usually were able to win extra shelf space that didn't diminish the presence of the company's mass-market brands.

It's the kind of push that has kept PepsiCo from sinking into a slow-growth pit as its core soda pop and potato chip products age. And the company's continual product and marketing reincarnations seem to have given it a sixth sense for tapping new markets. "They have been early to see trends and aggressive in targeting them," says Robert van Brugge of Sanford C. Bernstein & Co. That means an ever-growing product family that ranges from Wow! low-fat chips to Propel Fitness Water, a flavored vitamin-enhanced water that surpassed $100 million in sales in the year after it launched in 2002.

By defining its mission as serving the customer rather than protecting its venerable brands, PepsiCo is hoping to stave off a stagnant middle age. And if it has to tap its international portfolio for ideas or snap up products in hot new niches to do so, it will. There's nothing more American, after all, than giving consumers what they want.

By Diane Brady in New York

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