Indra Nooyi Rediscovers the Joy of Pepsi

The company lost soda share as it concentrated on healthier offerings

Since becoming chief executive officer of PepsiCo five years ago, Indra Nooyi has accelerated the snacks-and-cola company’s move into healthier fare: yogurt drinks, hummus, oatmeal bars, etc. While the strategy makes sense, given America’s obesity epidemic, the change in focus has taken a toll on the company’s sugary namesake, Pepsi-Cola.

In the U.S. soda market, the company lost share to arch-rival Coca-Cola from 2008 through 2010, according to Beverage Digest, an industry newsletter. Two years ago, Diet Coke, a regular advertiser on high-profile TV programs including the Academy Awards, overtook full-calorie Pepsi-Cola to become the second-best-selling soft drink in the U.S., behind Coca-Cola. PepsiCo’s stock has risen about 2 percent during Nooyi’s tenure, while Coke has gained more than 50 percent over the same period.

Now it looks like PepsiCo is preparing to shore up its weak flank. Nooyi and her team are due to finish a yearlong business review on Feb. 9, and analysts expect her to announce a major investment in advertising and marketing. “This is a pivotal year,” says Wells Fargo analyst Bonnie Herzog. “If the trends continue, they’ll continue to lose in beverages, and you’re looking at much slower earnings growth, margins deteriorating—all of it.”

PepsiCo began to change tack last year, although analysts and investors think Nooyi still isn’t investing enough in the flagship brand. The company boosted ad spending for North American beverages 30 percent, and over the summer loaded airwaves with a new Pepsi-Cola campaign that featured a vacationing Santa Claus. (St. Nick has been a regular in Coke ads for more than 75 years.) Nooyi also inked a $60 million sponsorship deal with Simon Cowell’s The X Factor, an answer to Coke’s decade-long sponsorship of American Idol. Pepsi-Cola will return to the Super Bowl this month, after skipping the last two years, with soft-drink ads featuring TV personality Regis Philbin and musician Elton John.

The assault so far hasn’t reversed the decline. The share of dollar sales of Pepsi-trademarked products at groceries, drug stores, convenience stores, and mass merchandisers, excluding Wal-Mart Stores, declined half a percentage point last year, to 18 percent, according to researcher SymphonyIRI Group. Classic Coke and its variants grew 0.3 percentage points, to 28.4 percent. To compete effectively, PepsiCo needs to spend about $580 million more on marketing this year than in 2011, says Ali Dibadj, an analyst for Sanford C. Bernstein. Herzog cites a similar figure. The company may fire several thousand employees this year to safeguard earnings, says a person familiar with the plans. “We are evaluating efficiencies in all areas of our operations, including employment levels and benefits,” said PepsiCo spokesman Peter Land in an e-mail.

Two years ago, Nooyi set a goal of tripling sales of what the company calls “nutrition products,” including Gatorade, Tropicana juices, and Quaker whole-grain goodies, to $30 billion by 2020. To that end, she has spent almost $6 billion in acquisitions, snapping up a Los Angeles-based coconut-water company, a Russian dairy and juicemaker, and a fortified water company in the U.K.

At the same time, PepsiCo scaled back spending on television ads pitching specific products. Instead, Nooyi spent about $100 million on the “Pepsi Refresh Project,” a heavily digital campaign where people compete to win grants for community endeavors—everything from building an animal rescue shelter to buying new instruments for a high school marching band. Herzog notes that ad spending as a percent of revenue has lagged rival Coca-Cola’s. “Nooyi may have taken her eye off the ball on the North American beverage side,” says Kevin Rendino, managing director for BlackRock Basic Value Fund, which holds some 850,000 PepsiCo shares.

PepsiCo’s struggles have led analysts including Dibadj to suggest that the company’s beverage and snacks businesses would be worth more separately than they are together. Nooyi has dismissed such recommendations. “PepsiCo’s value is maximized as one company,” she said in an October call with analysts.


    The bottom line: Analysts say PepsiCo needs to boost marketing spending on sodas by about $580 million to recoup share.

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