Thursday, January 17, 2013

Divergent Business Strategies From Pepsi and Coke in Addressing Obesity

A number of years ago, Pepsico's CEO, Indra Nooyi (a Yale School of Management alumni), embarked upon a broad strategy to promote what she's called 'good for you' foods (or at least 'better for you' foods) by expanding the company's portfolio beyond just sugary soda and potato chips.  The strategy began even before she became CEO.  In fact, she's been pushing this strategy ever since arriving at Pepsico as a corporate strategist in 1994.  For example, she was instrumental in divesting the company of it's low-margin fast food chains (KFC, Taco Bell, and Pizza Hut, now known as Yum! Brands, Inc.), and pushed for acquisitions in this new direction, including buying companies like Quaker Oats (many argued the acquisition was an excuse to get its hands on Gatorade which rival Coca-Cola also wanted, but Ms. Nooyi argues otherwise).  Outside the U.S., she has acquired a yogurt manufacturer in Russia, for example.

In 2011, she told The Wall Street Journal (see http://on.wsj.com/khwcXf) that the company would stop what she called the "scorched earth policy" of scrapping for a point or two of market share in the shrinking cola market.

"What's been happening in this category forever: we, Pepsi, would push like hell to get a program with the [retailer], we'd spend everything, and get a tenth of a point of market share," she said. "The next period, Coke would come along, push like hell, and gain a tenth. This was a zero-sum game. The cola category was profitable, but didn't grow profits."

Pepsico has been pursuing a dual strategy for cola, Ms. Nooyi said. The company is spending money to maintain its base business but also is searching for a breakthrough in sweeteners that will yield a naturally sweetened, zero-calorie cola, what Mrs. Nooyi calls "the ultimate nirvana."

Ms. Nooyi said Pepsico has made "enormous progress" the last two years as it experiments with different sweeteners and is 90% closer to a breakthrough. "Unfortunately, the last 10% is the toughest part," she acknowledged in December at a conference hosted by Beverage Digest, a trade publication.

Wall Street Likes Coke's Stock Better, But Whose Strategy Is Better?

However, although Ms. Nooyi's moves have diversified Pepsico's revenue stream away from peddling empty calories exclusively, they haven't done quite as well for investors.  True, since becoming the first female to lead Pepsi in late 2006, the company's earnings per share have gained around 36%, and its sales have nearly doubled to $65 billion.  However, the big problem is that Pepsico's stock has done worse than other companies in the space - gaining just around 10% during that time. For comparison, Coca-Cola has done nearly 10 times better.

She could certainly improve that with some financial maneuvers which wouldn't help the company in the future but would push it's stock price up, such as with share buybacks which are all the rage in other industries such as pharmaceuticals, for example.  Her belief is that without a big piggy bank of cash, the company may be unable to make important acquisitions as they did with Quaker.  Ms. Nooyi is a strategist, not really a short-term numbers executive, having done stints at  Booz Allen Hamilton and Boston Consulting Group.  But some on Wall Street are losing patience, with some big institutional shareholders pushing for her to step down, while others are calling for the company to split itself up (splitting the drinks business from the snacks business, for example).  None of those have gained much traction, but if Pepsico's stock price doesn't do better before much longer, that could change.

Although Coca-Cola, Inc.'s stock has done much better, strategically, Coke is by some accounts far more dependent on pushing sugary beverages than is Pepsico.  About 60% of Coke's revenue in the U.S. is derived from carbonated soft drinks, compared with about a quarter at Pepsico.  Coke went from a diversification period in the 1980s, as the former owner of Columbia Pictures (it was then sold to Sony) to its current position back in the 1990s.  Shareholders seem to feel Coca-Cola has a better focus on beverages, and have rewarded the stock, but I wonder if Wall Street is being short-sighted, as always?

For example, in my opinion, Coke has all but pretended the issue of it's role in obesity really did not exist until recently, and Wall Street hasn't really cared.  However, last week, Coca-Cola launched a high-profile, feel-good campaign about obesity for the first-time.  I suspect it's in response to campaigns in many areas which seek to restrict their ability to sell their sugary beverages without restrictions, such as the limits placed on beverage sizes which recently went into effect in the nation's largest city, New York City.

Pepsi faces a similar challenge, but it's stock has less room to drop because it's not as inflated to begin with IMHO.  In fact, a big chunk of Pepsi's profits come from its massive Frito-Lay snack-food business (which many argue plays as much of a role in obesity as its core soft drinks business), which is facing different challenges.  Notably, the big mass market is shrinking.  Lower-income consumers are moving away from Frito Lay brands to store brands, while higher-end consumers are migrating to products from startups such as Pop Chips and Stacey's.  (For more background, see "Frito-Lay Takes New Tack on Snacks" by Stephanie Strom, The New York Times, Jun 12, 2012, http://nyti.ms/KrhCjP).

Ms. Nooyi has tried to fix the company's strategy from within.  At Pepsi's Frito Lay unit, the company has pushed new options such as different varieties of Baked Lays Potato Chips, Sun Chips, etc.  it's unclear how many buyers those products are luring, but they are being distributed by Pepsico with increasing frequency.  In the core beverage business, on December 17, 2012, news leaked (see http://huff.to/13FBZiy) that Pepsico Inc. was quietly changing the sweeteners used in Diet Pepsi, with the goal of helping the soda maintain its flavor longer.

Previously, Diet Pepsi used only aspartame, which is sensitive to heat and breaks down more easily.  Many people find that older cans of Diet Pepsi taste awful because the sweetener has broken down and is no longer sweet.  Cans of Diet Pepsi around the country are now listing a mix of two artificial sweeteners, a pairing that is commonly found in newer diet sodas, most notably in Coca-Cola's "Zero" versions of it's regular soft drinks (Coke Zero, Sprite Zero, Mello Yellow Zero, etc.).  Companies like Pepsi have learned to be sensitive to public perceptions that they might be tinkering with major brands after the New Coke debacle in the 1980s.  But the new sweetener mix will also mean that Diet Pepsi tastes slightly sweeter than it did previously.  The company says the switch is only intended to help prevent the taste from degrading over time, but will soon be promoting it as having enhanced flavor.

Coke Finally Responds To Obesity ... Sort Of

In any event, Coca-Cola recently took the weight concerns to a new level with a new 2-minute anti-obesity ad that looks more like a public service announcement than a commercial.  That commercial can be seen below, or by visiting http://youtu.be/zybnaPqzJ6s:



Clearly, its a professionally-produced spot, and tries to acknowledge the obesity problem, but it doesn't really address Coca-Cola's role in creating the obesity problem, only how it has responded with new choices.  The L.A. Times reported (see http://lat.ms/V6oAwb) that the new "... ad points out that the company's portfolio of more than 650 beverages includes more than 180 low- or no-calorie drinks. Most of the full-calorie drinks also have healthful versions, according to the spot."

The original idea behind Coca-Cola's Zero brands was as an alternative to diet brands like Diet Coke or Diet Sprite because the Zero brands supposedly tasted more like the original, sugar-sweetened versions of the same brands.  They were initially pitched at young men who might perceive diet beverages to somehow be unmasculine.

The new Coca-Cola ads have gotten a lot of attention, but I was curious if they will really mean anything?  NPR's "The Takeaway" program recently discussed the Coca-Cola move.  They speak with Cindy Gallop, who's an advertising consultant who focuses on brand reinvention, business game-changing, and transformative business practices.  She supposedly has been watching the new Coca-Cola campaign closely.  The program is worth a listen, which can be listened to below, or by visiting http://bit.ly/VLilA3:


Its still a bit too  early to reach any conclusions on which company's strategy has a more likely chance of success, and even while I'm personally a Diet Coke fan myself (although I've been known to consume Diet Dr. Pepper which is sold by a rival company), I think Pepsi's longer-term strategy is more likely to have long-lasting success.  Pepsico's is less of a PR move, and more fundamentally changing what the company sells to consumers.  However, whether the moves come fast enough for Wall Street's impatient shareholders remains to be seen.

What do my peers in the diabetes online community think?

5 comments:

Sara said...

I was watching Stephen Colbert this week and he was talking about a lawsuit filed against Coca Cola regarding their Vitamin Water.

It looks like the case started two years ago, so I am not sure about the resurgence in the media now. However I would say that their statement that "no consumer could reasonably be misled into thinking vitaminwater was a healthy beverage" indicates their actual intentions in the fight against obesity.

Jenny said...

What I think is that people with diabetes need to be more aware of the role of phosphoric acid in possible kidney damage. Phosphoric acid is added to all the brown sodas and correlates with a higher lifetime risk of kidney failure in all people, not just those with diabetes.

You can cut down on your intake of phosphoric acid by switching to non-brown sodas. This is an issue for both sugary and sugarless sodas.

Details: http://diabetesupdate.blogspot.com/2007/07/coke-adds-death.html and http://diabetesupdate.blogspot.com/2011/02/link-between-diet-soda-consumption-and.html

Amy A. Phillips said...

Sugary beverages are not really good even if we drink moderately. I prefer drinking crushed real fruits rather than the artificial one

Scott S said...

Amy, your comment makes little sense. First of all, crushed fruits are as high (if not higher) in calories than sugary beverages and the nutritional value is suspect. On top of calories, fructose is a sugar which is really no healthier than sucrose vis a vis diabetes. I think you should stick with water, personally, not fruit juice.

Janeira Tracie said...

I have diabetes and it's really a burden for me. Do you know any juice that taste really good but is safe for people like me?