PepsiCo Inc. and the Coca-Cola Co., Inc. have traditionally hewn to different strategies in their constant I-raise-you-raise battle for market supremacy.
While retailing on-shelf is often simply a pricing game, when it comes to the kinds of products the companies offer those retailers, Coke has preferred to go all in, making big purchases like Glaceau, completely reinventing its namesake product, even reversing course on that reinvention. When it succeeds – or fails – it has typically done so in spectacular fashion.
PepsiCo, however, has been slower and steadier at the table, preferring to win by building a full raise rather than running other players off the table by raising the stakes. That strategy of steadily building a strong portfolio reached its apex in 2008, when, due to strong performances across a number of brands, the company’s valuation finally exceeded that of its chief rival.
Indeed, PepsiCo is a true business conglomerate, comprised not just of beverage brands but companies like Frito-Lay and Quaker that play in snacks and breakfast foods. As part of its wider reach, PepsiCo has also built leadership positions in RTD coffee and tea categories by building partnerships with Unilever and Starbucks; both alliances have kept it ahead of its chief rival in these parts of the cooler by building a horizontally integrated portfolio rather than one centered around just one or two top brands. When it came to energy drinks, PepsiCo built a suite of products to build up share, rather than try to center its effort behind one brand.
But for a company built to win by storing up a strong set of very good cards rather than one that gambled off a few aces, when it comes to innovation, PepsiCo has shown a fairly anemic series of hands. Even when its strategy paid off and it briefly passed Coke in market capitalization, in mid-2008, PepsiCo nevertheless slipped back by the end of that year. And to make things worse, at the end of that year, PepsiCo imitated Coke’s playbook by going for a few big plays of its own, re-launching major planks like Gatorade and Tropicana – and fumbling them – while still feeling the pain of industry-wide declines in bottled water and CSDs.
And while PepsiCo had always shown leadership in earlier eras when it came to building “New Age” beverage categories like sports drinks and bottled water, when it came to the current emerging crop – energy drinks, functional waters, the next generation of sports drinks – it was being left behind.
By late 2008 Coke had acquired Glaceau and it had revved up an energy portfolio by growing NOS and creating a distribution partnership with Hansen’s for Monster Energy. Gatorade seemed less important in light of the specialization of the sports nutrition category, one that had begun to take protein and caffeine seriously. While PepsiCo had rebuilt SoBe into a fighter brand to take on Vitaminwater, distributors still had one serious question about Pepsi’s beverage offerings: had the company, which has always tried to be more youthful than its competitors, become reliant on a moribund stable of brands?
At least one of Pepsi’s major partners seemed to think so: Pepsi Bottling Group (PBG) – which, as the company’s chief distributor, was sure to suffer collateral damage due to flagging performance by Pepsi’s brands. So even with talk swirling in the background (correctly, it turned out) that the distribution company might soon be bought by the larger entity, PBG began to deal itself a new hand of its own. It was a bold move, given that distributors are often loathe to upset their chief partners by seeking outside brands – and that both PepsiCo CEO Indra Nooyi and PBG CEO Eric Foss were on record as not being interested in buying any of those outside brands, either.
Nevertheless, PBG went to work, and in 18 months, even as PBG has itself become part of the larger PepsiCo, the portfolio of brands distributed by or associated with brand Pepsi has changed considerably, placing building blocks in several evolving beverage categories – those that the chief supplier had very little, if any, presence in the past.
“They’ve certainly covered a lot of ground very rapidly,” says Carl Sweat, the CEO of FRS, a company that PepsiCo itself recently cut a distribution deal with to broaden its sports nutrition offerings.
Beginning in early 2009, PBG augmented its portfolio of brands by adding distribution deals for key companies in emerging areas: Rockstar for energy drinks, Muscle Milk for sports nutrition, and O.N.E. for coconut water. PBG also shored up holes in old-line categories like CSDs – adding Crush from the Dr Pepper Snapple Group – and, most recently, it brought on board the ethnically-focused Hispanic power brand Tampico to shore up its portfolio of juice offerings.
“It was the bottlers who took the initiative completely,” said a source with close knowledge of the deals. “They went out and got Crush, Tampico, Muscle Milk. [PepsiCo] can’t argue with the millions of cases that a brand like Crush brought into the system.”
While PepsiCo only bought in on some of the ideas initially, as PBG and PepsiCo have begun the process of knitting themselves into one larger company – in fact, as they sat down to compile their Annual Operating Plans this summer, which will detail how the companies will focus their efforts in the coming year – it was increasingly apparent that those alliances made by PBG will play an important role in shaping the hand that Pepsi will show in the future.
“I think they need these beverages,” said Joey Cannata, the senior VP of sales and distribution for Rockstar. “To win where they haven’t traditionally won, they’re going to need Rockstar. They’ve done a great job in partnerships in the past, look at Lipton [Unilever] and Starbucks, but the one place they hadn’t done it is energy.”
Not that the brands themselves haven’t benefitted. When Rockstar hooked up with PepsiCo, it was facing distribution limbo. Once the first of the three large independent energy brands to hook up with one of the Red or Blue system, Rockstar’s three year-old distribution deal with Coca-Cola Enterprises was now compromised by a new agreement between Coke, CCE and archrival Monster Energy. Meanwhile, Rockstar had burned bridges exiting its independent DSD network, leaving a limited number of places for it to turn.
But Pepsi’s weakness in the energy arena left it a natural fit for Rockstar, and in January of 2009, both PBG and Pepsi struck, cutting a deal that put Rockstar into Pepsi accounts in the late spring. While it took a year for momentum to build, recent reports showed Rockstar up 28 percent year-over-year in the last sales period, according to Cannata.
That’s not to say that things have been rosy in every deal. O.N.E. has struggled to separate itself from rivals ZICO and Vita Coco since it came on board with PBG. Meanwhile, Muscle Milk, which pioneered the protein beverage category and built sales past $250 million, was forced to realign its sales force earlier this year to try to get into better step with Pepsi’s major accounts. But at a time when sports nutrition is being remade – witness the second reboot of Gatorade that has taken place in the past 18 months – distributing the leading brand in the protein space seems to be a wise move.
“From a retail opportunity and partnership standpoint, and in terms of filling the void, I think what they’ve done is incredible,” says John Blair, the Senior VP of sales for Muscle Milk. “They knew they had to strengthen their hand, and they’ve done so.”
Of course, PBG wasn’t just operating to make its parent company look good. Much of what drove its attempt to fill space in its portfolio was an increasing sense that it had to grab some of the revenues it couldn’t get from Gatorade, a brand that PepsiCo distributes through its warehouse division rather than DSD. With other core Pepsi lines sliding, PBG, in 2008, opened up a program called “Learning Labs” to seek investment in up-and-coming brands and nurture them in test markets. The first investment was with O.N.E. – yet another rising player in sports and nutrition. While still a small category, the activity in coconut water has been the story of the year across the beverage industry.
The legacy of Learning Labs continues today – the Tampico deal, which added Tampico Plus, a reduced-sugar juice line of juice drinks to the Pepsi distribution portfolio, was also announced as part of the Learning Labs program. This time, however, it was billed as a program of Pepsi Beverage Company – the entity that represents the combination of PepsiCo’s two recent distributor acquisitions, PBG
and Pepsi Americas.
At a recent year-end meeting designed to introduce the company, its bottlers, and assorted Wall Street hangers-on to upper-management’s strategy for “The Power of One,” PepsiCo’s vaunted attempt to leverage all of its brands through its now-vertically integrated distribution network, it became apparent just how large an impact the PBG crew would have as the company went forward. PBG’s former CEO – now CEO of Pepsi Beverage Company – Eric Foss made it clear that “Learning Labs” would continue. In earlier statements, he had made it clear that Pepsi’s bottlers would continue to seek outside brands to grow revenue – revenue that will now benefit the combined company.
Nevertheless, the purchase of PBG did throw a wrench into the growth of the portfolio in at least one respect – at the time of the acquisition, PBG had more potential partnerships in the works. While the two companies integrate, activity on those deals has slowed. Only time will tell if the legacy of PBG’s strategic alliances continues to help the Pepsi portfolio evolve. But in the meantime, you can see it in your store. •