February 19 2008: 4:23 AM EST
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The Pepsi challenge

Can this snack and soda giant go healthy? CEO Indra Nooyi says yes, but cola wars and corn prices will test her leadership.

By Betsy Morris, senior editor

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As CEO, the India -born Nooyi succeeds a long line of white males and is emblematic of the dramatic change sweeping the company.
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Indra Nooyi (second from left) with her brother Nandu Narayanan (left), grandfather A. Narayana Sarma, and older sister Chandrika Tandon
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Nooyi meeting in her office last month with her top deputies: (from left) Mike White, John Compton, and Massimo D'Amore. Her predecesor calls her a "larger-than-life leader."
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Pepsico's purchase of Southern California's naked juice in 2007 made the company a stronger player in the booming healthy-beverage segment . Naked charges a premium price: about $3 for a 15-ounce bottle.

(Fortune Magazine) -- Pepsi can have a strange effect on people. The company, that is, not the beverage. No sooner had PepsiCo president Indra Nooyi gotten word 18 months ago that she was to become the next CEO than she hopped on a plane to Cape Cod, where Mike White, her main challenger for the job, was vacationing. The two had worked together for years. Both had been CFOs and rising stars. Both loved music. When they'd been kicked out of a board meeting the previous month while their fates were being discussed, they went to the Jersey Boys musical on Broadway and sang along to all the Frankie Valli songs.

As Nooyi's plane landed on Cape Cod, there was White waiting for her at the airport with a card he'd written to congratulate her. They took a long walk on the beach. Back at his beach house, he played the piano and she sang. Before she left, they went for ice cream. "Tell me whatever I need to do to keep you, and I will do it," she told her longtime colleague, who was vice chairman at the time. White said he would sleep on it.

That kind of scene may be rare in the hypercompetitive realm of C-suites, but not at PepsiCo (PEP, Fortune 500) (rank on the 2007 Fortune 500: No. 63). PepsiCo's three ex-CEOs, all on good terms with one another, weighed in to help Nooyi keep White onboard. She says she asked the board to increase White's compensation to nearly match hers (Nooyi's 2006 compensation: $7.1 million). White was Pepsi's best operations man - the kind of guy who would be indispensable in a downturn. He would be an important advisor. In the end, White decided to stay. When it was his turn to speak to the troops at the meeting the following week to announce Nooyi's appointment, he put it this way: "I play the piano and Indra sings." Says Nooyi: "I treat Mike as my partner. He could easily have been CEO." At key meetings she makes sure he is seated on her right.

That isn't the way a new CEO usually takes charge, but Indra Nooyi is an entirely different kind of CEO, a product of her native India as well as of PepsiCo's family-values approach to grooming CEOs. She is not hung up on pay. She's not shy about asking for help when she needs it. She's 52 years old and does not plan for this job to be her last. Her friend Henry Kissinger predicts that it's only a matter of time before she is plucked for a big Washington post, possibly a cabinet job, and Nooyi acknowledges that at some point, she'd like that. She's cosmopolitan, rigorously educated, and a strategic thinker - her background is Boston Consulting Group - much more interested in the burgeoning markets in Russia and China than in the noisy U.S. cola wars. A dinner gathering at her house is as likely to include Tony Blair and government ministers from India or Mexico as traditional pinstriped business types. As a vegetarian who for years has been talking about the importance of "gut health," she's not who you'd think would be leading a maker of sugary soda and salty snacks - but that's why she's taking the company in a different direction. She sings karaoke; she plays electric guitar. Her South Asian heritage gives her a wide-angle view on the world.

Since becoming CEO, she has reorganized PepsiCo to make it less fixated on the U.S. and broadened the power structure by doubling her executive team to 29. She has installed an Italian native, Massimo d'Amore, atop the division that includes the troublesome U.S. soft drink business, and recruited a former Mayo Clinic endocrinologist to head up R&D. Last year she spent $1.3 billion on acquisitions like Naked Juice, a California maker of soy drinks and organic juice. She has created a motto - "Performance With Purpose" - that puts a positive spin on how she wants PepsiCo to do business both at home and abroad.

It essentially boils down to balancing the profit motive with making healthier snacks, striving for a net-zero impact on the environment, and taking care of your workforce. "If all you want is to screw this company down tight and get double-digit earnings growth and nothing else, then I'm the wrong person," she says. "Companies today are bigger than many economies. We are little republics. We are engines of efficiency. If companies don't do [responsible] things, who is going to? Why not start making change now?"

Nooyi didn't wait to become an elder statesman CEO before making herself heard on the public stage. Her predecessor, Steven Reinemund, calls her a "larger-than-life leader." In a speech to the food industry in January, she pushed the group to tackle obesity. "Do you remember campaigns like 'Keep America beautiful'? What about 'Buckle up'?" she asked. "I believe we need an approach like this to attack obesity. Let's be a good industry that does 100% of what it possibly can - not grudgingly but willingly." At the 2008 World Economic Forum in Davos she told Secretary of State Condoleezza Rice it was critically important that "we use corporations as a productive player in addressing some of the big issues facing the world."

Her fluency in the global arena is increasingly critical to the business. With the U.S. marketplace in slow-growth mode even in the best of times, the biggest opportunities are overseas. PepsiCo's international business grew 22% last year, triple the rate of domestic sales, and now contributes 40% of total revenue ($39 billion last year). And a CEO had better be taking the moral high road. There is no longer a free pass for the ugly American company: Should Baked Lays fail to live up to its health claims, it'll get bounced off the store shelf by regulators in Britain. And if you are just the next greedy American corporation, you don't stand a chance in China's tight labor market. Set too ambitious a profit target in India, and there will be hell to pay if your bottling company drains the water table.

"If you look at the job entirely from the American perspective, then it becomes impossible to run a global business," says Kissinger, who consults for Pepsi and other companies on international matters. "You have to relate your interests to the interests of other parts of the world - to be relevant in their societies. Indra seems to understand this instinctively."

Suddenly, however, a change in the economic environment is likely to test whether Nooyi is a leader for all seasons. With a possible recession looming in the U.S., PepsiCo is headed into the toughest period it has faced in a decade. Prices are soaring for its main ingredients, commodities like corn and cooking oil. Its newest products, like premium-priced juice, may face resistance from budget-conscious consumers. Meanwhile, archrival Coke (KO, Fortune 500) is gearing up to revive the cola wars with such products as calorie-free Coke Zero, which looks like a hit, and the company's newly acquired Vitaminwater lineup.

For a long time, investors have been enamored of PepsiCo for its bold strategic moves and steady, reliable growth. The company's stock has more than doubled since 2003 and now hovers around $70 a share, up about 10% since she took over. But Wall Street will care much more about how well Nooyi handles corn prices than about how well she solves world problems. So far, so good. In the fourth quarter of 2007, revenue went up 17%, to $12.3 billion, and operating profits rose 9%, to $1.7 billion. Industry analysts at Bank of America say PepsiCo "is demonstrating great flexibility in a tough environment."