PEPSI OPENS A SECOND FRONT After years of floundering overseas, Pepsi is at it again, brazenly attacking Coke's foreign fortresses. Good luck.
(FORTUNE Magazine) – IF YOU WANT to get Stacey Clark's adrenaline flowing as fast and furiously as the Pepsi that apparently pumps through his veins, mention the cola wars in the United States. Thirty years ago, Coca-Cola dominated the U.S. soft drink industry with about 38% of the market to Pepsi-Cola's 18%. Clark, a Pepsi vice president in charge of Great Britain, likes to tell customers how Pepsi rose to control 31% of the U.S. market, while Coke's share of sips rose three points. With a rush of confidence and nary a smile, Clark says, ''Coke isn't unbeatable. It can be done.'' The cola battle is raging anew, this time around the world. Outside North America, PepsiCo, a longtime global lightweight, gets outsold by Coke at a rate of three to one. But following years of blundering, Pepsi is now moving aggressively into those hallowed foreign markets where Coca-Cola sits sheltered from stiff competition, sells its drinks at deliciously high prices, earns monster profits, and derives four-fifths of its total earnings. Look at it as a challenge shared by all the No. 2's of the world: You can follow the leader and take what you're given -- or go for broke. Pepsi, of course, is going for it. The battlefield commander on the company's second front is Christopher Sinclair, 43, chief executive of PepsiCo Foods & Beverages International. He is employing many of the strategies that worked for Pepsi at home: Embrace risk. Act quickly. Innovate constantly. Deliver what's perceived as the best value. The company is also using acquisitions to gain control of foreign distribution. Skill in execution, more than marketing pizzazz, will be the No. 1 driver if this No. 2 is to be successful, as it learned five years ago when it bungled an expansion in Germany. Sinclair is egging on a growing army of remarkably young guns (British boss Clark, 32, is one) to break the rules of soft drink marketing. Indeed, the company's new no-sugar cola, Pepsi Max, introduced last year in Europe and now pouring into the Far East and Latin America, signals the intention to play a different, outside-the-traditional-box game. Designed specifically for foreign drinkers, Max is lapping up Coke consumers. ''We'll grow faster than Coke,'' says Sinclair, who, being a Pepsi man, loves a good fight. And he's getting one. From Norway to Mexico, Coke and Pepsi are engaging in price wars, copycat advertising, court battles, and the renaming of products to foil each other's strategies. Sinclair is making some headway. Before he took charge of Pepsi-Cola International in 1989, volume gains outside North America averaged 4% annually. Case sales have since expanded 8% per year -- four times the growth rate of the total soft drink market abroad and faster than Coke's overseas volume. This growth is off a small base, of course, but it has added three points to Pepsi's international market share. Latest tally: Coke 48%, Pepsi 18%. Viewing the world from his airy, suburban office in Somers, New York, Sinclair says, ''If Coke starts growing 8%, we'll do 10 to 12.'' Audacious, yes, particularly when you consider that profits from foreign beverage sales are a droplet in PepsiCo's capacious bucket (see chart). And Pepsi's payback from each drink it sells is puny: Pepsi-Cola International's estimated profits of $145 million last year represent only 6.6% of the operation's $2.2 billion in revenues. This profit margin is less than half the level that PepsiCo's beverage business achieves in the U.S. and far below Coke's quenching return of 30% on foreign sales. That in itself is reason enough for Pepsi to have increased its investment in foreign bottlers tenfold since the late 1980s, to about $500 million earmarked for this year.
Pepsi's foray abroad is crucial because growth isn't coming easily to PepsiCo as a whole these days (1993 sales: $25 billion). The parent company's second-quarter earnings were flattened by price-cutting wars in domestic soft drinks and slow customer traffic in PepsiCo's restaurant operations, which include Pizza Hut, Kentucky Fried Chicken, and Taco Bell. Analysts predict a 9% gain in earnings this year, even though Chief Executive D. Wayne Calloway says, ''We're not at all backing off our commitment to 15% long-term growth.'' Out of necessity, the focus of PepsiCo's expansion is changing from domestic to foreign. Says Calloway: ''We've had a nice 25 years, and we don't apologize for that. But 95% of the world's consumers don't live here.'' Consumers abroad, on average, drink one-eleventh the amount of soft drinks that Americans do, ''so there's a lot of opportunity to grow,'' he adds. Paine Webber's beverage-industry analyst Emanuel Goldman agrees: ''Overseas, the world is their oyster.'' The opportunity lies substantially in Sinclair's itchy hands. A smart No. 2 player, he believes, never gets far enough by trying to steal business from other small fry: You focus the mind best by aiming high, fighting a competitor who wants to -- and maybe can -- wipe you off the map. ''You have to get people thinking about dramatic growth,'' says Sinclair. After nearly tripling Pepsi-Cola International's revenues in the past five years, Sinclair is now targeting ''five by '95,'' that is, $5 billion in sales by 1995, more than double 1993's $2.2 billion. When asked by FORTUNE if he was delusional, Sinclair smiles and says, ''This sounds so outrageous. But we can do it with a little help from certain acquisitions.'' They've heard this before in Atlanta, of course. Says Ralph Cooper, the senior vice president in charge of Coca-Cola's operations in the European Community: ''We produce results and leave the rhetoric to everyone else.'' Coke, after all, is ''the world's best brand,'' as FORTUNE has noted in a cover story (May 31, 1993). It is the No. 1 consumer product sold in Europe, according to A.C. Nielsen. And in Latin America alone, more Coca-Cola products -- 330 million more cases, in fact -- are consumed than Pepsi beverages in all of the 163 countries outside North America where they are sold. There is also the matter of Coke's 50-year head start, partially thanks to General Dwight Eisenhower's passion for the product. During World War II, Coca-Cola built 64 plants and shipped them worldwide with help from the U.S. government, turning 11 million GIs into very appreciative customers. Like any company going global late, Pepsi needs to alter the market, not simply follow the leader. Sinclair says, ''You want an organization out there that's passionate about change.'' And at Pepsi-Cola's European headquarters in Richmond, England, you do meet many passionate types. Charlotte Pinder, Pepsi's first-ever marketing director for Europe, says, ''I joined Pepsi 18 months ago to develop big ideas.'' A serious, intense woman recruited from Grey Advertising in London, Pinder, 36, is launching a bunch of promotions, including a traveling basketball tourney that features Magic Johnson, and also Pepsi's own TV program, a hip and edgy magazine show called Passengers that teens see throughout Europe. Locally in Britain, Stacey Clark is busy hiring people thirsty for change. Marketing manager Tim Davie, 27, who joined Pepsi last December from Procter & Gamble, says he didn't like the package design of 7 Up, a brand that Pepsi owns outside the U.S. After some consumer research, he hired a graphics firm from suburban London to make the greens on the can greener and its 7 Up bubbles swirly and three- dimensional. Another British marketer, Tony Mulderry, also 27, last year decided that Brits, who drink a lot of juices, might favor fruit-flavored colas. He bulled through two layers of new-product approval and now is launching Strawberry Wild Bunch Pepsi and Tropical Wild Bunch Pepsi. Overseeing the new Max cola in Britain is Shafi Saxena, 28, a risk-loving internationalist. An American of Indian descent raised in Hawaii and the Philippines and schooled in the U.S. and Italy, Saxena worked for four years in marketing at P&G in Germany, then switched to Pepsi last February. ''Been there. Done that,'' she says, mimicking Pepsi Max's ad campaign. ''I wanted to work in a faster-moving place.'' Which she does. Sinclair constantly urges his people to ''change the rules of the game'' because, he explains, ''Coke, with huge investments and market share to protect, has very little incentive to be the aggressive innovator.'' So far, Max is the principal example of rule-breaking innovation. The new drink defies Coca-Cola's commandment of soft drink marketing -- a cola is the ultimate global brand, transferable from Tulsa to Tibet to Timbuktu -- because Max is concocted specifically for non-American drinkers. It is a one-calorie beverage for international consumers, who, by the way, typically do not like diet beverages. Outside North America, diet products account for only 4% of soft drink sales. The radical Pepsi Max evolved from research done three years ago, in which consumers in Britain, Germany, and Australia indicated they would like to cut their sugar intake. More important, over half the regular-cola drinkers, particularly young men, said that they would try a no-sugar cola if it didn't have a typical diet taste or sissy image. Since young males consume more cola than any other group, says Sinclair, it was an obvious opportunity, a way to outflank Coke. Back at Pepsi-Cola's R&D labs in Valhalla, New York, scientists had been experimenting with sweeteners and flavor oils that were new to Pepsi, and several blends seemed to taste better than Diet Pepsi. Two more years of mixing and testing were needed until a drink comfortably achieved Sinclair's ''action standard'' -- the requirement that a new diet product be favored by at least 40% of consumers in taste tests against regular Coke. The drink that cleared the hurdle uses a sweetener, acesulfame-K, manufactured by Hoechst AG. Hoechst is awaiting FDA approval for its use in beverages in the U.S. ''Max is a major step forward,'' says Goldman of Paine Webber. ''It's the closest thing yet in terms of a diet drink tasting like a full-calorie product.'' Even though you may believe that soft drinks are essentially sugar water and hype, Goldman says, ''the importance of taste can't be overemphasized. Taste is where you start, and everything else comes after.'' The ''everything else'' included some important decisions for Pepsi-Cola: How do we position the new product -- as one calorie, no sugar, good for your health or your teeth? What do we name it -- Pepsi One, Bold, 2000, Blue? From surveys and interviews with 1,000 additional consumers in Britain, Pepsi found that the name Max inscribed on bold blue-and-red cans best suggests the desired attributes: no sugar, maximum cola taste. Pepsi's ad agency, BBDO Worldwide, struggled unsuccessfully to come up with an original ad campaign, so just before Max rolled into its initial British test market last year, the agency hurriedly adapted U.S. ads for its Diet Mountain Dew drinks. Frenetic and in-your-face, the TV spots feature grungy male daredevils who surf, snowboard off cliffs, and ''live life to the Max.'' And now Max is in consumers' faces. To reach folks reluctant to try diet drinks, Pepsi is running huge sampling events with Max women, decked in blue and red, and Max men, who look like the hunky athletes in the ads. These Max marketers ride in Maxmobile jeeps and dart about on Rollerblades handing out free cans -- 3.5 million to date. It is still too early to tell whether Max will be a hit, but analysts are encouraged by high rates of repeat purchase, about 80%. Max's market share in Britain has risen to 1.7%, equal to $33 million in annual retail sales. Pepsi's overall cola share in Britain is up two points since last year, to 21%. Coke's share, meantime, has dropped three points, to 58%, due to Max and fierce new private-label competition (see box). Now Sinclair is taking Max to the max. Pepsi has popped the cola into 12 other countries, including France, Spain, and Uruguay; he plans to enter at least nine more by year-end. Sinclair expects sales to exceed $300 million this year. He is spending $40 million on Max marketing in 1994, in hopes, he says, of creating a billion-dollar brand. Sinclair cites Max as an example of what he calls ''competitive jujitsu'' -- throwing the competitor off balance by violating a global marketing precept. He knows, though, that No. 1 inevitably fires back. ''Sure, we can surprise or stun Coke, but only for a while. We might be able to score some points and gain a competitive edge, but these will almost always be temporary advances.'' There's plenty of firepower, aggressiveness, and marketing shrewdness on the other side. Coca-Cola, which controls a sumo-size 56% share of the market in Japan, cleverly nabbed the Max name and introduced its Aquarius sports drink there as Aquarius Max. Pepsi then had to use an alternative label, Pepsi MX, locally. To muddy the waters in Australia and Thailand, Coca-Cola is running TV ads that hype its own cola's ''maximum taste,'' while commercials for Cherry Coke in Argentina advise viewers, ''Decontrolate al maximo.'' Translation: ''Lose control to the maximum.'' In Norway last fall, just as Pepsi was launching Max, Coca-Cola brought out Tab X-tra, a revised formulation of its diet drink. Using their distribution clout, the Atlantans have blunted the Max attack, at least for the time being. Sinclair takes Coke's copycat marketing in stride. ''They're close to the edge (legally). But I guess I'd worry more if there were dead silence from Atlanta.'' When Coke tried a similar gambit in Mexico, the world's second-largest soft drink market, Pepsi was ready. Coca-Cola aired Max-like TV commercials for diet Coke last fall and Fresca last May, but Pepsi preempted the enemy's preemptive strike, launching instead a Pepsi Challenge taste-comparison campaign. ''Our competitive jujitsu,'' says Manuel Rubiralta, 49, the area vice president in charge of Pepsi-Cola Mexicana, which is one-third the size of Coke's operation there. Remember the Pepsi Challenge, the U.S. marketing campaign from the 1970s in which Pepsi-Cola pitted its drink against Coke in 20 million blind taste tests? Rubiralta kept plans for Mexico's first Challenge secret from Coca-Cola via various machinations, such as shooting TV commercials in Canada and telling the actors that they were flying north to film a Mont Blanc pen ad. The spots, which premiered in late May, show a handsome 30ish Hispanic winsomely pitching consumer democracy: ''Pepsi values your freedom of choice,'' he says, instructing viewers to stop by Challenge booths at supermarkets all around Guadalajara and Monterrey. ''Let your taste decide.'' The payoff? More than 100,000 consumers have sampled Pepsi and Coke since early June. Guess which drink 55% prefer? Case sales in the two Challenge cities have jumped 13%. Rubiralta says he plans to do three million more Pepsi Challenges and -- hear this, Atlanta -- launch Max this fall. Comparative advertising such as the Pepsi Challenge is classic No. 2 strategy: It is supposed to shake consumers' ingrained beliefs that the ubiquitous brand is best. International markets have only recently permitted comparative ads, and ''now you're seeing us jump through the window,'' says Sinclair. Pepsi is testing the limits around the world by also staging its first Challenges in Singapore, Malaysia, and Portugal this year. In Argentina, Coca-Cola won an injunction that bans Pepsi from comparing brands in a Pepsi Challenge ad. Pepsi is appealing to Argentina's highest court. There's also a bit of table turning in South Africa, where Coca-Cola controls 75% of soft drink sales. Pepsi pulled out of that country in 1985 and now is reentering in partnership with an investor named Ian Wilson. The selfsame Wilson was a top internationalist at Coke until he lost the CEO race to Roberto Goizueta in 1980. Says Sinclair: ''He helped build Coke in South Africa. He'd like the chance to do it again with Pepsi.'' That Pepsi-Cola is even contending foreign markets is surprising to some observers of the company. Consider a bit of history: In 1982, Pepsi got socked by a major accounting scandal overseas -- elaborate scams by the company's finance staffers in the Philippines and Mexico to inflate bottling profits. The problems caused management to take a large write-off and, as Sinclair recalls, ''pull the ripcord on international, sell off bottling operations, hunker down, take no risks.'' He continues, ''We overreacted. The scandal led to the attitude that we don't even know what we're doing operating overseas.'' That fear lasted until the end of the Eighties, when CEO Calloway began to reconsider. He assigned Sinclair, then president of Pepsi-Cola's operations in the central U.S., to come up with an answer. Sinclair is a deceptively genial and urbane man whose manner derives in part from his eclectic background. Born in Hong Kong and raised in India, he broke from an early marketing career at General Foods to manage a ski lodge in Burke, Vermont, for two years. He and his wife, Margaret, still ski there with their three children. After joining PepsiCo in 1980, he jumped ship once more in the early Eighties to head marketing for Newsweek for two years. ''That didn't fulfill my entrepreneurial needs,'' he says. Perpetually dissatisfied, Sinclair ''sets higher standards than anyone I've ever worked for,'' says Stacey Clark, Pepsi's chief in Britain. ''Whenever you get within reach of the ((performance)) bar, Chris is already raising it.'' Sinclair talks openly about his adolescent trauma -- polio, from which he has recovered fully -- to inspire his people to believe that they, too, can beat the odds. Pepsi in the U.S. and Coke overseas had gained tremendous market share by investing in bottlers, getting decision-making clout, and upgrading sales and distribution. Sinclair quickly understood that he would have to do the same when he took over Pepsi-Cola International. In visiting 77 countries in six months all he saw was seas of red -- grocery aisles awash in Coca-Cola red and the red ink that bleeds from decrepit operations. In Mexico, Pepsi's market share had plunged to around 20%, from above 50%. Bottlers in Taiwan and Argentina, badly managed and starved for Pepsi-Cola's marketing support, were going bankrupt, and Pepsi products were almost disappearing from the market. So much of our weakness was self-imposed,'' says Sinclair earnestly. ''I formed the conviction that so much was in our own hands, rather than that this was a competitive game that we couldn't win.'' Calloway was easily convinced that the company must spend abroad heavily. Though executives in PepsiCo's other businesses, restaurants and snacks, were also hungry for capital for acquisitions and joint ventures, the CEO recalls deciding, ''This had to be no small commitment. We have to create a whole new infrastructure, invest in vending and trucks. It's a whole new game.'' He approved an enormous investment plan: $2 billion over five years, up from $200 million the previous five. This $2 billion equals about 14% of PepsiCo's total capital and equity-investment spending for the five years up to 1994.
Pepsi-Cola's first acquisition, in Germany, proved to be not Normandy but Dunkirk. ''It was our biggest blunder,'' Sinclair says. In 1990, Pepsi bought < the rights to bottle and sell its drinks to German retailers (bars and restaurants continued to be served by franchisees). The Pepsi people stormed into Germany like know-it-all corporate cowboys, trying to push Pepsi's prices to Coke's lofty levels. What was really needed: brand-building advertising and merchandising plus a lot more trucks and coolers. Pepsi so alienated two major German retailers, Tengelmann and Asko, that it lost distribution in those stores for a couple of years. Pepsi is back on the shelves, but the damage was done. Today the company has only a 4.6% share, down a point from 1989, in a country that generates $7.5 billion in soft drink sales annually. Germany is Coca-Cola's largest and most profitable European market. Price cutting, new packaging, and a push on the company's 7 Up brand have been improving Pepsi's sales, but Calloway says, ''in a mature market with an entrenched competitor, there isn't any overnight solution.'' Today, PepsiCo has ownership positions -- via joint ventures and five outright acquisitions -- in 40% of its bottling network outside North America, up from 15% in 1989. Sinclair says he has learned to invest selectively: in emerging markets with rising GNPs, liberalizing economies, and huge populations of thirsty young people. These include Mexico, where Sinclair has committed $750 million over five years for joint ventures, and Argentina, where last September Pepsi-Cola took a 26% stake in Baesa, a publicly held bottler based in Buenos Aires. The philosophy is simple: ''You put your money where you think you've got the chance to have a big business. Scale means a lot,'' he says. Wall Street applauded Pepsi-Cola's and Baesa's agreement last September to create a South American ''superbottler,'' which eventually will cover 400,000 retail accounts in lower South America. Baesa has incorporated Pepsi's Chilean and Uruguayan operations as subsidiaries and plans to absorb key Brazilian territories when bottling franchises there expire during the next couple of years. But look inside another developed soft drink market, Spain, and you see how new investment can whip the cola warriors into action. Pepsi-Cola's seventh- largest market was a sleeper until late 1992, when Sinclair decided to acquire its bottler, Kesa, as well as Kas, an owner of local beverage brands. As part of this $320 million deal, Pepsi now owns Bitter Kas, a quirky, fruity carbonated drink that accounts for 1% of the Spanish market but has terrific distribution. Bitter Kas is sold in as many Spanish stores, bars, and restaurants as Coke is, and in twice as many as Pepsi. Armed with new distribution muscle and a retrained sales force, Pepsi has been churning out a new product per month so far this year, including Max and grapefruit- and orange-flavored Bitter Kas, as well as various juices. Before the acquisition, Pepsi typically launched one new drink annually in Spain. This is no time for siestas, as even Coke realizes. ''They've invested massively,'' says Jose Nunez-Cervera, president of Coca-Cola's Iberian division, based in Madrid. Nunez-Cervera arrived at Coke in 1993, following 27 years at Dow Chemical in Spain. He never fathomed, he says, such high-charged behavior from the No. 2 competitor. Price battles erupted late last year when Coke, losing volume to Pepsi, began deep-discounting. This brought down Coke's retail prices near Pepsi's level in some outlets for the first time in Spain. ''We're defending and gaining points of market share at any cost,'' says Nunez-Cervera. ''We have far more money to spend than they do, and stronger bottlers.'' But the battle in Spain is one reason that Coca-Cola's revenues and profits in the European Community declined last year for the first time since at least 1989, when the company began breaking out that region separately in its financial reports. Nunez-Cervera speculates that Pepsi makes no profit at all in Spain. Hearing this, Sinclair smiles and says, ''We make pretty good money.'' FORTUNE estimates that Pepsi last year earned $30 million on revenues of some $500 million in Spain. Sinclair says that profits will probably rise more than 20% this year. There are even bigger targets for the $2 billion that Sinclair has to invest during the next five years. His company plans to spend $350 million to build ten new bottling plants in China, the world's most populous country, with 1.2 billion potential Pepsi drinkers, and invest heavily to combat Coke for 890 million consumers in India. Pepsi arrived in India in 1990 and quickly grabbed 30% of the market. But the real war started last October when Coca-Cola returned after a 16-year absence. Coke bought Parle Exports, India's leading beverage company, which has a 60% market share. If Pepsi lacks anything in this global push, it is adequate human resources. International's executive head count will almost double through 1998, so Sinclair has been ramping up training programs. And last fall he took charge ^ of PepsiCo's international snack business in addition to drinks, so now, he figures, he can exchange talent more easily between the two operations. He still has to improvise. For example, in Poland, which has one of the fastest-growing economies in Eastern Europe, Sinclair is helping Pepsi-Cola General Bottlers, which operates in the midwestern U.S., acquire several franchise operations. This international arrangement is a first for a domestic Pepsi bottler and ''an important move for PepsiCo because it frees up talent to invest elsewhere,'' notes Andrew Conway, who follows the beverage industry for Salomon Brothers. To pull off his plan, Sinclair is going to have to coax all the ability, agility, and pure guts out of people like Clark and Saxena in England and Rubiralta in Mexico. He clearly has staked not only his career but a big chunk of Pepsi's future profits on it. ''It's a bet, but we think it's a damn good bet,'' Sinclair says. Michael Jordan, one of his former PepsiCo bosses and now CEO of Westinghouse, believes that if Sinclair makes the numbers, he is a prime contender to succeed Wayne Calloway in seven years. ''Getting the real profit return from the international soft drink investment is Chris's great challenge,'' Jordan says. Regarding that 6.6% profit margin, Sinclair says, ''If we can't get over 10% in the next couple of years, we're nuts. There's no reason that this can't be a 15% margin business long term.'' There's also no reason to expect smooth sailing. The U.S. cola wars, notorious for their price slashing, are a reasonable model for Pepsi's international fight, Sinclair reckons. That would imply that if Pepsi's foreign margins go up, Coke's will come down, leveling the playing field, particularly in developed markets such as Britain, Spain, and Australia. As in the U.S., the smart player innovates and delivers value, making products ever more affordable. Volume goes up. You earn a decent living. You fight harder and become smarter. The war rages on and on and on.
BOX: GO AFTER NO. 1
-- Set a winner's growth goals. If you act like No. 2, you'll always be No. 2. -- Hire people who love change and thrive on risk-taking. -- Practice competitive jujitsu. Upset the rules of the marketplace to throw a rival off balance. -- Always anticipate the response you may provoke. What if the competitor comes back hitting harder? -- Execution of a plan often drives success more than marketing. Control & distribution so you serve customers directly.
CHART: NOT AVAILABLE CREDIT: FORTUNE CHART CAPTION: PepsiCo 1993 operating profits Coca-Cola 1993 operating profits The Pepsi Challenge: to get its paltry profits from international beverages anywhere near Coke's.