Corporate Profile: The Pepsi regeneration

Pepsi, perennial runner-up in the the wars of the cola world, pours more resources into the snack-food market, the boss takes a $1m- a- year paycut to work for just a dollar, and employees thank Pepsi it's Friday because then their weekend starts at lunchtime - all to fizz up the company's finances and push through a revolutionary new way of co- ordinated, worker-friendly retailing that's beginning to pay off

Fact File

Market capitalisation: $57.97bn (pounds 37bn)

Revenue in 1998: $22.3bn

Operating profit in 1998: $2.58bn

Main businesses: Frito-Lay, the salty-snack company, has grown phenomenally in recent years and now accounts for two-thirds of PepsiCo's revenues. Britain is among the most important foreign markets for Frito-Lay. Its brands here include Walkers and Doritos. PepsiCo's beverage business includes Pepsi Cola, Pepsi One, Tropicana Orange Juice, Aquafina, Seven Up (outside US), Lipton Teas (partnership), Mountain Dew and Frappucino (partnership with Starbucks).

Key executives: Roger Enrico, CEO and chairman of PepsiCo. Steven Reinemund, just appointed as president of PepsiCo. Currently CEO of Frito-Lay.

Workforce: 151,000

SOMETHING, YOU might imagine, is amiss over at PepsiCo headquarters in Purchase, New York, just north of the big city. It is Friday lunchtime and the workers appear to have knocked off already. "We have special Friday hours in summer," a spokesman shyly volunteers. Then there is the news that Roger Enrico, the boss of Pepsi, is awarding himself just $1 in annual salary for the second year in a row.

But do not take either of these corporate eccentricities as symptoms of desperation. While it may be true Pepsi still cannot shake its image as perennial runner-up to the mighty Coca-Cola in Atlanta, Georgia, times at the company are anything but desperate.

Wherever its executives found themselves on Friday - on the beach or the golf courses - they were surely wearing grins that almost spelt smug.

Fresh evidence that PepsiCo is actually doing rather nicely will come this morning with the release, just before the opening bell on Wall Street, of its second quarter figures. They are expected to show earnings of 29 cents a share before exceptional charges. While not spectacular, that is slightly above the 28 cents this time last year. And all sales volumes, in snacks and drinks, should be up also.

For once, the comparison with Coke is a rather happy one. Coke revealed last Thursday that its second quarter earnings had slumped 21 per cent compared with a year ago, thanks to economic reversals in international markets and, of course, by that little health-scare embarrassment in Belgium and France last month.

By the last count, Coke was forced to withdraw 17 million cases of its fizzy drink after at least 249 people in Belgium were sickened by it on 9 June. The cost of the recall has risen to $103m (pounds 60m).

Nobody at Pepsi is crowing at Coke's misfortune. "There but for the grace of God," might be the mantra along corporate corridors in Purchase. Nor is Pepsi expected to draw much benefit from the situation. "It is not in Pepsi's best interest to seek to take advantage," a report from Dun & Bradstreet noted. "Given the very strong market shares of Coca-Cola products in the key affected countries, Pepsi would have to boost sales and production tremendously to take a significant bite out of Coke's piece of the pie." In Belgium, Coke has 63.7 per cent of the cola market, Pepsi only 2.2 per cent.

While the hegemony of Coke will always be a galvanising factor for the folks at Pepsi - for every Pepsi drunk in the US, three Cokes are consumed (the worldwide ratio is one-to-five) - the reasons for the return of good cheer in Purchase are nearly all internal. And mostly they date from the arrival in the chairman's seat three years ago of Mr Enrico, a 28- year-veteran of the company, and to the restructuring he has overseen.

They also have less to do with the brown bubbly stuff than with crisps. Think PepsiCo and really you should think first of Frito-Lay. Since its merger with Pepsi all the way back in 1965, Dallas-based Frito-Lay, owner of the Dorito brand and, in Britain only, of Walkers crisps, has grown to the point today where it is the largest salty-snacks company in the world. More to the point, it now accounts for roughly two-thirds of PepsiCo's revenues. The best volume-growth numbers in the report due out today are likely to be for Frito-Lay sales in the US. They should be up 4 per cent.

Frito-Lay derives part of its power from an intensely efficient US distribution system that uses its own personnel and equipment to shift the product from the plant to the shelves in the supermarkets. There is also the seemingly endless potential for expansion with a food that consumers seem more and more to enjoy scoffing.

"We have a more than 50 per cent market share in the US and there is room to grow, especially internationally," said Frito-Lay Vice President, Lynn Markley. "People are beginning to snack more instead of having their old three squares a day." Coke has no snacks division. Mr Enrico, 54, revealed his $1-a-year wage packet to PepsiCo's workforce in a letter dated 2 March last year, redirecting the nearly $1m he would have received to the company's college scholarship fund for children of employees.

"My father worked on the front line all of his life - in an iron ore processing plant. I know what a difference he made," he says. "I also know how much it meant to him when I received a scholarship that enabled me to go to college." He is making the same gesture this year, though a substantial bonus and share package - worth $4.1m last year - will save him from the bread line.

Underpaid or overpaid, Mr Enrico has made his mark. Soon after being elevated to CEO in April 1996, he was faced with disaster abroad. Around the globe, associate bottling operations were going under and, most embarrassing of all, Pepsi's bottling partner in Venezuela performed a high-profile defection to Coca-Cola. Losses at Pepsi-Cola International - the soft drinks business outside North America - had reached $652m in 1995. Returning PCI to profit has been a first order of business.

Although the work is not over - PCI still lost $219m in 1998 - progress is being made. Drink volumes have been growing steadily in foreign markets, up 6 per cent last year. Indeed, in 1998 more Pepsi was sold internationally than inside the US for the first time.

But Mr Enrico took several other dramatic steps, all designed to simplify PepsiCo's mission and focus more clearly on sales of drinks and snacks. In 1997, he spun off the corporation's fast-food restaurant chains, Pizza Hut, Kentucky Fried Chicken and Taco Bell. Then last year, he similarly announced plans to shed Pepsi's own bottling operation, the Pepsi Bottling Group.

An initial public offer (IPO) was successfully completed in April, with 60 per cent of its shares sold to the public. Also, in 1998, Mr Enrico purchased the world's largest orange juice retailer, Tropicana, from Seagram for $3.3bn (PepsiCo's biggest acquisition). This opened another front in the war against Coca-Cola, owner of the number two juice brand, Minute Maid.

Under Mr Enrico, the strategy has been all about increasing volumes. Pepsi sales in recent weeks have been helped particularly worldwide by a tie-in with the latest Star Wars epic, Episode I: The Phantom Menace. Since the film's release, Pepsi has piggy-backed on the film's box-office success, for example with collectable beverage cans adorned with some of its characters.

Similar efforts are being put into vending sales, with the number of Pepsi machines on the US landscape boosted recently from 1 million to 1.4 million. Figures released by the advertising industry last week revealed that spending by Pepsi on US advertising in the first quarter exceeded Coke's budget for the first time since 1990. Much of that money was spent promoting Pepsi One, the company's latest response to Diet Coke.

With Frito-Lay, PepsiCo is also trying to perfect a retailing formula that it has dubbed "The Power of One". The concept is straightforward - to persuade supermarkets to stock PepsiCo snacks and drinks side by side on their shelves, or, at least, on opposite sides of the same shopping aisles.

When shoppers stock up on salty snacks, the logic goes, they will automatically think at the same time of buying drinks to quench the thirst that will follow. PepsiCo is fighting the campaign fully aware that its leverage over the supermarket chains is strong: with its beverage and drinks products combined, PepsiCo accounts for no less than 3 per cent of check-out sales in US supermarkets, compared with 1.8 per cent for Coke.

But catching up with Coke in US drinks volume will also mean doing better in so-called fountain sales - when cola is not poured from a can or a bottle but squirted from a gun. Fountain sales in fast-food chains account for a quarter of all cola drinks consumed in the US, and on this turf PepsiCo comes a very distant second to Coke. Its share of the fountain market in the US is 25 per cent to Coke's 65 per cent.

Lost to it, most importantly, are both McDonald's and Burger King (though Pepsi was a serious challenger when Burger King renegotiated fountain contracts earlier this year) as well as theme parks, like the Disney ones.

Mr Enrico, who had already suffered a heart attack before taking command at Pepsi, will one day retire. Just two weeks ago, the current CEO of Frito-Lay, Steven Reinemund, was named as PepsiCo's new president, fuelling speculation that he was being positioned as a likely successor to Mr Enrico.

But before the day comes when the latter decides to take more than just Friday afternoons off (and only in the summer) he will be looking to score one decisive goal in the century-old contest with Coca-Cola. Stealing a Disney or a McDonald's from the clutches of Atlanta would do very nicely.

A BOTTLED HISTORY

1898: North Carolina chemist named Caleb Bradham invents a brown concentrate that mixes with carbonated water to produce what is known today as Pepsi-Cola. Bradham begins selling his drink in direct competition with another similar beverage named Coca-Cola

1934: Pepsi-Cola sells its products internationally for the first time, beginning operations in Canada. International and domestic operations expand rapidly during the early 1950s

1948: Mountain Dew, still a favourite US soda beverage, is invented (Acquired by Pepsi in 1964)

1961: Frito-Lay is formed by the merger of the Frito Company and the H W Lay Corporation

1965: PepsiCo is created out of the merger of Pepsi-Cola, headed by Donald Kendall, and Frito-Lay, whose CEO is Herman Lay. The new company reports first-year sales of $510m and boasts a total of 19,000 employees

1970: PepsiCo sales pass the $1bn mark for the first time

1976: Pepsi introduces its most successful marketing campaign - the Pepsi Challenge. In blind-tasting sessions, consumers are asked to pick the cola they like best - it's Pepsi every time, of course

1991: PepsiCo profits exceed $1bn for the first time. Ray Charles fronts new commercials with the `Uh-Huh Girls'. Diet Pepsi gets the slogan: "You've Got the Right One, Baby, Uh-Huh!"

1994: A new brand of salty snack appears on British supermarket shelves - Doritos from PepsiCo

1996: Roger Enrico appointed CEO and Chairman

1997: PepsiCo spins off restaurant division - Pizza Hut, Taco Bell and KFC

1998: PepsiCo board agrees to IPO for Pepsi Bottling Group (completed in April 1999). Enrico asks for $1 as annual salary