Crunch time: what now as PepsiCo loses fizz?

She pledged to ‘snackify drinks and drinkify snacks’ in 2010, as part of a push into nutritional products. Then, last week, PepsiCo CEO Indra Nooyi said she’d had a rethink. PepsiCo is turning back to what it does best: sugary drinks and salty snacks.

PepsiCo will axe 8,700 jobs globally and invest $500m on 12 ‘megabrands’ - primarily US soft drinks and snacks - in 2012 in a bid to stave off rising costs and stiffening competition. The key reasons are clear: the company’s been losing share to Coca-Cola for years in the US, by far its biggest market, while growth is flatlining in the US snacks market, of which it commands a 58.3% share [Mintel 52 w/e 31 December].

“The biggest struggle is in the American beverage industry,” says Marcia Mogelonsky, a global food analyst at Mintel. And it’s a fight PepsiCo has been losing. It ceded leadership in the US to Coca-Cola back in 2008 and last year Diet Coke stole Pepsi Cola’s spot as the second biggest-selling pop in the States. “PepsiCo is looking to get back as number one or at least on an equal footing with Coca-Cola.”

The UK performance is decidedly fizzier, of course. Working with bottlers Britvic, Pepsi Cola sales grew an impressive 10.1% last year, with volumes up 3% [Nielsen 52 w/3 24 December 2011]. And this week, prime minister David Cameron was on hand to open yet another new facility to meet demand for its fast-growing Quaker Oats So Simple cereal, up 19%, while Walkers Crinkles racked up £30m in its first year alone, helping to compensate for a flat performance by the core brand [Nielsen 52 w/e 1 Oct 2011].

So what are the lessons to be learned? Number one: healthy snacks don’t necessarily mean healthy sales. as ed After Cocan to have turned this around in the UK, as

But as Jamie Oliver has discovered, health is an even harder proposition to sell Stateside, and Pepsi’s healthier crisps are in freefall. Sales of Baked! Lay’s and Baked! Ruffles fell 20.9% and 14.2% respectively [Mintel 52 w/e 31 Dec 2011]. “They might own the world’s biggest snack brand but they are up against the thought police who are telling them they can’t let kids eat their products,” says Mogelonsky. “But introducing food that’s healthy and that people actually want to eat are two notions that are very hard to put into one product.”

‘Absolutely furious’
Performances like that won’t satisfy investors’ appetites for a quick profit, either. “If I were a Pepsi shareholder I’d be absolutely furious about them pursuing healthy snacks,” says the CEO of one Walkers rival.

“There are very few healthy snacks that taste right. Pepsi is an absolutely superb business and they have built an incredibly powerful and profitable position in the UK. They dominate the market, kill the competition and make huge profits. But if I were a shareholder I would want them to put their money into what they do best.”

Pepsi’s eye has been taken off the ball, agrees Claire Nuttall, senior partner at branding agency 1HQ, which lists Coca-Cola and Unilever among its clients. “It’s a classic mistake when pursuing a new growth area and needs to be realigned. This is reflected in their plans. Many companies have announced a focus on their core brands, including Coke. Market conditions are tough. Budgets won’t stretch to doing everything.”

Despite its overall strong showing in the UK, marginal or failing brands such as Baked! or Walkers Red Sky - which fell out of the top 20 bestselling bagged snacks last year [Nielsen] - face an uncertain future. “Situations like these are often a good time to review to ensure the basics aren’t being overlooked,” adds Nuttall. “If at this point there seems over-proliferation we could see casualties.”

Of course PepsiCo hopes the true casualties of its brand investment will be rivals - primarily Coke, but also salty snacks newcomer Kellogg’s (thanks to its $2.7bn buyout of P&G’s Pringles brand this week) and United Biscuits here in the UK. “If I were UB I would be quaking in my boots,” says the Walkers rival. Acquisitions could also be on the cards to achieve growth in the US, he adds. “The lesson from the UK is basically - buy up everything you can and then make it really hard for anyone else to make any money. The places they can’t make it work - Germany, for example - are the places they can’t buy up all their rivals. They’d have loved to have bought Pringles had they been allowed to.”

The US snack market is seen as ripe for consolidation because it comprises a number of smaller players that enjoy significant regional sales, such as Massachusetts’ Cape Cod brand. But adds it would need to tread carefully on the acquisitions trail.

“There is a lot of support for the little guy in America,” she says. “People are passionate about their snacks and there could be a big brouhaha when they realise a big multinational has bought their favourite brand.”