Knocking it out of the Park

May 1, 2004
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Knocking it out of the Park

PepsiAmericas’ development has been one of intense change and consolidation on many fronts — and across many borders. Much of the change began with the merger of Pepsi Americas and Whitman in 2000, when the third-largest bottler in the Pepsi system merged with the second-largest bottler. Operating in 18 states, the combined business accounts for nearly 19 percent of all Pepsi-Cola products sold in the U.S. And with operations in nine markets in the Caribbean and Central Europe, the combined market share makes the company the second-largest anchor bottler in the Pepsi system.
“After the merger, we needed to integrate three separate companies into one cohesive business,” says Robert C. Pohlad, chairman and chief executive officer. “It involved integrating strategies, systems and culture. In 2003 our hard work paid off and we began to see positive results from a cost, pricing, volume mix and systems perspective. Everything began to click.”
According to Ken Keiser, president and chief operating officer, the company is on its way to achieving its vision of becoming a premier bottling business.
“We want to make sure we’re returning shareholder value as well as improving return on invested capital,” says Keiser.
There are clear signs that PepsiAmericas is on that path. In 2003, the company grew earnings per share by 22.5 percent and improved return on invested capital by 80 basis points to 7.0 percent. 2003 also marked the year that PepsiAmericas turned losses into profits in its international businesses.
Profiting Overseas
“The goal in 2003 was to break even internationally,” says Mike Durkin, chief financial officer. “We not only broke even, but we turned a profit. Going forward, we’ll continue to manage our costs and increase efficiencies.”
Pohlad attributes the success in the company’s international businesses to tighter operating structures and a sharp focus on profitability. “After losing nearly $30 million three years ago,” Pohlad says. “Central Europe and the Caribbean contributed to the company’s operating income growth in 2003.
“We will continue to improve our international business’ performance through mix management and increased consumer relevance,” Pohlad says. “We want to capitalize on their unique consumption trends. For example, in the United States, over 90 percent of our volume is from CSDs, with the balance coming from water, juice and other non-carbs. By contrast, the water category accounts for approximately 28 percent of Central Europe’s volume. We’ll continue to build CSD volume overseas while looking at other categories to drive growth.”
Durkin says that building its international business involves focusing on the top-line and maintaining a cost structure that fits within the business environment. He cites higher sugar prices in the European Union and improvement in gross domestic product as examples of variables that can have an effect on business in that part of the world.
In the Caribbean, Pepsi-Americas has used innovative partnerships to build scale. “In 2003, we partnered with Frito-Lay to bundle soda and snack sales in Trinidad,” says Keiser. “Our customers got more efficient deliveries and we boosted the size of our average invoice.”
Looking into the future, the company wants to change its profile, and one way to enhance its current position is to expand into other categories, according to Keiser.
The Midwest and Beyond
At home, the bottler serves markets in what is traditionally called the “Pepsi heartland” because of its high-share levels. It’s an area of the country that Jim Nolan, executive vice president of U.S. operations, describes as a triangle that includes markets from Cleveland to Fargo to New Orleans.
“More than 85 percent of PepsiAmericas’ business is done within this market area,” Nolan says.
“The domestic business is by far our biggest contributor to the overall numbers whether it’s revenue or profit,” says Durkin. “In 2003, U.S. net sales reached more than $2.7 billion.”
Brands bottled by PepsiAmericas under licenses with PepsiCo Inc. or its joint ventures accounted for more than 90 percent of PepsiAmericas’ total U.S. volume in 2003. And domestic product and package introductions, such as Pepsi Vanilla, Mountain Dew LiveWire, FridgeMate and 8-ounce multi-can packs, helped to drive consumer interest and incremental demand for Pepsi products.
“We have a strong relationship with PepsiCo,” says Pohlad, “and domestically, we have a collaborative marketing relationship with Pepsi-Cola North America. Their role is to create demand and our role is to fulfill it.”
However, the delineation of responsibilities is not as clear-cut as one might think, according to Nolan. While a bottler’s duties may appear obvious, the collaborative nature of the relationship between the two companies is less clear. The partnership results in equal efforts in areas such as promotion, selling and manufacturing.
“We call on customers together depending on the size of the account,” he explains. “We provide input relative to marketing and promotional programming, and we partner to reach the marketplaces in a collaborative fashion.”
The bottler’s employees are expected to be specialists in the markets the company serves. Not only is staying on top of demographic trends a high priority, but so is maintaining familiarity with psychographic trends.
“The company’s culture is built on accountability and recognition, which our organization grasps,” says Anne Sample, senior vice president of human resources. “There’s energy and passion around what we do. There’s tremendous integrity and teamwork. People in our organization know what’s expected of them and what our standards are. They get what we’re trying to accomplish and where we’re headed. We all feel good about it.”
Coming together Consolidation is an all-too-familiar discussion in the beverage industry. PepsiAmericas’ own experience with consolidation has taught it valuable lessons about the changing beverage business environment. “There are a few different ways to do it,” says Pohlad. “If you’re really clear and really knowledgeable about what needs to be changed immediately, do it. Otherwise, take a step back to be objective and determine if you really know, because in any organization your effectiveness is determined by listening and trying to understand before making judgments and taking actions. It is not always the way you believe as an outsider. The people who are there have a tremendous amount of knowledge of the way things work, what has been successful and what hasn’t been successful. “Have patience because you will arrive at the right answers if you don’t force things,” he continues. “The company’s mentality is ‘let’s use this experience [of the PepsiAmericas team] to figure out what those opportunities are for the future.’ We’ve worked hard for our success and we don’t intend to lose our momentum.”
Stateside Recharge
After the merger in 2000, the process of integration gave way to strategic planning and implementation. In 2003, the company’s U.S. operations were consolidated under Nolan. After some painful cost reductions and a structural realignment in the early part of 2003, the business picked up steam in the second half of the year.
“We took a slow start and turned it into a wave of momentum,” says Nolan. “We ended the year strong and turned in a very good first quarter in 2004. Just as important, every business unit manager in the company is clear about our priorities and focused on delivering results.”
It may have taken a couple of years for a common culture to take hold, but the result is a unified organization with a clear purpose.
The Role of Cost Consolidation
Creating efficiencies to improve operating performance is a common theme across the organization.
On the supply chain side of PepsiAmericas’ operation, the last three years have brought incredible change and operating improvements. With 28 manufacturing plants in nine countries, and more than 100 distribution facilities worldwide, continuity is crucial to controlling quality, maintaining efficiencies and controlling costs.
While the company is always looking for ways to streamline operations, there are restrictions in the traditional supply chain, according to Jay Hulbert, senior vice president of worldwide supply chain.
Balancing cost effectiveness and customer responsiveness is a role Hulbert knows well. “It’s one thing to be low-cost; it’s quite another to be low-cost and responsive. Often in order to be responsive you have to add cost, knowing that somewhere down the profit chain there’s a better profit picture for us.”
For the past two years, PepsiAmericas’ supply chain focus has been on consolidating production operations and adding strategic capacity. More recently, the team’s been focused on driving down transportation costs.
“Previously, transportation from the bottling plants to distribution centers was handled by common carriers,” Hulbert explains. “Today, the company has migrated to a mix of company-owned vehicles and common carriers to handle the workload.”
The introduction of new software has helped lower transportation costs by eliminating empty miles and leveraging freight rates, according to Hulbert. “Being able to cut down the vendor base – eliminate the middle man – and take on some more private fleet has allowed us to become more efficient,” he adds.
Future supply chain initiatives include bringing more of the manufacturing activities in house.
The financial side of the business also has a strategy in place for future success. PepsiAmericas’ established a cost steering committee that focuses on two- to five-year goals. Additionally, the company formed a cost productivity team that executes short-term as well as high-level strategy relating to the entire cost system.
“We’ve done a lot of heavy lifting but it’s not over,” Durkin says. “We’re doing things to manage our costs and keep them relatively low. We went from 6.2 percent return on invested capital in 2002 to 7 percent last year. Our goal is to add 30 to 50 basis points every year with the focus on profitability.”
Making It in the Market
As PepsiAmericas continues its development, growing volume and maintaining pricing discipline will continue to be key performance contributors. The company has definite plans for both.
Late last year, marketing programs helped concentrate sales in the company’s most profitable package – single serve. With a marketing calendar that emphasizes consumer value and consumption occasions, PepsiAmericas has been able to reverse a trend of a declining 20-ounce business.
The company is also focused on pricing discipline and consumer value, both important aspects of beverage sales and marketing. According to Nolan, PepsiAmericas has been successful in ensuring that proper pricing relationships are maintained in all their markets.
Of course a successful beverage company never takes its eye off its core brands – for PepsiAmericas, that’s Pepsi and Mountain Dew.
“We want to stay really focused on those brands that we feel are either large in scale or growth categories,” Nolan says. In 2004, nearly every marketing promotion will be tied to one of the company’s premier trademarks.
“At the end of the day, the Pepsi and Dew trademarks account for nearly 80 percent of our domestic sales volume,” Nolan explains. “We’re going to continue to support those brands with robust promotion calendars and the marketing muscle of the Pepsi system.”
Another priority for the company is winning with the right customer base. “There’s no question that our customer base has consolidated and that some of these customers are better positioned than others,” Nolan says. “We want to make sure that we’re making the right bets and putting our resources up against those customers that are going to deliver growth in the future.”
PepsiAmericas markets
United States Minnesota North Dakota South Dakota Wisconsin Iowa Illinois Michigan Indiana Ohio Kentucky Kansas Louisiana Tennessee Alabama Mississippi Texas Missouri
Arkansas
Central Europe Poland Hungary Czech Republic Republic of Slovakia

Caribbean
Puerto Rico Jamaica Barbados Bahamas Trinidad and Tobago
Change Fosters Growth
One way PepsiAmericas is ensuring that both large and small customers get the service they need is through the company’s biggest capital investment – NextGen.
In 2001, PepsiAmericas began converting its conventional route sales system to a pre-sell/tel-sell selling and delivery model. Using state-of-the-art handheld technology, account sales managers are now better positioned to meet customer needs and manage the massive SKU proliferation, while tel-sell agents reach out to lower-volume customers with the same level of support.
“We’re in the final stages of completing the rollout that started three years ago,” Keiser says.
A big piece of the NextGen initiative was realized in 2003, when the company opened a consolidated call center in Fargo, N.D. When it’s fully operational later this year, the call center will link 50,000 customers to 150 sales support agents using state-of-the-art customer relationship software. All 13 U.S. divisions will have some portion of their accounts being serviced out of the tel-sell center.
“Our decision to build the call center was not about just accepting orders,” Keiser explains. “This was about maximizing selling and distribution opportunities. We have highly trained agents who are focused on selling to our customers. They have access to recent order history, gaps in product portfolios and promotional items, which improve our customers’ sales as well as ours.”
Additionally, Keiser says the decision to segment lower volume customers as a tel-sell priority has boosted PepsiAmericas' sales volume. And Pohlad agrees: “The significant investment in time and money is reducing selling and delivery costs, and helping support mix management strategies.”
Furthermore, the technology allows the company to handle the increasing number of products being offered, while anticipating future needs with a sophisticated system.
“It’s pretty simple: Everything we do starts and ends with the customer,” Durkin says.
Out with the Old
The emergence of large strategic retail customers has created fewer decision-making points in both the bottling business and, ultimately, for consumers. It also creates an interesting balancing challenge for manufacturers considering the local, regional and national aspects of their business.
And consolidation isn’t the only change in the beverage business that is affecting PepsiAmericas' outlook on the industry going forward. The proliferation of brands and packaging in the beverage industry has required that PepsiAmericas take a different approach to meeting customers’ needs.
“We were a soft drink company; today we are a beverage company,” Keiser says. “Our business has reflected those kinds of changes whether it’s our distribution system, warehousing system, selling system, or how we talk to customers about their expectations.”
Consumer attention to health and wellness are also playing a big role in the changing beverage environment. PepsiAmericas’ water and ready-to-drink tea businesses have capitalized on this shift in consumer preference. Nolan predicts this trend will continue as more education about maintaining balanced lifestyles hits mainstream markets and more beverage options to support that goal are available on the store shelves.
PepsiAmericas not only manufactures and delivers core Pepsi products and brands such as SoBe and Tropicana, but also serves as a front-end contributor to PepsiCo’s beverage innovation process. Nolan says as ideas are generated by Pepsi-Cola North America, PepsiAmericas and Pepsi Bottling Group, among others, are brought into the process of introducing new products and packaging.
“We get in on the early stages of the process and we collaborate on packages,” Nolan says. “We talk about brand extensions, diet offerings and promotional approaches.”
Eight-ounce cans were one of the packaging innovations introduced in 2003 among the cola companies, which Nolan says is reflective of lifestyle trends. The way people live will dictate future consumption, and, ultimately, packaging trends, he adds.
“The goal is how to anticipate a lifestyle trend: is it multipack vs. single-serve from a consumption standpoint?” Nolan says. “Is it just size, or is it ergonomic qualities to packaging?”
Among the new products introduced in the Pepsi system, LiveWire rolled out last summer and appeared on store shelves in most markets from Memorial Day to Labor Day. Additionally, to test the popularity of the new orange-flavored Mountain Dew brand extension, markets such as Chicago and Cincinnati kept the product in stores after the three-month introduction period. The decision to keep the product on the shelf was part of PepsiAmericas’ long-term strategy, and it worked with PepsiCo on testing to compare sales between in-and-out and extended-exposure markets.
This year, PepsiAmericas will make, sell and distribute Pepsi Edge, the mid-calorie cola soon to be on store shelves.
While mid-calorie colas are unlikely to create a whole new category in the beverage marketplace, Nolan confirms that the soft drink industry has picked up on consumer demand for a middle-of-the-range sweetened soft drink.
“I think both cola companies are betting that the timing is right and people are convinced that if the right product shows up, and it’s mid-calorie, that the concept will reverberate,” he says.

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