Beverage Industry

Driven to succeed

January 1, 2005

Driven to succeed
By SARAH THEODORE
In the fast-paced world of soft drinks, The Pepsi Bottling Group has gained respect — and its designation as Beverage Industry’s Distributor of the Year — for staying a step ahead in innovation and marketplace execution. PBG is the world’s largest bottler and distributor of Pepsi-Cola products. It operates in seven countries, and with more than half of Pepsi-Cola beverage sales in North America and 40 percent worldwide, the company has more than $10 billion in annual sales.  
During the past year, PBG rolled out a number of innovative new products and packages, helping it grow volumes and revenues, acquired new bottling operations in the United States and abroad, and opened its first new U.S. production facility in several years.
Yet for all its products and geography, PBG prides itself on operating market by market, customer by customer. The key, says John Cahill, chief executive officer of the Somers, N.Y.-based company, is staying focused on the front line.
“We strive for simplicity, and it’s critical for the person on the front line, whether it’s the salesperson, the merchandiser or the person working in the delivery warehouse, to understand specifically what their role is and what they’re held accountable for,” he says.
“I think our people are driven for results,” he says. “We sell more than a hundred million 8-ounce servings of our products a day, in hundreds of transactions per day with our customers. That can yield enormous complexities with the portfolio of brands and packages we have, and the hundreds of thousands of customers we have across the United States. It either can be a burden or a competitive asset, and what we strive to do is make that an asset.”
During the past three years, the company has invested heavily in sales training, and enhanced its First Focus program, a video-based approach to communicating with employees across the country.
“Every four weeks, we send a communication out to our front line to say ‘during the next period, here are our objectives, and here are the products, the packages and the approaches we have to be able to reach those objectives," Cahill says.
“First Focus is a very simple concept that has an incredible amount of power,” comments Kevin Cox, PBG’s executive vice president. “To have the top of the house say to the front line, ‘I know you’re busy, you’ve got a lot going on… here’s what we think the three or four most important priorities are going to be for the coming period.’ We work really hard to make a complicated and very dynamic business as simple and clear and focused as we can.”
In the palm of your hand
Training and technology have gone hand in hand at PBG, which is making full use of handheld devices to enhance sales and communication.
“Our ability to communicate via the handheld device to our salespeople is a critical way to interact with them. It’s very powerful and very necessary as a DSD company,” Cahill says.
Gary Wandschneider, senior vice president of operations, says the handhelds solved two issues for the company — they helped reduce out-of-stocks, which are one of retailers’ biggest concerns, and gave employees greater ability to sell and service accounts.
“There are two things you want to do in a direct-store-delivery system,” Wandschneider says. “You want a good in-store order and then leverage the in-store presence to drive an even better order.”
Basic use of a handheld device eliminates paper orders, but PBG has been working to integrate more advanced “knowledge management” into the technology so salespeople can know with the push of a button what they are expected to accomplish each day at each account. Information currently being rolled into the technology includes store-specific sales histories, selling initiatives, information on customer promotional agreements, and adjustments to be made for new products, limited-time offerings or seasonal changes and holidays.
“We are growing largely through innovation, which means we’re moving into product categories that we weren’t in a year ago, line extensions we weren’t doing, package changes that weren’t happening,” Cox says. “The number of SKUs has grown incredibly, yet ultimately it’s that person who is putting that product in a grocery store or convenience store who has to figure it out. That’s the reason for the handheld.
“You can look at it on the one hand as an inventory control and invoicing system. On the other hand, you can say that’s the key to having us take a giant step forward in how much we can handle because of tools that are that powerful.”
The full slate of handheld capabilities is not yet available in all of PBG’s markets, but is in its final test phase in select markets such as Florida, and is planned for the rest of the company’s territories.
Limited-time offerings
Giving PBG’s sales force the tools to manage products on the shelf has become even more important during the past year or so, as the company has made innovation in products and packaging one of its hallmarks. The bottler has a close relationship with PepsiCo, and both companies have been determined to keep up with consumers’ ever-increasing desire for product variety. Last year, in particular, the Pepsi system introduced several limited-time offerings such as Mountain Dew Live Wire and Pitch Black, and Pepsi Holiday Spice.
“If you’re constantly innovating and just adding more SKUs, you’re adding complexity and potentially cost that might or might not be sustainable over time,” says Eric Foss, president of PBG North America, explaining the appeal of the seasonal products. “The beauty of this limited-time offering that we’ve used very effectively is that it allows us to take advantage of the consumer’s appetite for variety and innovation without the cost added to something that might not be sustainable.
“It tends to be more incremental because I’m not cannibalizing any of my own existing space and I get the beauty of a test market scenario with consumers to figure out how much repeat I can drive and therefore how much staying power I have,” he says, pointing out that some of the short-term products have potential to be long-term offerings.
Foss puts the Pepsi product portfolio at the top of the list of assets for PBG, and says the bottler has four distinct product platforms from which to innovate: Pepsi, Sierra Mist, Aquafina and Mountain Dew.
“Dew is a great trademark to extend because you have this heavy, loyal user base but very low household penetration,” he says. “That’s probably the best brand within liquid refreshment beverages today in which to innovate because you bring more users into the franchise. That tends not to be the case when you innovate on colas or other CSDs. You can really extend this thing multiple times and have it be incremental.”
Another new product that has been particularly successful for the bottler was last year’s rollout of Tropicana juice drinks. The new brand achieved sales of nearly 16 million cases in its first year.
PBG often works with PepsiCo to determine consumer needs and product potential. “PepsiCo has great marketers,” Cahill says. “They are in touch with what the trends are. But they will also tell you that some of their best ideas, historically, have come from bottlers. We are on the front line, we see what’s going on.
“More specifically, because we are the largest Pepsi bottler in the United States, we do interact with PepsiCo very frequently. Virtually every week we have discussions with them about upcoming events, products, packages, trends in the marketplace, customer ideas. It’s always back and forth, and I think it works quite well from that respect.”
PBG’s close proximity to PepsiCo also has been beneficial in developing talent within the organization. In addition to each of their own intensive employee management programs, the two companies often exchange talent to provide broader knowledge and experience, Cox says.
“I think the chance to leverage PepsiCo as a source of talent, and their [ability] to leverage us as a source of operating strength is pretty good. There aren’t a lot of companies with that kind of advantage and ability to tap one another’s potential in a structured way,” he says.
Managing mix
Having the right product and packaging mix is key to PBG’s success, not just during the past year, but for the past 24 consecutive quarters that it has enjoyed net revenue-per-case growth. Volume growth, says Cahill, is critical for the company, but becoming experts in revenue management was an essential part of its overall achievement.
“Revenue management is not an art or a science. It’s really both,” he says. “This is not, by any stretch, merely a matter of pricing. The art element is in managing mix, which should be beneficial to both the customer and the bottler.”
“One of the things we did at the time of the IPO [in 1999] was shift the mindset away from pricing off of the competition,” Foss explains. “We have a principle we talk about a lot, which is all of the pricing starts and ends with the consumer.”
New package sizes and configurations have greater perceived value to consumers, and create opportunities to fine-tune the package mix at retail. An example is the recently introduced 8-ounce six-pack, which appeals to light users and those looking for portion control. For the bottler, it offered improved revenue on cans.
“That’s an example of something that had great consumer appeal, it improved our customers’ trade margins, and helped on the bottling P&L,” Foss says.
Other new packages from PBG include the Fridge Mate multipack, 12-ounce PET multipacks, and a 14-ounce PET bottle.  
In addition, the company tries to manage the “bandwidth” between regular pricing and promotional pricing — having too big a difference between the two can distort the value of products for consumers.
“We try to manage that gap to a reasonable level,” Foss says. “It allows us to deliver more consistent value throughout the year.”
In addition to carbonated soft drinks, PBG sees its position in the bottled water market as one of its strongest opportunities. Aquafina is the No. 1 brand of convenience still water in the United States, and the fastest-growing part of PBG’s business.
“We continue to feel that, in the water category, the game will be won or lost on the ability to build a brand,” Foss says. “And we continue to be more and more convinced that direct-store -delivered waters are the key to success for retailers.”
As household penetration of bottled water grows, he explains, water will become a destination category at retail. “It’s going to be featured more frequently, and that’s going to put a premium on merchandising intensity, and that plays to DSD’s strengths,” Foss says.  
People power
When it comes to other PBG strengths, the one thing all of PBG’s management points to is its people. “I think this is a demanding industry and our folks are as goal-oriented and as driven as you could imagine,” Cox says. “It’s always amazing to me that I can go to Moscow [for instance] and find in a different country, almost half-way around the world, that Pepsi people over there still have that DNA.”
The company made several acquisitions this year, including bottlers in Maine, Canada and Mexico, which add scale to its operations, provide alignment in certain territories, and Cahill says, bring new people into the fold. “It creates opportunities for our own people to grow… and brings new people into our organization,” he says. “Many of the acquired bottlers have tremendous people with great skills and backgrounds who are happy to be with PBG and grow with us.”
Looking ahead into 2005, Cahill says the industry can expect to see the company focus on even more ambitious use of technology, and more on new products and packages. “I think you’ll see us continue to build our capability and the capability of our people,” he says. “You’ll see us expand our portfolio of products with PepsiCo because consumers are increasingly desirous of variety and we intend to provide that to them. I think you can look at us collectively as being leaders in innovation.” BI
At a glance
Pepsi Bottling Group

Headquarters
: Somers, N.Y.
Incorporated: January 1999; went public March 1999 in one of the largest public offerings in the history of the New York Stock Exchange
Countries of operation: The United States, Canada, Mexico, Greece, Russia, Spain and Turkey
Plants: 45 in the United States, and 97 worldwide
Distribution centers: 253 in the United States, and 513 worldwide
Employees: 66,000 worldwide
Brands: Pepsi, Diet Pepsi, Pepsi Vanilla, Diet Pepsi Vanilla, Pepsi Twist, Diet Pepsi Twist, Wild Cherry Pepsi, Diet Wild Cherry Pepsi, Pepsi One, Pepsi Blue, Mountain Dew, Diet Mountain Dew, Mountain Dew Code Red, Diet Mountain Dew Code Red, Mountain Dew AMP, Sierra Mist, Sierra Mist Free, Mug Root Beer, Diet Mug Root Beer, Lipton Iced Tea, Lipton Brisk, Tropicana juice drinks, Starbucks Frappuccino, Starbucks Double-shot, SoBe fruit drinks and teas, Dole single-serve juices and blends, and Aquafina