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Muddled Mission

By Mel Duvall  |  Posted 2003-05-01 Print this article Print

The choice of a new generation is rife with options. Will Pepsi prove itself to be up to the challenge?

Muddled Mission">

Muddled Mission

Perhaps most representative of this foregone opportunity is that PepsiCo's topmost managers continue to issue mixed messages. For example, the company created the Business Solutions Group but didn't dismantle the technology management in each of the business units. Unit managers are compensated and rewarded for meeting financial goals of their divisions, not for how well or how often they cooperate with each other or with the shared services group.

On the flip side, the shared services group, according to several former PepsiCo technology leaders, often steamrolls business unit wishes. In turn, the business units have resisted change. It's been a bad dynamic, insiders say.

One former manager recalls how several business units had concluded after a technology evaluation that database software from NCR Corp.'s Teradata division was best for a large data warehouse project.

The Business Solutions Group, however, opted for IBM's database instead, in part because of an ongoing relationship with the vendor. The database was adequate and, as a longtime account of IBM's, PepsiCo gets rebates when it spends more than a set minimum on IBM products.

In this case, the give-back was $500,000, the manager says, adding that the money was split between the Business Solutions Group and Pepsi Bottling Group, which was the unit that initiated the data warehouse project.

"When they came up with a standard for the data warehouse, they never asked us for input," the manager says.

A shared services model demands that local executives give up authority. And no one likes that. At diversified companies, each historically independent business unit often contends that its unique needs make it impossible to share much technology with others, says Rudy Hirschheim, a professor of information systems at the University of Houston.

Texaco, which owned oil companies, gas stations and convenience stores when Hirschheim consulted there a few years ago, faced the same problem, he says.

"The corporate unit has a job to ensure commonality. The business units felt it would hamper them and that their own I.T. people know what's best," he says. "This is a common plague."

Indeed, Frito-Lay is now negotiating with vendors for a $100 million upgrade to its mobile systems. But rather than handheld devices similar to those chosen by the bottlers, Frito-Lay is leaning toward larger tablet computers.

It says its field team needs a bigger screen to make effective sales pitches. The four-inch screen of a handheld, the argument goes, can't depict the full glory of an in-store display of Frito-Lays chips, dips and accompanying promotional banners the way the 10-inch screen of a tablet computer can.

And because Frito-Lay products are located in several spots throughout a store—dips in the chip aisle but also in the condiment aisle, for example, or single-serve packs of peanuts in racks near cash registers—the company wants the handhelds to show merchandisers pictures of where everything is at each store. It'll help merchandisers refill shelves faster.

If Frito-Lay wants tablets, Symbol, for one, will sell it tablets. If it wants handhelds, that's OK too, says Barry Issberner, a marketing vice president at Symbol in Holtsville, N.Y. "I am willing to go however the customer wants me to," Issberner says. "But there are definitely cost impacts of that [buying different computers], that I have to pass on to the customer."

The brick buildings of the PepsiCo Business Solutions Group sit in Plano, across from a fenced field where four spotted horses grazed on a recent rainy afternoon. PepsiCo put the group on the Frito-Lay campus, hoping to build on that unit's past technology successes.

But because of its location, the Business Solutions Group almost immediately drew a reputation as biased toward Frito-Lay's systems and procedures. Most of the 2,300 staffers of the group come from Frito-Lay.

"There was a suspicion on the part of other companies that this [was] Frito-Lay pushing its systems down our throat," says one former technology manager. "As a result, the discussions would all be very nice. Everyone would nod their heads. But no one made a move."

Discord between the divisions and the Business Solutions Group has contributed to high turnover among technology managers at the business units (see "Org Chart: Popping The Top At Pepsi," p. 49).

Frequent changes in leadership can corrode even a strong technology foundation because there is little consistency or long-term thinking, says Jerry Luftman, executive director for the graduate information systems program at the Stevens Institute of Technology, in Hoboken, N.J.

"What PepsiCo is trying to do from a business point of view is right," says Luftman, who worked at IBM for 22 years, including as CIO. "But if you don't have the right leader and commitment, there's no way [its plans are] going to happen."

One setback for the corporate group happened after PepsiCo had spun out Pepsi Bottling Group in a March 1999 initial public offering.

At first, the Business Solutions Group held onto the bottler's information technology function. Later, just as leadership at the central group was changing, the bottler requested to take over its own technology "and they let them," according to a former manager. "They [Business Solutions Group] lost the opportunity" to control the information systems direction of a key Pepsi organization. "That was a huge loss."

Implementing enterprise systems across divisions, which is a PepsiCo goal, is as much a people issue as it is a technological one. Every time a new chief information officer comes in, bridges have to be built. That doesn't always happen. "It's a source of failure with a lot of organizations," Luftman says.

For years, PepsiCo has harbored the idea of having its products delivered to customers on one or two trucks. Frito-Lay chips, Quaker granola bars and oatmeal, Tropicana juices, Aquafina water and, of course, the high-fructose cash cow Pepsi-Cola would be packed together to arrive at a Wal-Mart or an Albertson's supermarket. A driver would unload the banquet, then, in some cases, arrange it all to PepsiCo's liking on store shelves.

Roger Enrico, chief executive from 1996 to 2001 and a 30-year PepsiCo veteran, called the concept "The Power of One." One company, one face to the customer.

It's true that PepsiCo marketers have achieved some cross-pollination aimed at Joe and Jane Consumer. Newspaper coupons offer deals on, for example, Tropicana orange juice when buying Quaker oatmeal. In January, for the first time ever, Lay's potato chips and Pepsi-Cola appeared in the same television commercial.

But the hard part—selling and delivering groups of diverse PepsiCo products to retail stores—remains a dream. The technology to make it happen isn't there. PepsiCo actually runs on the power of five: five powerful businesses—Frito-Lay, Quaker, Pepsi, Tropicana and the bottlers—doing their own thing.

Today, four or more trucks with items from Frito-Lay, Quaker, Pepsi and Tropicana all rumble up to a store's loading dock on different schedules.

Quaker granola bars are now part of Frito-Lay's delivery network and Quaker, Frito-Lay and Tropicana share 20 distribution centers, warehouses and offices. Quaker and Tropicana had combined some of their sales forces as of February 2002. But most facilities, by far, still belong to individual businesses. Frito-Lay, for example, operates 50 factories and 2,000 warehouses, distribution centers and offices in North America. Pepsi runs two syrup plants and seven warehouses. The Big Three bottlers run 126 separate plants.

"Can you imagine if they truly executed on the Power of One?" asks one of the former executives. "How the heck do these organizations continue to meander around?"

With the Power of One stalled, Reinemund in February said PepsiCo would try again to change. A so-called business process optimization plan calls for the divisions to copy much of the computer systems of Frito-Lay and some core management techniques from Quaker.

Reinemund has put Nooyi in charge of the effort. She helped plan the $3.3 billion acquisition of Tropicana in 1998 and the $14 billion deal to buy Quaker Oats in 2001.

Pain is the impetus for the new plan. The company's gross margin of profit has sunk from 58 cents on the dollar in 1998 to 54 cents last year. In effect, the company would have captured $1 billion of additional gross profit last year, if it had maintained its 1998 margin.

Both its guzzle and its crunch businesses are getting hit.

"In the beverage business, they're losing momentum to Coke, and in snacks, consumers are putting a lot of pressure on pricing," says Caroline Levy, an analyst at UBS Warburg in New York.

Margins are getting squeezed in the snack business as private-label competitors undercut Frito-Lay's pricing. Plus, as Frito-Lay gets into healthier snacks such as baked chips and rice cakes, it faces pressure from packaged food giants Kraft and General Mills.

Sales growth at Frito-Lay increased less than 5% last year, down from roughly 7% in 2001 and more than 11% in 2000. Operating profits grew 8% in 2002, down from 10% in 2001.

Pepsi's soda market share dipped slightly—by less than half of 1%—last year to about 31%, compared with Coca-Cola's 44%. Pepsi blamed the slowdown on poor sales of its new Pepsi Blue berry cola, while the new Vanilla Coke sold well. Coca-Cola has meanwhile promised an onslaught of new flavors and packaging this year, vowing to extend its lead.

Pepsi Bottling Group reported that sales volume was down 3% for the first quarter, as a brutal winter in the northeast kept too many soda drinkers away from stores and restaurants. PepsiAmericas cut 530 of its 10,500 U.S. jobs in March as sales dropped 7% for the quarter.

With sales growth slipping, PepsiCo must find ways to bolster margins, Levy says.

Early last spring, PepsiCo quietly invited technology integrators, including Electronic Data Systems, IBM and India-based Infosys, to bid on a contract to take over much of the work of the Business Solutions Group. The contract, valued at $100 million to $300 million over three to five years, according to one industry estimate, would have encompassed data center management, help desk, and network and desktop support.

It's unclear why, and officials declined to talk about it, but PepsiCo nixed outsourcing and instead has decided to try to fix itself.

Contributing Editor
Mel Duvall is a veteran business and technology journalist, having written for a variety of daily newspapers and magazines for 17 years. Most recently he was the Business Commerce Editor for Interactive Week, and previously served as a senior business writer for The Financial Post.

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