508-054-1

Pepsis strategy to address changing consumer buying

behaviour: Would it succeed?
Consumers are increasingly looking to beverages to supplant food for a variety of caloric and
nutritional needs. 1
Randy Gier, chief consumer officer, Cadbury Schweppes Americas Beverages

PepsiCo, a $35 billion company 2 , and a world leader in convenient snacks, foods, and beverages,
owns some of the world's most popular brands, including Pepsi-Cola, Mountain Dew, Diet Pepsi,
Lays, Doritos, Tropicana, Gatorade, and Quaker Oats (Annexure I). The company saw a major
shift in consumer buying behavior in the late 1990s 3 . Consumer preferences around the world,
especially in developed nations, were shifting from regular snacks and beverages to health food.
The global beverage industry also witnessed a rise in functional drinks in the mid 2000s 4 , and new
entrants emerged in the market, catering to the various needs of the consumers.

With rise in health consciousness amongst its core consumers, PepsiCo set to expand its product range,
and launch new and healthy products to get a larger share of the market. In addition to this, PepsiCo started
to compete with new manufacturers by launching new innovative products, consisting of various healthy
ingredients and addressing the unfulfilled needs of the consumers. Though PepsiCo owned some of the
leading global brands in the food and beverage industry, including brands, which were as old as the
category they dominated 5 with the new launches, PepsiCo, like its new crop of competitors was treading
on un-chartered waters. Whether its new strategy of product innovation would succeed in the wake of
changing consumer tastes and stiff competition remains to be seen.

Rising health consciousness

According to the US Centre for Disease Control and Prevention, obesity has been rising at an alarming rate
in the United States 6 . By far, the highest proportions of overweight and obese consumers exist in the US,
which is approximately 65.8% 7 of the adult population, in the year 2004. Some of the European countries
are not far behind, especially Germany and UK with 54.2% 8 and 61.6% 9 consumers respectively being
obese in the year 2004.
Health experts believe that overeating, lack of physical activity, obese parents 10 ; social, environmental and
psychological factors such as dissatisfaction and stress are some of the major reasons behind the rise in
obesity. Experts opine that to some degree the food industry is also responsible for the rise in obesity. With
the rise in the obesity levels, consumers are concerned as obesity has been found to be one of the major
1 Kate and McArthur, Pepsi, Coke: We satisfy your 'need states', Advertising Age, November 27th 2006, page3
2 Ibid.
3 Wells and Melanie, Pepsi's New Challenge,

http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=8817726&site=ehost-live, January 20th 2003

4 Ibid.
5 Core Pepsi carbonated soft drink in the carbonated soft drink category.
6 Mohanty Dakshi, PepsiCos New Challenge: Transformation into a Health Food Company, Fast Food Retailing:

Emerging Trends, ICFAI Press

7 Ibid.
8 Ibid.
9 Ibid.
10 Studies have shown that 70% of the children whose parents are obese are found to be obese.

This Case was written by Rao P, Mulye A and Vasanthi V, IBS Research Center. It is intended to be used as the basis for
class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was
compiled from published sources.
2009, IBS Research Center.
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 508-054-1

causes of chronic diseases such as high blood pressure, type 2 diabetes 11 , arthritis, and certain types of
cancers. As a result of this rise concern amongst consumers, in 2006, the size of dieting products market
has touched $42 12 billion in the US, and is growing at a rate of about 3.5% 13 per year.

Growing concerns over health and obesity issues have prompted various food companies to change their
product offerings. The past years have witnessed many healthy servings in quick serve restaurants. Major
beverage companies like Coke, Pepsi and Cadbury Schweppes launched low calorie versions of their
popular brands to address the rising obesity concerns. The year 2004 saw a rise in the Atkins 14 low
carbohydrate/high-fat diet, Weight Watchers 15 , Lean Cuisine 16 , and Healthy Choice 17 diets. Nabisco 18 also
introduced low calorie/fat versions of some of its popular brands. Coca-cola too launched Minute Maid, a
cholesterol-lowering Heart Smart juice, and C2, a low sugar Cola. The energy and nutrition bars originally
meant for athletes, also gained acceptance amongst the masses with their nutritional benefits and
convenience. Manufacturers including Luna, Snickers, Marathon, Cliff, Atkins, Pria, Mojo and Zone started
the promotion of energy bars. Kelloggs also introduced Rice Krispies Muddles, a nutritious cereal.

In mid 2000s, the food and beverage market entered a new domain. Earlier, soft drinks and snacks were
consumed for enjoyment. However, these days they serve many needs, which the consumers were not
aware of earlier. Previously, beverages were served as accompaniments while eating, but now beverages
have found their way into various needs such as hydrating, boosting energy, refreshing and so on.
Consequently, new entrants have also found their way into the market. Manufacturers such as Energy
Brands, Jones Soda and Red Bull have increased their acceptability in the market. Lately, even the
beverage giants have entered the functional drink market, as the market size has reached $68 19 billion
(Exhibit I and II). Coke, in 2005, reshaped its beverage portfolio by concentrating on approximately 17
needs, which included refreshment, relaxation, hydration, energy boosting, weight management, heart
health, and so on 20 . Cadbury Schweppes Americas Beverages also started to boost health ingredients in its
product portfolio.

11 Diabetes mellitus type 2 is a disorder characterised by disordered metabolism and inappropriately high blood sugar
resulting from either low levels of the hormone insulin or from abnormal resistance to insulin's effects coupled with
inadequate levels of insulin secretion to compensate.
12 Wellness Foods Trends 2007, http://www.foodprocessing.com/articles/2006/250.html, June 12th 2006
13 Ibid.
14 Atkins is a portable nutrition foods company offering bars and shakes under the Atkins Advantage brand

that has nutrition advantages.

9 Weight Watchers is a company offering various diet products and services to assist weight loss and

maintenance.
16 Lean Cuisine is a brand of frozen foods and dinners in low fat, low calorie versions sold in the United States, Canada,

and Australia by Nestl.

17 Healthy Choice is a food manufacturer, which provides cooking tips and meal plans, plus fitness and exercise tips, and

health news.
18 Nabisco or National Biscuit Company has been formed by the merger of 100 bakeries and manufactures and markets

cookies and crackers in America.

19 Pepsi, Coke: We satisfy your 'need states', op.cit.
20 Ibid.

2
 508-054-1

Exhibit I
Leading Beverage Products

Source: Led by bottled water, teas and energy drinks, the U.S. liquid refreshment beverage market grew by 2.8% in 2006,
http://beveragemarketing.com/?section=pressreleases&hl=DRINKS, March 8th 2007

Exhibit II
U.S. Beverage Market

Source: Led by bottled water, teas and energy drinks, the U.S. liquid refreshment beverage market grew by 2.8% in 2006,
http://beveragemarketing.com/?section=pressreleases&hl=DRINKS, March 8th 2007

The functional drinks and non-carbonated drinks market has expanded over the last few years. Though the
soft drinks market, which is a $100 billion 21 industry, still leads, but sales have gone down by 1% to 2%
whereas, sales of bottled water have grown by 22%, sports drinks have grown by 23% and tea has grown

21 Pepsi, Coke: We satisfy your 'need states', op.cit.

3
 508-054-1

by 15% 22 . Euromonitor International opines that over the next four years, the $138 billion global health-and-
wellness soft-drink segment will expand by $38 billion. 23 Given the changing market dynamics Pepsi
realised it had to rethink its growth strategy in the food and beverage market.

Pepsis Strategy

The expanding market for functional drinks and the rise in health consciousness among consumers led
Pepsi to alter its strategy. Instead of concentrating on just its core brands, it decided to overhaul its product
portfolio. The plan was to enter new segments and launch new variants of its products. In 2002, the
company hired Dr. Kenneth Cooper and Dr. Dean Ornish, two famous physicians, to advise researchers at
the company to incorporate health foods in their product portfolio, in an effort to change its image of a junk
food provider 24 . The company divided its portfolio into three categories, namely, fun-for-you, good-for-you
and better-for-you.

The fun-for-you category comprised of PepsiCos core brands such as Pepsi-Cola, Mountain Dew and
other regular sodas that had too much sugar, and core Frito-Lay sub-brands such as Tostitos, Doritos.
These products were consumed more for enjoyment. The company believed that the products of this
category could cater to the small indulgences aspect of a balanced diet. This category generated 62% 25 of
the total sales of North America, in the year 2004. The good-for-you category consisted of 19 products and
needed minor modifications, so that the products would not harm consumers health. Tropicana, Dole,
Aquafina and the likes are categorised under this head. These products were believed not to have any
negative impact on health even if consumed daily. 16% 26 of the revenue came from this category in 2004.
The last category is the better-for-you category, which contains products such as Gatorade and Tropicana
comprising of calcium that has been fortified. These products were aimed at maintaining a healthy lifestyle,
as they did not contain any harmful ingredients. In the year 2004, this category yielded around 22% 27 of the
revenue in North America. To continue attracting its snacking customers, that is the fun-for-you category,
the company decided to promote its core products as it has done over the years, by aggressive advertising.

To highlight its healthy image, and to promote the other two categories good-for-you and better-for-you,
the company emphasised on product innovation. Over the last few years, the cola division of PepsiCo has
launched various soft drinks with low calorific value. With new entrants coming into the market, Pepsi has
been aggressively trying to cater to the changing customer tastes. To remain competitive in the market,
Pepsi introduced new ingredients in its array of beverages. The soft drinks that were launched by Pepsi,
contained new variety of sweeteners and ingredients, such as Splenda 28 , ginseng 29 , tauirine 30 (Exhibit III).
This helped Pepsi create a unique image, that of a company offering healthy food and beverages.

The company also experimented by mixing two varieties of drinks in its new product launches. Pepsi has
launched many beverages, which combine the features of the fun-for-you and better-for-you categories. In
2007, for example, it launched Diet Pepsi MAX, which is a zero-calorie cola with ginseng and more caffeine.
Diet Pepsi MAX is sweetened with a blend of aspartame 31 and acesulfame potassium 32 . This product is a

22 Pepsi, Coke: We satisfy your 'need states', op.cit.

23 Ibid.
24 PepsiCos New Challenge: Transformation into a Health Food Company, op.cit.
25 Foote and Andrea, And good for you, Beverage World, January 15th, 2004, page 28
26 Ibid.
27 Ibid.
28 Splenda is the trade name given to Sucralose, an alternative to sugar that is low in calories and carbohydrates.
29 A group of closely related herbs that grow in China, Siberia, Korea and North America, ginseng possess healing

properties and an ability to invigorate and prolong life. It is one of the widely used herbal food supplement.
30 Tauirine is an organic acid and forms an ingredient in many energy drinks and energy products.
31 Aspartame, a low-calorie sweetener with a clean, sweet, taste, provides many benefits including aiding in weight control

as a sugar substitute and extending and enhancing flavors.

32 Acesulfame potassium (Ace-K) is a low-calorie sweetener that has been used in foods and beverages and is often used

with other low-calorie sweeteners because it enhances the sweet taste of foods and beverages.

4
 508-054-1

cross between an energy drink and a cola. The company also launched better versions of its existing colas
and snacks, as in the case of Pepsi Edge.

Exhibit III
PepsiCo. New Product Launches (2005-2007)
Cola Division
Sl. Date of Product launch Brand Product Name Main Health Feature
No.
1 March 2005 Pepsi Pepsi One Sweetened with
SPLENDA brand
sweetener. Full flavor cola
with one calorie.
2 November 2005 Pepsi Pepsi MDX Ginseng, Guarana,
Taurine and D-Ribose
satisfying consumers
need for energy.
3 May 2006 Pepsi Dole Sparklers Made with real fruit,
containing B-complex
vitamins and 50% less
sugar and calories than a
regular juice drink.
4 July 2006 Pepsi Jazz A zero calorie soda
available in three flavors.
Compiled by the authors

In their snacks division also, the company launched new products that were beneficial to health and
contained marginal amounts of sodium, trans-fat 33 or calories. In this category also Pepsi, experimented
and included ingredients such as whole grains, proteins, and vitamins, to boost its health-friendly image.
The company also launched fat free versions of its core snacking products Doritos, Cheetos and Tostitos
(Exhibit IV).

33Trans-fat is the common name for a type of unsaturated fat with trans-isomer fatty acid. Trans fats may be
monounsaturated or polyunsaturated. They are neither required nor beneficial for health.

5
 508-054-1

Exhibit IV
PepsiCo. New Product Launches (2005-2007)
Snack Division
Sl.No. Date of Brand Product Name Main Health Feature
Product
launch
1 September Quaker Weight Control Instant 25% more whole grain, fiber, protein
2005 Oats Oatmeal and no added sugar. Recognized by
FDA
2 December Quaker Flavor extension of Life Made from whole grains, low in fat
2005 Oats Cereal called Life Vanilla and delivers nine essential vitamins,
Yogurt Crunch minerals, calcium and fiber.
3 January Quaker Life Chocolate Oat Provides 2 servings of whole grains,
2006 Oats Crunch 3 grams of fiber and 10 essential
vitamins and minerals.
4 March 2006 Frito Lays Lay's Sensations Cooked in pure sunflower oil, zero
grams trans fat.
5 March 2006 Frito Lays Tostitos Sensations Cooked in 100% pure corn oil, has
zero grams trans fat so as to lower
the saturated fat per serving
6 March 2006 Frito Lays 100 Calorie Mini Bites, Low in calorie value.
includes Baked!
Cheetos, Doritos Nacho
Cheese, Doritos Cool
Ranch and Cheetos
Asteroids snacks
7 April 2006 Quaker Flavour extensions of Provides good source of fiber.
oats Rice-A-Roni Savoury
Whole Grains
8 May 2006 Frito Lays Low fats version of Lays Cooked in NuSun sunflower oil,
and Ruffles which is good for heart and is known
to increase mono- and poly-
saturated fats only.
9 August 2006 Quaker Quaker Oatmeal Crunch It is low in fat, delivers one gram of
Oats soluble fiber from oats, and is a
source of several essential vitamins
and minerals, including calcium,
vitamin A, iron and B-vitamins.
10 October Frito Lays Tortilla chips along with Contains zero grams of trans Fat.
2006 Natural Tostitos Picante
Sauce
Compiled by the authors

To capture the growth in the non-carbonated drink market, which was growing faster than carbonated
drinks, Pepsi launched new products in this category as well. Since 2004, the company has started focusing
on this category with frequent product launches (Exhibit V).

6
 508-054-1

Exhibit V
PepsiCo. New Product Launches (2005-2007)
Non-Carbonated division
Sl.No. Date of Brand Product Name Main Health Feature
Product
launch
1. January Aquafina Aquafina sparkling Zero calorie carbonated water
2005
2. January Aquafina FlavorSplash Natural fruit juices sweetened with
2005 Splenda. Zero calorie Drink.
3. February SoBe Two flavor Zero calorie Drink.
2005 extension of SoBe
Lean.
4. March 2005 Dole juice Flavor extension of Low on calorie and sweetened with
Dole 100% juice sucarlose
5. March 2005 Dole juice Dole Light 50% juice beverage. Low on calorie
and sweetened with sucarlose.
6. December Tropicana Tropicana Pure The juice delivers 3 grams fiber for
2005 Premium every 8-oz. glass - as much fiber as is
Essentials with found in a medium-sized orange. The
Fiber juice will also provide vitamin C,
potassium and folate.
7. January Tropicana Tropicana Delivers 9-13 servings of fruits and
2006 Fruitwise veggies per day, as recommended by
the United States Department of
Agriculture (USDA).
8. March 2006 SoBe SoBe Life Water A refreshing vitamin-enhanced line of
water containing the powerful
antioxidant vitamins C & E, as well as
vitamin B complex.

9. January Aquafina Aquafina Alive A low calorie, vitamin-enhanced water

2007 beverage. The drink is available in
three flavors and is made from fruit
juice enhanced with Vitamin E, Vitamin
B6, Vitamin B12 and Niacin. It is a low-
calorie drink that provides 10% of the
Daily Value important nutrients in a
single serving.
10 January Tropicana Tropicana Healthy The juice contains a high quality,
2007 Heart specially encapsulated, marine-based
source of omega-3 eicosapentaenoic
acid (EPA) and docosahexaenoic acid
(DHA), fatty acids to offer heart-health
benefits to the consumers.
Compiled by the authors

As soft drinks are impulse purchases, the company gave main emphasis to rapid product launches. The
company planned to flood the market with new products, at short intervals. Since 2005, the company has
launched as many as 24 new products or product versions (Exhibits III, IV and V). By 2007, it plans to
launch as many as 19 drinks, which would target the various needs of consumers, as well as be beneficial
to their health. Some of the major drinks to hit markets in 2007 include All-natural Dole Sparklers, Green

7
 508-054-1

Tea and Diet Brisk, Gatorade AM, Lipton, Ocean Spray Refreshers, Propel packets, Sobe Lifewater,
Tropicana Essentials with Omega 3 amongst others.

Apart from this, the company also promoted its healthier foods in schools through a program called
Wellward Choice, which encouraged kids to be more active. The company sponsored internet-based
journals, and helped teenagers to track their daily physical activities. It also launched new corporate
advertisements to emphasise its image as a health friendly company and to convey this new image to its
consumers. The company invested around $10-$20 million 34 on the advertising campaign, by the end of
2004. With this campaign, the company highlighted Quaker and Tropicana as Pepsis brands, which
promoted health.

PepsiCo also changed the packaging of its good-for-you and better-for-you products by
introducing the Smart Spot symbol (Exhibit VI (a) and VI (b)). The symbol was designed to help
consumers identify the companys food and beverage products that contributed to a healthier
lifestyle. The logo appears on PepsiCo brands such as Tropicana, Gatorade, Frito-Lay, and Diet
Pepsi. The products marked with Smart Spot met nutrition criteria based on authoritative
statements from the U.S. Food and Drug Administration (FDA) and the National Academy of
Sciences. The products that are low in fat, cholesterol, sodium and added sugar, are marked with
the Smart Spot symbol. The Smart Spot symbol also distinguishes products, which contain
marginal amounts of fat or sugar, or products formulated to have specific health or wellness
benefits. To provide more information on the Smart Spot, the company also launched a website,
www.smartspot.com, which informs consumers about products that are better for their health. It
also provides health related information as well.

Exhibit VI (a)
Smart Spot Symbol by Pepsi Co.

34 PepsiCos New Challenge: Transformation into a Health Food Company, op.cit.

8
 508-054-1

Exhibit VI (b)

Source: PepsiCo Health & Wellness Capturing Growth at the Intersection,

http://www.iom.edu/Object.File/Master/24/744/Taaffe_part1.pdf, January 27 th 2005

Apart from offering healthy products, the company has also initiated various programs since 2004
to promote healthy lifestyles. The company is the national sponsor for the America on the Move 35
program. The program aims to recommend small changes to achieve energy balance. The
company has also started Balance First 36 in partnership with the Discovery Channel and America
on the Move. The programs aim at providing educational material to children, in terms of balancing
the number of calories consumed and calories burnt.

As part of their commitment to healthy living, PepsiCo in partnership with KaBOOM 37 launched its
S.M.A.R.T. 38 lifestyle program, by building the first Smart Spot playground in the capital of the US. The
citizens of the US can nominate their city or town for a Smart Spot playground. The company plans to build
at least 12 playgrounds to support its SMART program, which indicates five easy steps to healthier living. In
order to create health consciousness, PepsiCo sponsored Discovery Health Channel's Total Family Health
program in 2005 in the US, which is aired on the channel in association with the American Academy of
Family Physicians 39 . This program is aimed at educating viewers about the full range of family health issues
that are essential to living healthy lives, including fitness, nutrition, finance, parenting and preventative
health care.

Since 2003, the company has also donated funds to communities such as the American Academy of Family
Physicians, Chicago Communities in Schools, the Consortium to Lower Obesity in Chicago Children
(CLOCC) 40 , Girl Scouts of the USA 41 , Family Health Self-Empowerment Project by University of Florida 42 ,

35 America On the Move is a national program dedicated to helping individuals, families and communities and promotes
healthful eating and active living through its Affiliate network of states, communities, employer groups, schools and other
organisations.
36 Balance First is one of PepsiCo initiatives in health and wellness and is a standards-based multimedia learning kit that

teaches kids about energy balance.

37 KaBOOM! is a national nonprofit organisation that envisions a great place to play within walking distance of every child

in America.
38 SMART is the healthy lifestyle program launches by Pepsi. It stands for S: Start with a healthy breakfast, M: Move more,

A: Add more fruits, vegetables and whole grains, R: Remember to hydrate, T: Try lower calories or fat.
39 Founded in 1947, the AAFP represents nearly 94,000 physicians and medical students nationwide. It is the only medical

society devoted solely to primary care.

40 CLOCC is a nationally recognised consortium that brings together organisations and individuals to confront childhood

obesity in Chicago.
41 Girl Scouts of the USA is the worlds preeminent organisation dedicated solely to girls.
42 Family Health Self-Empowerment program is designed to promote healthier lifestyles among children, adolescents, and

their caregivers, particularly those who are overweight or obese.

9
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Shape Up Somerville program by TUFTS University 43 , National Urban League 44 and National Council of La
Raza 45 , Womens Sports Foundation 46 , YMCA, and Preventative Medicine Research Institute (PMRI) 47 .
Activa2 was PepsiCo Foundations first international health and wellness school program. The Company
also donated $16 million 48 to YMCA 49 over a period of 10 years, to help teenagers belonging to lower-
income groups.

To further its commitment towards health, Pepsi also acquired IZZE Beverage in September 2006 for $75
million 50 , which made health drinks. In November 2006, Pepsi purchased Naked juices a 23-year-old
company, for $450 million 51 , which made natural juices. This acquisition of Naked Juices, as per analysts,
helped Pepsi in competing with the Oswald juice brand of Coca-Cola.

In July 2007, the company also redefined its marketing practices aimed at children. The company decided
that all its advertisements targeting children less than 12 years would feature only healthier variants of its
products. To veer away children from overeating and binging, it also decided that its campaigns would
feature only two products. To affirm its seriousness towards promoting healthier eating habits in children,
Pepsi allotted 1% of its advertising budget for advertisements aimed at children. At least half of these
advertisements would feature products that have already earned their Smart Spots that is they promise
higher nutritional value. The company also signed an agreement with the American Heart Association, to
establish the first-ever voluntary guidelines for snacks sold in schools that will provide healthier food choices
for the nation's children. Pepsis new strategy started yielding results the company posted a net income of
$5,065 million in the year 2006, a rise of 12% over the year 2005 52 .

Looking Ahead

Management experts opine that for top line growth, innovation and differentiation are the key drivers. They
also add that heavily regulated and conservative industry such as the food and beverage industry 53 poses a
great challenge and a barrier to product innovation. Due to these factors innovation is limited to minor
changes in existing products or extensions of the current product line as has been the case in the food and
beverage industry for a long time.

Michael Bellas, CEO of US based Beverage Marketing corporation 54 has categorised innovation into three
heads close-In innovation, strategic innovation and breakthrough innovation. He stresses more on
strategic and breakthrough innovation as it would give the company a long-term lead with substantial and
long-lived results. Pepsi so far has been good in close-in innovation and is moving ahead in the field of
strategic innovation by stressing more on new product launches and acquiring various firms producing

43 Shape Up Somerville: Eat Smart. Play Hard, a 3-year program is an environmental change intervention designed to
prevent obesity in culturally diverse, high-risk, early-elementary school children.
44 National Urban League is a nonpartisan civil rights organisation based in New York City that advocates on behalf of

African Americans and against racial discrimination in the United States.

45 Private, non-profit, and non-partisan organisation focused on reducing poverty and discrimination, and improving

opportunities, for Hispanic Americans.

46 Womens Sports Foundation is a charitable, educational organisation dedicated to promoting girls and women in sports

and fitness.
47 PMRI is a clinical research organisation dedicated to conducting trials that examine the effects of lifestyle choices on

disease.
48 PepsiCos New Challenge: Transformation into a Health Food Company, op.cit.
49 The Young Men's Christian Association is a world-wide, largely nonsectarian and apolitical social movement with a

special emphasis on community development and young people.

50 Starling Shane, Pepsi pushes health with brands, acquisitions,

http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=23804986&site=ehost-live, January 2007

51 Ibid.
52 Performance with purpose, http://www.pepsico.com/PEP_Investors/AnnualReports/06/PepsiCo2006Annual.pdf, March

3rd 2007
53 Ibid.
54 Bellas Michael, Beverage Innovation: A Three-Ring Circus, http://www.beverageworld.com/content/view/28929/,

February 14th 2005

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juices and functional drinks. To gain first mover advantage the company needs to stress on breakthrough
innovation, which has its own risks in a food and beverage company. According to senior company officials,
the company plans to add new products for the future, through product innovation, while simultaneously
keeping the old brands fresh. The company plans to focus on product innovation as the new products are
providing 15%-20% growth to the company. 55 The company intends to make its fun-for-you product
category more nutritious. But competition from established players like Coca-Cola as well as new entrants is
posing a major challenge to the company.

With the overlapping of functional drinks and carbonated soft drinks, a new breed of competitors has
emerged. Small brands such as Energy Brands' 56 Glaceau, Jones Soda 57 and Red Bull 58 have also started
to compete with companies like Coke and Pepsi. Cadbury Schweppes Americas Beverages is also
developing a formula for its diet version of 7Up. Cadbury will also roll out premium version of Snapple, its
juice brand and various varieties of teas. Realising the benefit of joint efforts the companies have started
innovating products to suit the consumers taste pallet. Cadbury has partnered with Hansen Natural 59 ,
marketer of Monster energy drink, and Energy Brands, Glaceau's marketer, to develop products in energy
and functional-waters business. Age-old rival Coke has also started on these lines and plans to invest $400
million 60 annually towards innovation. It has added PowerAde to challenge Gatorade of Pepsi. Coke has
also trademarked various beverages like Diet Coke Plus, a zero-calorie, energy-enhanced version of coke.
Coke has also introduced the products like Enviga and products in juices and non-carbonated categories.

The market has also seen a spur in bolder, spicier ingredients added to the more traditional flavour. The
lines between savoury and sweet has blurred today. Consumers are choosing nutritionally fortified food and
drinks. There is also a craving for products that boost memory, cognitive endurance and mental energy.
Ethnic flavours are now becoming regional. Consumers are also demanding energy products with
effectiveness lasting for over five hours. But there is also an increase in the price of raw material and the
balance of power has been steadily shifting towards retailers, which is reducing the margins of the food and
beverage companies. Apart from this by the year 2030, it is estimated that 25% 61 of the population in
developed countries would be aged 65 years or above. As the elderly are rarely the primary targets for food
and beverage companies the next challenge for the company is to identify and adapt to this change.
Experts believe that those companies in this sector that are quick at understanding and responding to these
changes, may achieve a bigger share of the market and gain the brand loyalty of consumers. However,
according to the Beverage Digest, Companies like Coke and Pepsi know they need to be ahead of the
curve. They are taking a lot more risks. 62

Apart from this combining nutrition, wellness and taste into one product is a major challenge for companies.
Companies need to satisfy consumers contradictory needs without losing its focus from its core
competencies, represents a challenge to the food and beverage companies. Apart from getting conscious
about health and wellness, todays consumers want more value packaged with convenience in a product
offering, which is a difficult task for any company. There has also been a spur in the demand for premium
products with original taste and flavour. Pepsi has been able to understand and act on these various new
demands from the consumers by focusing on new products, which contain ingredients, which are both
healthy and satisfy the taste pallets of consumers. The company has used various ingredients so as to cater
to the rising demand for healthy food. For the past few years, the company has been expanding,
horizontally by acquiring companies that extend its already existing business segments. Around 60% of the

55 Ibid.
56 Energy Brands, also known as Glaceau is a company that makes a line of enhanced waters main products include
vitamin-water.
57 Jones Soda is a full line beverage distributor in Western Canada.
58 Red Bull is the brand name of an energy drink that originated in Thailand and is now famous throughout the world.
59 Hansen Natural, the company with its subsidiary, markets and sells all-natural sodas and fruit juices.
60 Pepsi, Coke: We satisfy your 'need states', op.cit.
61 The food and beverage industry, op.cit.
62 Everything Old is New: 'Health' Drinks Flood Market, op.cit.

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companys revenue comes from fun-for-you category and 40% from good-for-you and better-for-you
categories 63 . The company plans to generate 50% of revenue in the future from good-for-you and better-
for-you categories and the remaining 50% from the fun-for-you category 64 .

With this new strategy in place for the first time, Pepsis profits that had been relatively flat throughout the
1990s have climbed by more than 100%, since 2000 65 . Pepsis net income has grown by 12% in 2006 66
over the year 2005. The company in 2006 has grown by 5% in terms of volume and 8% in terms of
revenue 67 . The market share in the year 2006 stands at 25% 68 of the convenient food and beverage sales.
The company, over a span of five years, has shown the ability to ride out the business cycles. The
companys net profit has risen by 50%, and sales are up by 33% 69 in the year 2006. The company features
16 brands bringing in more than $1 billion 70 revenue each year. Operating profits are expected to rise by
7.5% per year as compared to the industry rate of 5% and 6.5% of Coke 71 , in the next five years.

Industry observers opine that Pepsi still has long way to go. The company needs to identify the avenues
where it can launch breakthrough products to stay ahead of its competitors. Whether Pepsis change in
strategy is a step in the right direction remains to be seen.

63 And good for you, op.cit.

64 Ibid.
65 Brooker Katrina and Burke Doris, The Pepsi Machine,

http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=19536777&site=ehost-live, February 6th 2006

66 Ibid.
67 Ibid.
68 ,The Pepsi Machine, op.cit.
69 Ibid.
70 Ibid.
71 Ibid.

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Sl.No. Division
1 Frito-Lay snacks
2 Pepsi-Cola beverages
3 Gatorade sports drinks
4 Tropicana juices
5 Quaker Foods
Compiled by the authors
508-054-1
Annexure I
PepsiCos Main Businesses
Products
Lay's potato chips, Ruffles potato chips, Doritos tortilla chips, Tostitos
tortilla chips, Fritos corn chips, Cheetos cheese flavoured snacks.
Pepsi-Cola, diet Pepsi Mountain Dew Sierra Mist (Regular & Diet),
Slice, Lipton Iced Tea (Partnership with Thomas J. Lipton Co.), Dole
juices and juice drinks (License), FruitWorks juice drinks, Aquafina
purified drinking water, Frappuccino ready-to-drink coffee (Partnership
with Starbucks), Miranda, 7UP etc.
Gatorade Thirst Quencher and Propel Fitness Water.
Dole juice, Tropicana juice drinks, Propel, SoBe, Slice, Tropicana Pure
Premium juices, Naked Juice.
Quaker Oatmeal, and other breakfast cereals
13