PepsiCo's Health Requires Some Balance
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Indra Nooyi, Chairman and CEO of PepsiCo (NYSE: PEP), has been under some considerable criticism lately. The executive is trying to transform the company by bringing more focus into healthy products and drinks in replacement of the more traditional carbonated drinks and salted snacks that have fueled much of PepsiCo’s success in the past.
Investors, however, are feeling anxious about losing market share against archrival Coca-Cola (NYSE: KO). Nooyi is facing a big challenge when trying to balance a bet into the future of healthy products and the need to protect the company´s brand positioning and market share.
In 2010 Diet Coke overtook Pepsi in market share, which meant that PepsiCo lost its number two position in the gigantic US soft drink market. Many companies have been switching from Pepsi to Coke lately, Starwood Hotels (NYSE: HOT) made that move last year and Dunkin' Brands (NASDAQ: DNKN) has recently announced its switching teams too: Coke's soft drinks, juices, water and energy drinks will be sold at Dunkin' Donuts and Baskin-Robbins stores nationwide. That kind of news is a bitter drink for shareholders.
PepsiCo seems to be reacting to shareholder´s concerns with some management changes that signal that the company may be trying to regain its position in soft drinks and snacks. John Compton, who had been successfully running the Frito-Lay division, has been named President, and other key positions have been taken by long time PepsiCo veterans. It looks like PepsiCo is having some second thoughts about giving so much space to healthy products and disregarding the more traditional ones.
This kind of situation is usually hard to manage, should the company keep pushing healthier alternatives or is it better to simply try to please customers as much as possible based on their current tastes, maximizing profits on the short term? A middle ground may be the best alternative.
PepsiCo´s acquisition of Quaker, which also produces Gatorade, in 2001 has been a huge success for the company, which shows that there are some strong basis behind Nooyi´s strategy of taking a healthier direction when it comes to products.
After all, there is a clear trend towards a healthier lifestyle all over the world. All changes have some costs, and PepsiCo´s transformation may very well turn out to be the best idea in the long term, but it may just be too soon to realize that.
On the other hand, decisions which imply changing the company’s more traditional and successful products don´t seem like a good idea. PepsiCo has reduced the fat, and taken out some of the sugar in many of its mainstream products, and it has added whole grains, fruits and vegetables to some of its snacks. That move may help at explaining some of the company´s recent setbacks.
One thing is to launch new healthy products, and even spending some marketing money on them early on based on their future profitability may be a smart idea. But when people feel that the products they liked so much are not so tasty anymore, they will hardly feel compensated by lower calories or more fruit content.
Customers want to eat healthier in general, but they primarily want to have a broad selection of choices, and they definitely don´t like it when a company “imposes” a healthier product on them by changing the content of classic and popular snack. Maybe this time PepsiCo can find a convenient middle ground by betting big on the emerging trend of healthier products without neglecting its more traditional and profitable ones.
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