Suppose you are in charge of Pepsi and things aren’t going so good – sales stagnant, profits lagging. What do you do? The lady in charge these days, Indra Nooyi, is doing exactly what her resume drives her to do. With two MBA’s (one from India and one from Yale), a career in marketing and consulting with Booz Allen, Indra knows one strategy and one strategy only – lay off 8,700 people and invest the savings in advertising. The people cuts will manifest themselves in the form of fewer facilities, consolidating and inevitably extending delivery chains and increasing inventory – but Yale doesn’t know how to dollarize those things and it does know how to put dollar signs in front of headcount, so there you have it. Pepsi prices went up last year because the cost of corn syrup went up, and Indra hopes that won’t be necessary again this year.
Maybe Indra doesn’t know who Charlie Guth is, or maybe she does and writes him off as an unsophisticated man from an unsophisticated time and doesn’t see where there is much to learn from him. Too bad for Pepsi either way. Guth was not the inventor of Pepsi but the guy who bought the rights and built it into what it has become. In the earliest days – the mid-1930’s – with sales and profits foundering, Guth took a tack that would shock Indra and her ilk. Soft drinks were sold in 6 ounce bottles in those days, but Charlie changed all that. He doubled the size of the bottle without changing the price – 12 ounces of Pepsi for the same price. Profits and sales boomed and Pepsi never looked back.
Raise prices, reduce staff, extend supply chains, and invest in creating a greater illusion of value – Indra’s approach – the polar opposite of the Guth approach – the proven approach that made Pepsi a soft drink powerhouse – give the customers twice as much value for their money.
What makes Indra’s strategy even less likely to succeed is that she is up against a Coke that is beginning to get it. The Pepsi investment in advertising is classical impression based thinking – create the impression that Pepsi is cool. Coke boss Muhtar Kent says, “The day today is no longer a day where we create consumer impressions. The day today is one where we need to, every single day, create new consumer expressions – positive expressions, instead of impressions. What that means is networking. What that means is every day – if we’re successful – there will be positive consumer expressions – consumers are going to talk about our brands in the way we want them to talk about our brands. Because we’re every day learning from our consumers, and that’s really the single biggest innovation for us” In short – don’t waste time telling people how to think, but use social media to accelerate word of mouth from satisfied customers.
Given the Pepsi twin towers can debacle – the ‘impression’ they created was one of pandering to Middle East sentiments to use the 9/11 tragedy to peddle more Pepsi to the Arab world, giving way to ‘expressions’ of outrage and widespread boycott when the cans were sold to American soldiers in Iraq – it seems Indra has a lot to learn from her competitor, as well. Let’s hope the impressions Pepsi creates with the $500-600 million advertising spend creates a better impression than the past spending.
Probably more threatening to Pepsi is that Muhtar Kent, when asked about pricing in light of the corn syrup cost increase, recently said, “Pricing at Coke depends on what consumes will pay, not company costs.” There is nothing in Indra’s track record to indicate she has the vaguest inkling of what Kent is talking about.
Most telling, to me anyway, is the Pepsi strategy under Indra’s leadership – specifically selling off YUM! Brands (Pizza Hut, KFC, Taco Bell, etc…) and investing in liquid oatmeal and a range of ‘healthy’ products. Given the mediocre (at best) performance of those ideas, and the booming success of YUM! it is impossible to avoid the conclusion that the strategy was based more on a theory of customer needs than the reality. Drinkable oatmeal may well be better for me, but what I want is a bucket of original recipe, a meat lover’s pizza, and a couple of chalupa’s. Indra seems to be quite out of touch with the people who actually buy her products.
The lesson to take from all of this is that the missing element in Pepsi’s strategy is value. Charlie Guth understood the way out of trouble was to improve the value proposition. Coke seems to have that idea down pat, as well. Until Pepsi figures it out, the ‘cola wars’ are going to be pretty one-sided.