PepsiCo Fights Back
May boost marketing budget to wrest market share from Coca-Cola
PURCHASE, N.Y. -- PepsiCo Inc. may boost the advertising and marketing budget for its namesake cola and other drinks by as much as $600 million, or 50%, to $1.7 billion when it announces the results of a yearlong business review February 9, according to analysts surveyed by Bloomberg.
CEO Indra Nooyi is seeking to take back market share from Atlanta-based Coca-Cola Co. and regain the confidence of investors who have questioned whether she has focused too much on healthier products.
PepsiCo's shares have risen about 2% during her five-year tenure, while Coca-Cola has gained more than 50%.
"PepsiCo overall needs to step up investments behind their brands to reinvigorate them," Bonnie Herzog, a New York-based analyst at Wells Fargo & Co., told the news agency. "If you go back 10 years, they have definitely been underinvesting relative to Coke."
Nooyi took over as Purchase, N.Y.-based PepsiCo's leader in October 2006 and sped up the company's move into healthier snacks and drinks. She set a goal of tripling sales of what the company calls "nutrition products," including Gatorade, Tropicana and Quaker, to $30 billion by the end of the decade.
To that end, Nooyi, 56, has focused resources on acquisitions, including juice producers.
Meanwhile, Pepsi-Cola advertised less on TV and pulled back on direct product pitches; the company's North American beverages unit didn't run Super Bowl ads for its Pepsi-brand drinks in 2010, the first such absence in 23 years.
The company spent about $100 million on its "Pepsi Refresh" campaign--with a heavy digital thrust--supporting good works proposed by customers, which did little to improve share.
"A good amount of the weakness stems from the management's increased focus on its better-for-you portfolio," Ann Gurkin, a Richmond, Va.-based analyst with Davenport & Co., told Bloomberg. "They took support and focus away from their core beverages--Pepsi-Cola, Diet Pepsi--and spent more time and more effort enhancing juices, waters, sports drinks."
PepsiCo as a whole should spend $579 million more this year than in 2011 to market its products, with most of that going to beverages in North America, estimated Ali Dibadj, a New York City-based analyst for Sanford C. Bernstein & Co. Herzog projected between $500 million and $600 million more for beverages overall. Mark Swartzberg, an analyst with Stifel Nicolaus & Co. in New York, estimated PepsiCo will spend an additional $200 million to advertise beverages in the Americas.
North American beverages account for about a third of PepsiCo's global sales, said the report.
Coca-Cola has invested more than PepsiCo as a percentage of its net sales for a decade, Herzog said. The gap widened in 2004 and averaged 5.1 percentage points through 2010, she said. PepsiCo's advertising spending declined to 4% of revenue as of 2010 from 6% in 2004, according to Kaumil Gajrawala, a New York City-based analyst for UBS AG. That excluded the impact of bottler acquisitions.
"It's too low, and historically there's been a clear link between advertising spend and sales," Kevin Rendino, managing director for Blackrock Basic Value Fund Inc. in Plainsboro, N.J., told Bloomberg. "Nooyi may have taken her eye off the ball on the North American beverage side."
PepsiCo lost share in the U.S. carbonated beverage market to Coca-Cola from 2008 through 2010, according to Beverage Digest. In 2010, Diet Coke--a regular advertiser on programs including the Academy Awards--overtook full-calorie Pepsi-Cola to become the second-best- selling U.S. soft drink behind Coca-Cola.
Nooyi started fighting back last year, boosting ad spending for North American beverages by 30% and focusing on soft drinks including Pepsi Max. The company loaded airwaves with a new Pepsi-Cola campaign that featured Santa Claus, a regular in Coca-Cola's commercials, shunning the brand for a Pepsi-Cola while on vacation at a tiki bar.
Nooyi also signed a $60 million sponsorship deal with Simon Cowell's X Factor, an answer to Coca-Cola's decade-long sponsorship of American Idol. PepsiCo also will return to the Super Bowl next month with soft drink ads.
The spending hasn't worked yet, sais the report. PepsiCo's share of dollar sales at groceries, drug stores, convenience stores and mass merchandisers, excluding Wal-Mart Stores Inc., for soft drinks carrying a Pepsi trademark declined by half a percentage point last year to 18%, according to data from SymphonyIRI Group, a Chicago-based researcher. Trademark Coca-Cola grew 0.3 percentage points to 28.4%.
PepsiCo's struggles have led analysts including Dibadj to suggest that the company's beverage and snacks businesses would be worth more separate than together. That would follow the example of Kraft Foods Inc., which is splitting in two to help its snack business push products into emerging markets while the slower-growing, higher-margin grocery company returns cash to shareholders.
So far, Nooyi has dismissed such recommendations. "PepsiCo's value is maximized as one company," she said during an October conference call. "It was created as an integrated snack and beverage business and its success is tied to this combination."
To help pay for a boost in marketing and advertising spending, Nooyi may have to cut costs elsewhere, Dave Novosel, a food and beverage analyst at Gimme Credit in New York, told Bloomberg. PepsiCo may fire several thousand employees this year, a person familiar with the plans told the news agency earlier this month.