PepsiCo president Steve Reinemund explains to Pepsi bottlers reasons behind "our decision not to participate with Priceline." Priceline.com is internet-based "name your own price" discount service for airline tickets, hotel rooms. Recently adds grocery products via affiliation with Webhouse Club. BD obtains July 21 memo from Reinemund to bottlers which notes PepsiCo had "direct discussions" with Priceline and researched "their business model." PepsiCo president: "Frankly, we don't understand how this system could ever make sense for manufacturers like us, or for our retail partners."

Permanent promotions. Reinemund says for manufacturers Priceline "essentially amounts to permanent promotions -- with Priceline as middle man, managing and pricing." Says approach would "inevitably lower margins for manufacturers and retailers." Reinemund explains Priceline "initially subsidiz(es)" retailer margins to provide incentive for them to participate. Adds, Priceline "can't pass the cost along to shoppers or they violate their core consumer proposition." Suggests "solving this gap will eventually force them to change the terms and ultimately damage retailer margins." Coke. Separately, source close to Priceline says Priceline "met with Coke" week of August 7 and anticipates additional meetings.

Internet potential. Reinemund, however, says Pepsi remains open to internet retailing opportunities. But declares "particularly in soft drinks, we cannot allow ourselves to be drawn into an ill-fated delivery scheme just as we've started earning the cost of capital again in the take-home segment." Not the way. Says PepsiCo sells "popular, successful brands" and "reducing margins to subsidize prices that already represent a great consumer value is not the way to continue building our business."

How it works. Priceline allows consumers to "bid" to buy items at less than retail price from grocery retailers. Consumer pays Priceline discounted price and receives payment proof to give grocer; Priceline then pays grocer retail price. Priceline looks to manufacturers and sponsors to "subsidize the price gap," says Priceline source. Gives example: "If you bid $2 for pint of (premium) ice cream that should cost $3.29, Priceline looks to the manufacturer to help close that gap." Priceline comment. Priceline Webhouse spokesperson tells BD: "We have participating manufacturers and 3rd-party sponsors who make up the difference in price between what our customers pay and what the retailers receive." Adds, "we have 120 brands that manufacturers provide the discounts for and are adding more each month." Says service fees from customers -- $3 per month -- also help finance price gaps. Majority of business. Explains, "we give the majority of the business in each (grocery) category to manufacturers who participate."