During a July 9 conference call with investors, PepsiCo CEO Ramon Laguarta offered a brief state of play on the newly organized PepsiCo Beverages North America (PBNA). In February, the company’s domestic beverage business was realigned into four US regional divisions – North, South, Central and West – and a single Canada division. The leader of each division manages the P&L, sales plans and execution (BD 2/15/19). Those leaders are Derek Lewis in Orlando (South), Kris Licht in Los Angeles (West), Neil Pryor in Chicago (Central), and Rich Tompkins in White Plains, NY (North). Richard Glover runs Canada, and all five divisions are overseen by PBNA CEO Kirk Tanner. One influential system executive told BD that Laguarta has given Tanner “a lot more latitude, that’s obvious, and Kirk is doing his level best to make the business better.” Since the new structure was announced, Laguarta has toured some independent markets with bottlers, according to multiple sources. This week, Laguarta told investors that the new PBNA structure should show benefits in the second half of this year, following a few months of transition. “But most important is the move we’re making for the future,” he added, citing improved service for regional customers, as well as segmentation of “consumer strategies” by state.
Results. PepsiCo reported +4% pricing growth for its North America beverage unit that helped offset a -2% volume decline. Organic revenue for PepsiCo Beverages North America grew +2.2% as a result. “We believe we will see a return to sustained, competitive performance as PBNA executes its planned investment agenda,” the company said in a statement.
System Views. BD asked executives within PepsiCo’s independent US bottling system (representing about 24% of volume) for an assessment of the new PBNA to date. We asked the following: A) What is your assessment of the new structure to date and will it improve execution and rejuvenate sales? B) Will PepsiCo eventually need to refranchise to be competitive with Coke’s refranchised system? The following responses are edited for clarity and space:
Executive 1: ‘Retailers applying pressure.’ A) PepsiCo is doing the right things. Their biggest issue is that these types of transitions take time, and they don’t have any time to spare as our competition continues to evolve and leverage their strengths. The retailers are applying pressure in areas where PepsiCo is notably weak. PepsiCo is so late reacting to the competitive and retail landscape changes that they are way behind the eight ball.
B) PepsiCo has a shot at remaining company-owned and having a thriving franchise system that accompanies it, but if synergies don’t happen faster and the company doesn’t get alignment with franchisees then they most certainly would be faced with other measures. There are still structural issues that need to be addressed, and they have yet to take concrete steps toward solving the issues in complete form.
Executive 2: ‘Refranchising inevitable.’ A) They are really trying. It’s designed to get [PepsiCo managers] closer to the business. It’s too soon to say how well it’s going to work. It depends on how much latitude and how much funding they give the individual business units to go out and do their own thing. One of the risks is it becomes a little more decentralized and therefore difficult to deal with the 24% of the system that is independent. Now the independents are all dealing with different heads. The independent system works better when we are in one group. There is more consistency in the funding. And when you get into the business issues that are important for the independents, all the franchise type issues, dealing with a single source is better. Operationally, there is a lot of logic as to why this should get all of us closer to the business.
B) I don’t see Pepsi having any real interest in going down the refranchising road, at this point. They need to do one of two things – they either need to buy the whole system or refranchise it. But I don’t think they are anywhere close to wanting to do either. Refranchising is inevitable. It took Pepsi a decade to follow Coke and create PBG [Pepsi Bottling Group] on the heels of CCE [Coca-Cola Enterprises]. The same kind of thing could happen here. It could be anywhere from five to 10 years. The Coke system is working. There is a lot of energy in the Coke system and the bottlers are working extremely well together, at least for now. The Pepsi independents just aren’t aligned with the things that PepsiCo wants to do. In the Coke system, the independents weren’t aligned with what Coke wanted to do and they solved the problem by creating a new contract, and opening up to refranchising was the carrot to get the new contract. I don’t see Pepsi having any carrot to hang.
Executive 3: ‘Not the right structure.’ A) Each region is set up very differently. They are trying to push down decisions and act like a bottler. The problem is that the teams in the field do not understand how a bottler functions or should operate, and they don’t ask for any help. They act like a publicly-traded company when they should be acting like an independent bottler, so they can make better and faster in-field decisions that are locally driven. I don’t believe it will change their sales or rejuvenate the system. It’s not the right structure. They have had and are having a large turnover of personnel, so execution is low.
B) They will need to refranchise. Is it too late? With the drop-off of revenues from their franchises, the value has dropped accordingly, so they will not get what they need or the shareholders want for that business.
Executive 4: ‘Feels less rigid.’ A) The leadership at PepsiCo in general feels less rigid. They still have aggressive agendas that the bottlers are not willing to go along with, but they also are showing some flexibility that I never saw before.B) I’m not sure how this is going to play out, but there is no question that we are all happy to see new leadership.
Executive 5: ‘Hard to fix today.’ A) This is nothing new. This was he structure they had maybe 20 years ago. It’s the same structure.
B) I think the Coke system of refranchising is the right way to go. Also, if you look at what Coke did, they went out and bought brands – Vitaminwater, Smartwater, Honest Tea, Monster, BodyArmor -- the big brands that the customer wants to have in the store. Our portfolio is not as strong as what Coke has to offer. It’s hard to fix today because there’s not that many big brands out there that make a lot of sense to go out and spend a lot of money. Could Pepsi go out and buy Essentia, which is the hottest water out there today? Sure, but they would have to pay a fortune.
Executive 6: ‘Don’t think refranchising would work.’ A) I doubt this new structure will really change things on the street. They have lost share to Coke for years now, so a lot needs to change. They have not asked for any suggestions yet. If they want to win, they have to invest. We will see if they are ready to do that.
B) I don’t think refranchising would work. They have too few independent bottlers left with the experience to run their much larger markets, with only a few exceptions. Getting outsiders with no soft drink expertise won’t work. Coke will have the most problems with bottlers they recruited from outside their system, like Chicago and LA. They will be the strongest where they refranchised existing bottlers who were already in the area, like Des Moines.
Executive 7: ‘Ramon knows it is going to take a lot of work.’ A) The [division leaders] are now in a dual role answering to a concentrate company and to the execution company via their own bottling system. Not too many things succeed with two bosses. Ramon knows it is going to take a lot of work to turn around this giant ship. I don’t think he has the complete picture as to how to go about it.
B) They will have to eventually spin off the franchises either through independent operators or a new publicly-traded PBG [Pepsi Bottling Group]. Lots of work to be done.
© 2022 Beverage Digest.
Design, CMS, Hosting & Web Development :: ePublishing