Professors Rosabeth M. Kanter, Rakesh Khurana, and Rajiv Lal and Research Associate Natalie Kindred, Global Research Group, prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2011 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
R O S A B E T H M . K A N T E R
R A K E S H K H U R A N A
R A J I V L A L
N A T A L I E K I N D R E D
PepsiCo India: Performance with Purpose
The biggest thing that keeps me awake at night is the need to balance the short-term and long-term—in other words, how to sustain the focus and investment necessary to continue to grow our core brands and successfully compete in this exciting market, while also investing in long-term sustainability efforts where the payoff is not necessarily reflected in immediate performance measures.
— Sanjeev Chadha, Chairman and CEO, PepsiCo India
In 2006, PepsiCo Chairman and Chief Executive Officer (CEO) Indra Nooyi announced the company’s new mission, “Performance with Purpose,” reflecting her belief that the private sector, including PepsiCo, had a responsibility to “marry performance with ethical concerns.”1 According to Nooyi, “all corporations operate with a license from society, and it’s critically important that we take that responsibility very, very seriously. We have to make sure that what corporations do don’t add costs to society.” Nooyi defined “performance” as the company’s commitment to investors to deliver superior, sustainable financial performance and “purpose” as a commitment to human sustainability, referring to the company’s portfolio of foods and beverages; environmental sustainability, or responsible management of natural resources; and talent sustainability, encompassing employee empowerment, workplace safety and investments in local communities where the company operated. Since unveiling the mission, Nooyi had consistently reiterated her dedication to it in interviews and company communications, and employees from across PepsiCo’s global operations reported feeling inspired and energized by “Performance with Purpose.”
PepsiCo’s challenge was to ensure balance between the company’s short-term performance and sustainability goals and commitments that would ensure the company’s long-term growth and market leadership. Investing in sustainable practices would not only yield future cost savings and revenue opportunities, but also deliver cost containment, reduce exposure to legislation and regulation, attract and retain talent, optimize PepsiCo’s global supply chain and help build the PepsiCo brand.
Specific guidelines and targets for the new mission had been established at PepsiCo’s global headquarters. Country managers had to meet these targets, yet had significant flexibility in how they translated “Performance with Purpose” into practice. This decentralized approach allowed the country units to meet the commitments enshrined in the mission within the context of local conditions—for example, by tailoring new products to indigenous tastes and investing in locally
Distributed by The Case Centre North America Rest of the world www.thecasecentre.org t +1 781 239 5884 t +44 (0)1234 750903 All rights reserved e info.usa@thecasecentre.org e info@thecasecentre.orgcase centre 512-041 PepsiCo India: Performance with Purpose2 relevant environmental projects. Perhaps more than any other subsidiary, PepsiCo India, which Nooyi called PepsiCo’s “biggest learning lab,”2 was leading the pack in local innovation.
PepsiCo India PepsiCo’s India business was established in 1989 and in 2011 fell under its Asia, Middle East, and
Africa division (AMEA), which netted revenues and operating profit of approximately $6.3 billion and $700 million, respectively, in 2010 (see Exhibit 1 for PepsiCo’s organizational structure and Exhibit 2 for revenues and operating profit by division from 2007 to 2009). Since 1989, PepsiCo had invested more than $1 billion in the India business’s distribution networks, product portfolio, and manufacturing facilities (13 company-owned bottling plants, 23 franchisee-owned bottling plants, and three food plants operated by its food division, Frito-Lay). By 2010, PepsiCo India was India’s largest food and beverage business and a leading employer, providing direct or indirect employment to some 150,000 people.3
A 2010 brand-equity survey named Pepsi as India’s most trusted beverage brand, with double the score earned by Coca-Cola. Such esteem highlighted the company’s remarkable recovery since the mid-2000s, when allegations of unsafe levels of pesticide residue in Pepsi and Coca-Cola sodas produced in India ignited a public relations crisis. The beverage giants were derided in the media and in public demonstrations, during which protestors emptied bottles of soda into the streets,4 and several Indian states had enacted partial bans on Pepsi and Coca-Cola products.5 Some PepsiCo India executives later acknowledged that the company had failed to deploy an appropriate and timely communications strategy in response to the crisis, contributing to a loss of public credibility, low consumer confidence and internal morale, and sluggish sales (particularly of carbonated drinks), despite the allegations having no factual basis, as was later proven.
Sanjeev Chadha became PepsiCo India’s CEO in 2007, and had since overseen its transformation into a well-respected and fast-growing company. In 2009, PepsiCo India’s retail sales surpassed $1.5 billion, representing a compound annual growth rate of over 20% since 1995. Sales were boosted by rapid portfolio growth, as Chadha explained:
When I came to this business four years ago, we had half the portfolio that we have now. Our business has been on a tear. We grew 8% volume in 2007, 14% in 2008, and 32% in 2009 — ironically, the worst year of the decade for the world was the best year of the decade for us. The growth came from a combination of factors—diversifying our portfolio mix, ensuring magic price points, expanding width and depth of distribution, all the good stuff.
In 2010, PepsiCo India’s product portfolio included well-known global brands (e.g., Pepsi-Cola, Gatorade sports drinks, Lay’s potato chips, and Quaker Oats), as well as products tailored to Indian consumer preferences—a strategy PepsiCo executives love to refer to as “Indo-vation,” or “innovation by India, for India.” In some cases, local relevance was introduced to existing global brands, such as a line of Lay’s potato chips in traditional Indian flavors (e.g., “lime and masala masti”).6 Other products were entirely indigenous, such as Kurkure snacks, launched in 1999, a line of crunchy, bite-size “namkeen”a snacks with traditional Indian flavors; Lehar Namkeen, another line of namkeen snacks, launched in 1996 and relaunched in 2006; Aliva, a baked, salty, wheat-and-lentil biscuit launched in 2009 that was available in four spice varieties reflecting regional flavor palettes; Slice, a popular mango drink launched in 1993 and relaunched in 2008; and Nimbooz, a take on a
a Namkeen referred to a salty Indian snack, typically made from besan or gram flour and fried, in a range of flavors and spices reflecting regional specialties.
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common homemade lemon beverage (nimbu pani).7 (See Exhibit 3 for selected brand logos and products.)
In directing the strategy for realizing “Performance with Purpose” in the India context, Chadha was responsible for framing the needs of Indian consumers for PepsiCo’s corporate team; persuading the team to provide additional financial resources to support his strategy; ensuring the strategy’s successful execution on the ground; and effectively communicating the business’s accomplishments to its stakeholders, including consumers, the Indian government, investors, media, and the corporate team. Chadha noted that managing expectations was crucial to maintaining corporate support over the long term. “One of my important roles is to communicate the realities,” he said. “For example, I preface every presentation by saying, ‘This is a great opportunity, but be ready for volatility in emerging markets.’”
Realizing Performance with Purpose
Human Sustainability
Put broadly, human sustainability accounted for the value PepsiCo products offered to consumers, including their nutritional composition. The company developed a framework for measuring products’ healthiness. PepsiCo’s three-tiered system for categorizing its portfolio included: “Good-for-You” products, such as Tropicana orange juice and Quaker Oats, that delivered positive nutrition through the inclusion of whole grains, fruits, vegetables, low-fat dairy, nuts and seeds while moderating total fat, saturated fat, sodium and/or added sugar; “Better-for-You” products, such as sugar-free Pepsi Max, whose levels of total fat, saturated fat, sodium and/or added sugar were in line with global dietary intake recommendations; and “Fun-for-You” products, such as Pepsi-Cola and Lay’s chips. PepsiCo India’s approach to human sustainability reflected the diversity of India’s 1.2 billion-strong population. Covering roughly 3.3 million square kilometers, India was a country of polarities: it had a fast-growing, globally connected middle class, but also millions of people living in extreme poverty, including a vast rural population steeped in tradition. For this reason, PepsiCo India treated the market as two distinct segments: first, the mushrooming middle class, which shared many preferences and health concerns (e.g., cardiovascular issues, obesity) with western consumers; and second, the bottom-of-the-pyramid demographic, for which lack of calories and malnutrition were major concerns. (See Exhibit 4 for income distribution.)
Middle class Through a combination of portfolio diversification and marketing, PepsiCo India aimed to increase healthy products’ share of sales (by volume) for this group from 30%—the 2010 level, mainly reflecting sales of Aquafina bottled water—to 50% in five years. In recent years, PepsiCo India had enhanced the healthiness of its portfolio by introducing several global brands, including Tropicana, Quaker, and Gatorade, that became core brands of PepsiCo India. In addition, it internally developed and launched numerous products, including several juices (100% juices and nectars) and juice drinks (10% juice content). It had also adjusted some existing products to make them healthier— for example, substituting rice-bran oil for palm oil in some foods (which cut saturated fat by 40%), and developing a whole-grain, vitamin-fortified version of Cheetos snacks. As one manager noted of changes to product development, “We used not to ask the questions about how much salt, how much sugar. Now if we were to do a beverage, we sit back and say, ‘Are we exceeding the limit on sugar? What is the impact? How can we make it taste better?’ We work very closely with flavor houses [producers of ingredient components for the food industry] that can deliver molecules to better the taste despite less sugar.”
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In some cases, the company’s nutritional goals were at odds with the low consumer interest in healthy foods. PepsiCo India had introduced a number of 100% juices, but sugary juice drinks were far more popular with Indian consumers, and its fastest-growing beverage was Mountain Dew. It had also invested heavily in marketing Diet Pepsi, including innovative packaging and advertisements featuring popular celebrities, with little impact on sales. When it became apparent that weak sales were not a function of consumer awareness, the team concluded that Diet Pepsi was a new taste experience for Indian consumers. “We were too ahead of the times with Diet Pepsi,” Chadha noted. As a result, they needed to decide whether to bet on Diet drinks’ eventual success, sustain their investment, and aim to preemptively carve a leading position in the diet-cola market; or to cut their investment and potentially forfeit a market opportunity to competitors. This need to balance current consumption patterns with expected future trends in consumer behavior—while highlighting the benefits of investments in healthy, less lucrative products while competitors focused on the popular, more exciting sugary-drink category—was an ongoing challenge.
A counter example was Quaker Oats, which sold well since its 2006 nationwide launch.8 The PepsiCo India team posited that the prevalence of cardiovascular health issues improved the market’s receptivity to Quaker Oats, which was promoted as a heart-healthy product. “The message was picked up immediately because people were already tuned in to heart health,” said Chadha. “Where there is a core issue, there is no problem with adoption. This is unlike what happens in areas where people aren’t used to the issue—for example, with low-sugar products, people in India say ‘Sugar? What’s wrong with sugar?’” A PepsiCo India manager elaborated on the difficulties in identifying appropriate health interventions:
Packaged soft drinks are less than 1% of all hot & cold liquid refreshment beverages in India. So very logically, why should one even think of health and wellness in terms of soft drinks? With salt, only 4% of all snack consumption in India is packaged salty snacks, so again, why think about health and wellness here? So if I look at it only from a financial standpoint, why should I invest in change when the market here is so underdeveloped in terms of my categories?
Allocating resources was a constant challenge. Substituting rice-bran oil for palm oil, for example, cost $5 million and drove a significant margin reduction for some brands. When the change was made, the two oils’ prices had been roughly equal, but palm oil’s relative price had since decreased significantly. Given the cost difference, some PepsiCo India managers questioned whether to maintain the oil substitution, as one executive recalled: “There was a huge debate, but I felt we needed to stay the line now that we’d moved to rice-bran oil. It’s critical to anchor ourselves to our values and to invest for future adoption and growth.”
There was also debate about allocating marketing expenditures among brands. “This is always a dynamic piece,” Chadha explained. “Some would love us to spend three times more money on Tropicana and half as much on brand Pepsi. But we’re in a competitive market. Looking at return on investment, if I cut spending on Pepsi while the competition is spending more, my brand is going to suffer, and I’m not going to have as much money to drive the other businesses as well.” The company struggled to persuade salespeople to promote new brands over established ones such as Pepsi-Cola— historically their “bread and butter,” noted a PepsiCo India executive. “The guy sells what he’s familiar with and the smaller, newer product gets less attention. So you could have the best research and development (R&D), the best products, and the financial support, but still struggle in the market.”
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Bottom of the pyramid For India’s lowest-income demographic, which accounted for 20% of PepsiCo India’s sales and profit, anemia and micronutrient deficiencies were far greater health concerns than obesity and cholesterol. Chadha recalled an interaction that impressed upon him the different role of PepsiCo products for this demographic:
On a recent tour, I visited a home with three kids and a family income of just $50 a month, of which an amazing 40% went to the children’s education. One of the kids told me that she buys our Kurkure snacks two to three times a week, and I couldn’t believe it. It seemed crazy that the family could afford that indulgence in light of their financial constraints. I asked her mother, “How is that possible?” And she told me, “I can’t provide too many happy moments for my kids. Kurkure brings them joy, so I’m happy to do it.” That moment was unforgettable and really highlighted the fact that a large group of our consumers value Kurkure as a very special treat, and that is a cherished role for any brand to play.
In 2008, PepsiCo launched Project Asha (the Sanskrit word for “hope”), an initiative through which it was developing low-cost, nutrient-fortified food and beverage products to sell to low- income populations with high prevalence of malnutrition.9 Beverages and snacks produced under Project Asha would be priced at Rs. 2 or below.10 Leveraging its own distribution networks and those of partner nongovernmental organizations (NGOs), the project was being piloted in India and two African countries. The potential to market to the bottom-of-the-pyramid was, by many estimates, a multi-billion dollar opportunity.
The company also engaged the bottom-of-the-pyramid by contracting with small-scale farmers and incorporating their production (e.g., potatoes and rice) into its supply chain. Through these programs, which began in 1989, farmers were provided with seeds or saplings, disease-management assistance, financial advice, and other technical expertise to enable higher yields and, subsequently, increased income. In 2010, PepsiCo India was seeking opportunities to expand its engagement with farmers in areas such as barley and oats cultivation.
Transforming PepsiCo India’s portfolio entailed more than simply acquiring and developing new products, as Geetu Verma, VP Innovation, explained: “Traditionally, the organization has been enabled to make, sell and deliver soft drinks and salty snacks, but now we’re accessing new product platforms and customer segments. So in the last three to five years, we’ve been shifting gears not just in terms of portfolio, but also systems, processes, structures, and skill sets that are required to bring this new portfolio to life and sustain its performance.” The requirements for producing and marketing fruit juices, for example, were far more complex than for carbonated beverages. Because of the quality and safety issues associated with fruit ingredients, PepsiCo India staff needed to understand the fruit supply chain and visit suppliers to ensure quality standards were upheld. In manufacturing, carbonated drinks only required cold filling, whereas fruit juices were first heated before being cooled. Fruit juices had to be packed for distribution in a specific way, due to their greater assortment (in terms of flavors and pack sizes), temperature-control requirements, and shorter shelf-life relative to carbonated drinks. Finally, personnel at every step of the chain, from manufacturing to retailing, needed to be educated about the different considerations involved in producing and delivering the two product categories. Verma explained: “As an organization, we need to have a mindset that truly internalizes the business we’re now in. We need the hard skills— knowledge of the product, how to market it, etc.—and also soft skills, in that we need to appreciate the similarities and differences between the two systems.”
The company was experimenting with organizational structures to accommodate its evolving product portfolio. In beverages, for example, a new strategic business unit had been formed to
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introduce Tropicana and Gatorade into the marketplace. After several years, the company decided to merge the separate unit into the existing beverage business. However, the team soon realized that running separate businesses had been more effective—“when you merge, you gain some synergies but you lose focus,” explained Verma—and started again separating the two, armed with learnings from both experiments. Most recently, the company was developing four go-to-market systems: one for carbonated drinks and other popular core beverages, such as Nimbooz; one for core snacks such as Lay’s and Kurkure; one for value beverages and snacks targeting low-income consumers; and one for higher-end nutritional foods and beverages, such as Tropicana and Quaker Oats products.
Environmental Sustainability
PepsiCo India’s approach to environmental sustainability centered on improving operating efficiencies, reducing costs, and engaging in projects with community and company benefits. Water conservation was a natural opportunity to achieve “Performance with Purpose”: water scarcity was a major problem in India (agriculture alone accounted for over 80% of water use) and also a strategic risk for PepsiCo India, whose operations consumed 5.1 billion liters of water in 2009. By investing in manufacturing efficiencies, the company reduced the water used per liter of beverage it produced from 7.3 liters to 2.4 liters from 2001 to 2009, generating cumulative savings of 5.2 billion liters. From 2005 to 2009, PepsiCo India reduced the amount of water used in manufacturing by more than 45%, and in 2009 it achieved a positive water balance, meaning it replenished or conserved more water than it consumed—5.8 billion liters versus 5.1 billion liters, respectively.11 This landmark achievement won PepsiCo India a lot of rewards and recognition, and as a global first in the beverage world, it was an achievement of which the team was justifiably proud. Reduced operating costs were an added benefit.
PepsiCo India took a multifaceted approach to water management, including collecting, treating, and reusing water at its plants, and conducting water harvesting (collecting rain in excavated ponds or from the roofs of structures). It worked with rice farmers in a process called direct seeding, which reduced water consumption in rice-paddy cultivation by 30% compared to traditional flooded irrigation. In 2009, direct seeding was carried out on over 6,500 acres (compared to 20 acres in 2006), generating savings of more than 4,700 liters of water. Direct seeding also significantly cut greenhouse gas emissions relative to traditional rice cultivation, which created emissions from biomass immersed in water and increased yields. This made the technology an attractive business proposition for both farmers and PepsiCo India. Additionally, PepsiCo India undertook projects to improve the quality and quantity of water available to communities near its facilities, and involved communities in planning, building, and maintaining the projects.
Packaging was another area where, given the volume of bottles, bags, and containers PepsiCo funneled into the market every year, the company was naturally positioned to make an impact. Between 2008 and 2010, the India beverage business had cut plastic used in bottle caps by 200 metric tons by replacing a two piece closure made with different materials with a single resin closure that was also easier to recycle. Between 2005 and2010, the India snacks business reduced plastic laminate used in snack bags from 4.1 tons per million transactions (packs sold) to 2.9 tons per million transactions.
Packaging innovations had enabled an overall decrease in laminate consumption, despite growth in volume of products sold. Guided by the “five R’s”—reduce, reuse, recycle, remove, and renew— PepsiCo India’s environmental efforts also included innovating with recycled plastic (e.g., in roofing and road construction); promoting household recycling and waste collection in communities; and
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capturing 26% of its energy from renewable sources (e.g., wind turbines, rice-husk and biomass boilers, and bio-methane).
The main constraint on environmental efforts was the cost of R&D (e.g., pertaining to more efficient packaging and manufacturing practices) and the equipment and training required to implement changes. Because consumer spending capacity was limited in India, the cost of innovation could not be offset easily with higher retail prices. For instance, while PepsiCo’s SunChips brand used compostable packaging in some markets, the technology was cost-prohibitive in India.
Talent Sustainability
Talent sustainability encompassed efforts to make PepsiCo an attractive workplace. These included traditional drivers of recruitment and retention (e.g., compensation, recognition and reward systems), as well as sustainability initiatives, which were an increasingly important consideration when high-demand talent, particularly recent graduates, decided where to work.
As a result of sustained communication efforts and tangible accomplishments around sustainability, by 2010, employees’ confidence in the mission was very strong. They took particular pride in PepsiCo projects that benefited their communities. Referring to a community water project, a manager noted, “It has given tremendous satisfaction to plant workers. The virtuous cycle is amazing. In India, there’s so much to be done. You don’t have the opportunity to make that difference as an individual, but as an organization, we have such leverage.” “We realized we needed to talk to employees and try to answer the inherent contradictions that were there,” recalled Pavan Bhatia, head of human resources for PepsiCo India. “If we want 5,000 people across 70 locations who speak 20 different languages to understand ‘Performance with Purpose’ in the same way, we needed to communicate the hell out of it.”
Employee feedback showed that PepsiCo India’s sustainability efforts had a positive effect on morale, representing an important accomplishment in terms of talent sustainability. PepsiCo India had been recognized for its talent sustainability efforts through internal and external awards, for example, an acknowledgement from the International Labor Organization (ILO), a United Nations agency, for its workplace-based HIV/AIDS prevention and support program, an “HR Star” award in 2006, and an AMEA Talent Sustainability award in 2010.12
The company continued to work on integrating “purpose” into other aspects of human resources, such as systems for evaluating personnel. In hiring, for instance, some “purpose”-related questions had been incorporated into standard interview practice, although there was some debate as to how much weight “purpose” should hold relative to a candidate’s “performance”-related credentials. The same balancing act applied to performance evaluations for current employees and business units. For example, in designating the year’s top-performing plant, only those facilities that had achieved the company’s water-sustainability criteria were eligible to be considered.
Managers had to find innovative ways to fulfill the mission within the parameters of their role and performance objectives. The company was sensitive to the fact that brand managers of health- focused products might have more straightforward avenues for delivering on sustainability than, say, managers of the Pepsi-Cola brand. Bhatia explained: “Pepsi targets the youth category, and youth see corporate responsibility as important, but other, healthier brands might seem better positioned to credibly stake a claim in social responsibility. In order to get what drives Pepsi’s performance—the brand equity of fun—to translate on the purpose side, we need to find that golden key.” Nonetheless, all managers were held accountable for customizing the mission to their particular setting. Across the company, all managers’ performance development reviews allocated 50% weight to talent
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sustainability (encompassing efforts to promote employee development and wellness) and 50% to business results (consisting of productivity, strategic priorities, competitive measures such as revenues, margin, and market share, and human and environmental sustainability goals).
Healthy Tension PepsiCo India’s achievements under the “Performance with Purpose” umbrella had garnered
praise from the Indian government, NGOs, and the global PepsiCo organization. Stated Nooyi in a 2010 interview, “The business in India is buoyant, which has turned attention to this country in a nice way. It is a terrific time for India. They can now ask and get resources, people, money and technology much easier.”13 Chadha was proud that the business was regarded so highly, but his satisfaction was tempered with the knowledge that fulfilling such high expectations would not be easy.
One challenge was being too far ahead of the expectations of the local Indian consumer when innovating healthier products. “If the consumer is at X, and you innovate far ahead to Y, the innovation may have difficulty gaining acceptance in the marketplace,” said Chadha. “Even though, by definition, every innovation is risky, if your innovation success rate is normally 30%, this is 15%.” Being ahead of consumer tastes also precluded PepsiCo India from capturing the goodwill benefits that might accrue in a more health-conscious market. For instance, the company decided not to advertise its palm oil substitution because consumers showed little interest in such messaging. Although Indian consumers reported being concerned about health, nutritional concerns did not yet drive their consumption choices; they did not “walk the talk,” as one executive put it.
However, the risk of outpacing the Indian market could also be construed as an opportunity to shape its direction, such as defining what “healthier” means in the Indian context, engaging with government stakeholders to develop sensible food regulations, and infusing corporate responsibility into PepsiCo India’s public image. A louder public voice would also allow the company to better communicate the nutritional merits of its portfolio.
Allocating resources between factors impacting near-term performance and sustainability-related objectives was an ongoing challenge. For example, the company faced growing competition from so- called value players, the small, local producers whose low production costs enabled them to undercut PepsiCo prices. In fall 2010, PepsiCo India created a new executive position focused on competition from value players, which was just one of the many priorities competing for resources. A related concern was how to sustain investment in R&D within a viable cost structure. While India was a high-growth market, it could not yet absorb the high levels of investment possible in some mature markets. A manager offered an example:
In a market like the U.K., 80% of PepsiCo products are sold through four customers, the four large retail chains. In India, we are selling through 1.5 million outlets, the mom-and-pop stores, in urban, semi-urban, and rural areas—and that reality will exist for the foreseeable future. So imagine how many people we need to employ at the front line compared to some other markets. Our revenue per pack is a fraction of what you’d get in the U.K., our selling effort is many times more than what you’d do in the U.K., but our capital costs are similar. So looking at that equation, it’s very tough in a low-margin business.
Given that some sustainability investments had longer-term payback horizons, both in financial returns and goodwill, PepsiCo India constantly had to balance both elements of its “Performance with Purpose” strategy. Chadha explained that the financial element remained his “toughest challenge:”
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If you ask me to maximize my margins in the short term, I will sell a lot more of the same top-selling products and not invest in my new platforms, whereas the transformation under “Performance with Purpose” requires us to divert funds to the new platforms to drive future growth. Packed in with that is a competitive challenge. We’re in a horserace for leadership in India’s food and beverage market. And if the other guy is focusing on the core revenue-driving products, and I’m doing other things—well, it’s clear that there’s a very fine balance that must be achieved between short- and long-term priorities. But in the long-term it will be a competitive advantage—that is the tension.”
Organizational Changes
Balancing the competing priorities of today—sustaining growth in PepsiCo’s current products— with the consumer and societal priorities of the future raised many organizational questions. For example, because the development timeframe and revenue expectations for new nutritional products could differ from PepsiCo’s traditional products, measuring and comparing the performance of the two product groups could be difficult. The product groups also required different go-to-market strategies. The human resources needs of each, in terms of talents’ experience, motivating factors, and performance metrics, could also differ. As PepsiCo India cultivated the organizational capacity to manage initiatives under “Performance with Purpose,” it also needed to develop systems to coordinate with and leverage the know-how of the Global Nutrition Group (GNG), PepsiCo’s newly formed group charged with managing innovation efforts around health and nutrition. In June 2010, the former head of PepsiCo India’s foods division, Gautham Mukkavilli, was named head of the grain nutrition vertical in GNG, which was based in Chicago, Illinois. Mukkavilli was, based in Dubai and coordinated all GNG activities in AMEA, with a special focus on India and China. GNG leveraged partnerships with academic and other research institutions to incorporate the latest nutritional science into its product development.14 Nooyi envisioned GNG playing a key role in reaching PepsiCo’s goal of growing its nutrition businesses from its 2010 level—roughly $13 billion in revenues—to $30 billion by 2020.15 How could PepsiCo India help achieve this goal?
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Exhibit 1 PepsiCo Organizational Structure
PepsiCo Americas Beverages PepsiCo Americas Foods
Frito-Lay North America
Quaker Foods North America
Sabritas
PepsiCo Europe PepsiCo Asia, Middle East & Africa
PepsiCo
Pepsi Beverages Company
Latin Americas Foods
Gamesa
Source: Adapted from “The PepsiCo Family,” PepsiCo website, http://www.pepsico.com/Company/The-Pepsico-
Family/PepsiCo-Middle-East-and-Africa.html, accessed July 2011.
Exhibit 2a PepsiCo Key 2010 Financials (in $ millions except per share data; per share amounts assume dilution)
2010 2009 Change (%)a Change Constant Currency (%)a,f
Summary of Operations Total net revenue $57,838 $43,232 34% 33% Core division operating profitb $10,626 $8,647 23% 23% Core total operating profitc $9,773 $7,856 24% Core net income attributable to PepsiCod $6,675 $5,846 14% Core earnings per share attributable to PepsiCod
$4.13 $3.71 12% 12%
Other Data Management operating cash flow, excluding certain itemse
$6,892 $5,583 23%
Net cash provided by operating activities $8,448 $6,796 24% Capital spending $3,253 $2,128 53% Common share repurchases $4,978 – n/m Dividends paid $2,978 $2,732 9% Long-term debt $19,999 $7,400 170%
Source: PepsiCo, Inc., 2010 Annual Report (Purchase: PepsiCo 2010), p. 15. a Percentage changes are based on unrounded amounts. b Excludes corporate unallocated expenses and merger and integration charges in both years. In 2010, also excludes certain inventory fair value adjustments in connection with our bottling acquisitions and a one-time net charge related to the currency devaluation in Venezuela. In 2009, also excludes restructuring and impairment charges. See page 108 (in source) for a reconciliation to the most directly comparable financial measure in accordance with GAAP. c Excludes merger and integration charges and the net mark-to-market impact of our commodity hedges in both years. In 2010, also excludes certain inventory fair value adjustments in connection with our bottling acquisitions, a one-time net charge related to the currency devaluation in Venezuela, an asset write-off charge for SAP software and a contribution to The PepsiCo
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Foundation, Inc. In 2009, also excludes restructuring and impairment charges. See page 108 (in source) for a reconciliation to the most directly comparable financial measure in accordance with GAAP. d Excludes merger and integration charges and the net mark-to-market impact of our commodity hedges in both years. In 2010, also excludes a gain on previously held equity interests and certain inventory fair value adjustments in connection with our bottling acquisitions, a one-time net charge related to the currency devaluation in Venezuela, an asset write-off charge for SAP software, a contribution to The PepsiCo Foundation, Inc. and interest expense incurred in connection with our debt repurchase. In 2009, also excludes restructuring and impairment charges. See pages 64 and 108 (in source) for reconciliations to the most directly comparable financial measures in accordance with GAAP. e Includes the impact of net capital spending, and excludes merger and integration payments and restructuring payments in both years. In 2010, also excludes discretionary pension and retiree medical payments, a contribution to The PepsiCo Foundation, Inc., interest paid related to our debt repurchase and capital expenditures related to the integration of our bottlers. In 2009, also excludes discretionary pension payments. See also “Our Liquidity and Capital Resources” in Management’s Discussion and Analysis (in source). See page 108 (in source) for a reconciliation to the most directly comparable financial measure in accordance with GAAP. f Assumes constant currency exchange rates used for translation based on the rates in effect in 2009. See pages 64 and 108 (in source) for reconciliations to the most directly comparable financial measures in accordance with GAAP.
Exhibit 2b PepsiCo Distribution of Net Revenues and Operating Profit by Division (%), 2010
Net Revenues (%) Operating Profit (%) PepsiCo Americas Beverages 35% 29% PepsiCo Americas Foods 37% 53% PepsiCo Europe 16% 10% PepsiCo Asia, Middle East & Africa 12% 8%
Source: Adapted from PepsiCo, Inc., 2010 Annual Report (Purchase: PepsiCo 2010), p. 15.
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Exhibit 4 Income Distribution in India, 2005
45.34
11.27 14.94
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highest 20% second 20% third 20% fourth 20% lowest 20%
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Population Grouped by Income Level
Source: Compiled via World Bank, World Development Indicators database, accessed October 2010.
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Endnotes
1 PepsiCo, Inc. 2009 Annual Report (Purchase: PepsiCo, 2009), p. 2.
2 Shamni Pande, “How India is Changing PepsiCo,” Interview with Indra Nooyi (conducted by Rohit Saran and Shamni Pande), Business Today, January 24, 2010, p. 52.
3 “Our Corporate Profile,” PepsiCo India website, http://pepsicoindia.co.in/Company/ ourcorporateprofile.aspx, accessed September 2010.
4 “India’s Cola Crisis Bubbles Up,” CNN World website, August 18, 2003, http://articles.cnn.com/2003-08- 18/world/india.drinks_1_coke-pepsi-cola-coca-cola?_s=PM:asiapcf, accessed November 2010.
5 Amelia Gentleman, “Pesticide Allegations Trip Up Coke and Pepsi,” The New York Times, http://www.nytimes.com/2006/08/22/business/worldbusiness/22iht-coke.2562750.html, accessed November 2010.
6 Shamni Pande, “How India is Changing PepsiCo,” Business Today, January 24, 2010, p. 45.
7 “PepsiCo Brands,” PepsiCo India website, http://pepsicoindia.co.in/brands.aspx, accessed September 2010.
8 “Pepsi Foods Private Limited,” IndiaMart website, http://www.indiamart.com/company/1901141/ products.html, accessed January 2011.
9 Rajiv Banerjee and Ratna Bhushan, “PepsiCo Seeks Ad Partner for Energy Drink & Biscuit,” The Economic Times, September 29, 2010, http://economictimes.indiatimes.com/news/news-by-industry/cons- products/food/PepsiCo-seeks-ad-partner-for-energy-drink–biscuit/articleshow/6647483.cms, accessed January 2011.
10 Ratna Bhushan and Chaitali Chakravarty, “Indra Nooyi Keeps Mystery Alive on Tata Job Offer,” The Times of India, November 10, 2010, via Factiva, accessed November 2010.
11 “Replenishing Water,” PepsiCo India website, http://www.pepsicoindia.co.in/CSR/ replenishingwater.aspx, accessed November 2010.
12 “We Nurture Differences,” PepsiCo India website, http://www.pepsicoindia.co.in/Career/ WeNurtureDifferences.aspx, accessed February 2011.
13 Ratna Bhushan and Chaitali Chakravarty, “Indra Nooyi Keeps Mystery Alive on Tata Job Offer,” The Times of India, November 10, 2010, via Factiva, accessed November 2010.
14 “PepsiCo Delivers Solid Third-Quarter Results, Posting Strong Gains in Net Revenue, Net Income and EPS and Broad-based Sequential Gains in Operating Performance; Establishes New Global Group to Drive Nutrition Innovation,” PepsiCo press release (Purchase, NY, October 7, 2010), via PepsiCo website, http://www.pepsico.com/PressRelease/PepsiCo-Delivers-Solid-Third-Quarter-Results-Posting-Strong-Gains- in-Net-Revenue10072010.html, accessed January 2011.
15 “PepsiCo Delivers Solid Third-Quarter Results, Posting Strong Gains in Net Revenue, Net Income and EPS and Broad-based Sequential Gains in Operating Performance; Establishes New Global Group to Drive Nutrition Innovation,” PepsiCo press release (Purchase, NY, October 7, 2010), via PepsiCo website, http://www.pepsico.com/PressRelease/PepsiCo-Delivers-Solid-Third-Quarter-Results-Posting-Strong-Gains- in-Net-Revenue10072010.html, accessed January 2011.
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