PepsiCo’s Indian summer

The appointment last week of Indra Nooyi to the top job at PepsiCo has led some to question whether she has the skills to succeed as chief executive, but her background may make her the ideal candidate for a company anxious to expand into new markets, argues David Benady

PepsiCo’s surprise announcement last week that chief financial officer and president Indra Nooyi will take over as chief executive from Steve Reinemund in October led many observers to wonder what had brought about the change.

For some, it seemed strange that Reinemund – who has driven PepsiCo through a successful period and pushed sales up by nearly a third and net profits up by 70% during his half decade in charge – should step down now.

To release the news in the middle of August when many investors are on holiday only added to the mystery. As analyst Lauren Torres, of brokers HSBC in New York, says “A lot of us were surprised. Steve is 58 and we thought the company would get a few more years out of him. It was earlier than a lot of us expected.”

Some speculated that rival consumer goods companies were attempting to lure Nooyi away, and PepsiCo was keen to ensure that she stayed. “One question investors have consistently asked over the past few years was whether there would be enough to keep Nooyi interested at Pepsi,” says Bank of America analyst Bryan Spillane. “This promotion to chief executive would seem to suggest that there is.”

Officially, Reinemund says he has stepped down to spend more time with his family. And he claims that this is a carefully managed succession which has been planned for the past year.

Nooyi’s promotion could be seen as a vindication of the policy of ethnic and gender diversity that Reinemund has placed at the heart of the business in his five years as leader.

It seems fitting that he should be succeeded at the helm of the world’s third-largest branded-food and beverages company – after Nestlé and Kraft – by an Indian-born woman who often wears a sari at corporate meetings and who once played guitar in an all-girl rock band. A wife and mother of two children, Nooyi is a most unusual US corporate boss.

Sources say that diversity at PepsiCo is more than just a corporate accessory – it is an essential strategy as the company seeks to expand globally and into new markets. Having managers who are close to the new consumers is seen as vital.

Some point out that Nooyi’s Indian background could help in resolving problems that both Pepsi-Cola and Coca-Cola are having in India after a scare about pesticide contamination, which both companies deny responsibility for.

On the professional side, though, Nooyi is a strategist who has not run a business before. She joined PepsiCo in 1994 as chief strategist following stints at Motorola, ABB and Boston Consulting Group. But a PepsiCo spokeswoman says Nooyi has been “hands on in her role as president and corporate strategist”. Her career background contrasts with that of Reinemund, a performance-driven ex-marine whose promotion through the ranks of PepsiCo was earned by the strong growth of the units he ran. He started at the company in 1984 and became president and chief executive of Pizza Hut, then led snack-business Frito Lay North America and after that the worldwide unit. He was appointed chairman and chief executive in 2001.

Hundred years war

Under his command, PepsiCo has expanded its international business, and last year overtook rival Coca-Cola in market capitalisation for the first time in over a century. Its market capitalisation has since exceeded $100bn (£52.8bn). While Coke has undoubtedly won the cola wars, PepsiCo – with a diversified portfolio of 17 brands each worth over $1bn (£528m)- has won the battle for corporate superiority.

In reality, Nooyi and Reinemund have worked closely over the years. Nooyi has developed many of the important changes that have transformed the business. The company says she has directed its global strategy for over a decade and was the architect of divesting restaurants into Yum! Brands, spinning off Pepsi Bottling Group, and acquiring Tropicana and Quaker Oats. Reinemund said of her at the handover meeting: “She not only co-authored our vision and drafted our strategic blueprint, she has a sharp talent for turning insightful ideas into realities and replenishing our talent base.”

Much of PepsiCo’s success in recent years has been driven by its realisation that health trends were moving towards “better for you” drinks and snack products. Nooyi is understood to have been instrumental in this policy.

However, some wonder how Nooyi will make the transformation from financial strategist to operational leader. One source says: “Indra is a corporate and financial strategist but hasn’t got experience running a division. It will be a challenge for her. She is quite brusque and speaks her mind, while running operations is about being diplomatic and inspiring.”

There was surprise in some quarters that the top job did not go to the head of PepsiCo’s global operations Michael White, who created the PepsiCo International division in 2003, smashing together the global beverage and snacks businesses outside North America into a co-ordinated unit. This is now PepsiCo’s largest and fastest-growing division, accounting for a third of its 2005 revenues of $33bn (£17.4bn). Morgan Stanley analyst Bill Pecoriello is reported as saying: “International is a significant driver of PepsiCo’s profit growth”, adding that there “could be concern” about how long White would remain, in the light of Nooyi’s appointment to the top post.

Meanwhile, the challenges that PepsiCo faces over the coming years still remain. The task of transforming it into a business more focused on healthier products continues.

But there is a decreasing pool of target companies and brands to purchase in this area. PepsiCo is known to harbour ambitions to buy Danone, the French chilled-foods and dairy giant which also owns Evian water – speculation that an acquisition would be mounted reached a head last year when it was reported that the French government would oppose any acquisition of Danone by a US company – but it is understood that Danone does not want to sell. A similar problem faces PepsiCo with Ocean Spray, with whom it has recently signed a new distribution deal. Again, the growers’ co-operative behind Ocean Spray has historically been against selling the brand to PepsiCo.

A healthy future

PepsiCo bought PJ Smoothies in the UK, but there are precious few opportunities for it to acquire other healthy brands. It is likely to make small acquisitions, though some believe the emphasis will shift to buying or developing new technologies to create healthier products.

As Nooyi takes over following such a successful period for PepsiCo, she has the tough task of maintaining the momentum. Last year, its sales were up 11% to $32.5bn (£17.2bn) and division operating profits grew 10% to $6.7bn (£3.5bn).

She will need to use all her strategic and financial nous, and some new operational skills, to ensure that level of growth continues.