PepsiCo Inc.: Coming Clean

Global beverage company learns that the truth will set you free -- and bring growth in the bargain.

A few weeks ago, a story about water rippled through the news when PepsiCo Inc. executives revealed that the company's Aquafina water brand was not sourced from spring water, as the snow-capped mountains on the sparkling blue label might have implied, but was in fact simply purified tap water.

The initial firestorm of controversy sparked by such a public admission from such a public corporation raged around the 24-hour news and online networks for a few days. Eventually, however, it was dampened by PepsiCo's forthright response to the crisis, and seemed to ebb away as the same consumer groups who had been flooding PepsiCo's call centers turned up the heat on the other big players in this market -- namely, Coca-Cola and Nestle -- instead.

Such candidness on the part of PepsiCo, an IW 50 Best Manufacturer for 2007, illustrates the benefit of coming clean to consumers in a crisis, and is yet another example of how the Purchase, N.Y.-based company is turning itself into a good example of positive positioning where issues of corporate social responsibility are concerned.

The water controversy story flows like this: At the end of July, a nonprofit consumer organization decided to expose what it saw as a "truth in advertising" issue and targeted PepsiCo with an aggressive public relations and phone call campaign to force the company to admit that it was, in effect, selling people a plastic bottle filled with tap water for a few dollars a pop.

From the moment the issue surfaced, it was clear there was no way for PepsiCo to simply ride out the wave of criticism without a response. Its Aquafina brand is currently No. 1 in the United States. And with wholesale sales of bottled water at around $11 billion last year, according to Beverage Marketing Corp., Aquafina's importance to PepsiCo corporate revenues is only likely to increase.

In the end, PepsiCo's public disclosure served to stem the tide of negative publicity, diverting it away from its own operations and contrasting PepsiCo with its competitors. Added to this, the company also changed its labeling practices to make Aquafina's source more clear by spelling out the words "public water source" on its label.

Such a straightforward response is consistent with what seems to be a corporatewide positioning strategy where issues of sustainability are concerned. As was recently reported on IndustryWeek.com, PepsiCo was the No. 1 purchaser of "green" power for 2006, with more than double the kilowatt hours generated from solar, wind, geothermal, hydro, biomass and biogas sources than its closest competitor. All told, three PepsiCo companies made the EPA Top 25 list, indicating an overall corporate commitment toward developing a sustainable supply chain.

In addition, the U.S. Green Building Council recently recognized PepsiCo's Blue Ridge Gatorade facility in Wytheville, Va., with its Leadership in Energy and Environmental Design designation at a Gold-level certification, making it the largest food and beverage site in the world to achieve this designation.

The food and beverage company is also diversifying its traditional snack goods to offer more health-conscious products through new introductions (Flat Herbs, which the company expects to be one of the top 10 overall food introductions of 2007) and mergers and acquisitions (Naked Juice), as well as changing production techniques and materials (eliminating trans fats and moving to "heart healthy" cooking oils) to minimize health risks to its consumers.

The fact that this consistent response to today's challenging business landscape -- from crisis control to energy costs to facilities upgrades to consumer health concerns -- is occurring across so many business segments and operational levels speaks of an overall positioning plan on the part of PepsiCo's executive leadership team.

PepsiCo Inc.
At A Glance

PepsiCo Inc.
Purchase, N.Y.
Primary Industry: Beverages
Number of Employees: 168,000
2006 In Review
Revenue: $35 billion
Profit Margin: 16.1%
Sales Turnover: 1.17
Inventory Turnover: 8.71
Revenue Growth: 7.91%
Return On Assets: 17.78%
Return On Equity: 39.59%

In a July 24 conference call with investors, PepsiCo chairman and CEO Indra Nooyi said, "Underlying our strong financial performance is our continued commitment to corporate social responsibility, which we at PepsiCo call 'performance with purpose.' We deliver on this commitment by focusing on three areas: our products -- providing greater choice to consumers in the area of healthier foods and beverages; our environment -- improving the relationship between our business, the communities in which we live and work and the natural environment; and then our people -- doing even more to find, develop, reward and retain the best talent."

The recent quarter saw growth in manufacturing productivity for the company's Frito-Lay division and significant growth in some of the company's snack lines according to John Compton, CEO, PepsiCo North America. "SunChips delivered another outstanding quarter, posting net sales growth of 28%. We added a new line in Topeka, Kan., during the second quarter and immediately sold out that new capacity. Another new line will be up and running by the end of the year."

And as for that tap water? According to Compton, the hydration segment of PepsiCo's business represents about 30% of overall beverage volume, and at least as of second-quarter 2007 PepsiCo was still experiencing strong growth in its trademark Aquafina brand. Of course, we'll have to wait until next quarter's report to see if sales start going down the drain.


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