PepsiCo: No Deposit, No Return

 
 
By Mel Duvall  |  Posted 2003-05-01
 
 
 

PepsiCo: No Deposit, No Return


PDF Download A salty-snack maker in Texas pioneered the use of wireless communications on delivery routes. Among the copycats: Pepsico, Pepsi bottling companies and such Pepsi subsidiaries as Quaker Oats and Tropicana. So how come all these Pepsi units invested in different wireless systems? After all, Pepsi owns Frito-lay, the company that showed the world how to turn drivers into an on-the-spot pricing and promotion infantry. This is the story of how hard it can be to get the benefits of a single technology to seep throughout a massive company.

As day breaks over Minneapolis, Mike Kinney climbs into his 10-wheel, side-loading Pepsi truck. He arranges his tools for the job ahead: coffee in its holder, sunglasses on the visor and wireless handheld computer in a cradle bolted to the floor.

Kinney has sold, delivered or shelved Pepsi drinks for 26 years. When he started in the late 1970s, he recorded deliveries on paper with triplicate carbons. Since 1990, he has used various handheld computers, mainly from Intermec Technologies. About six months ago, PepsiAmericas, the $3 billion a year bottler based in Minneapolis, gave Kinney and 100 of his fellow Teamsters a new handheld computer from Symbol Technologies.

At seven inches long, the device looks like an overgrown calculator. It has 23 keys and weighs about a pound and a half. It can zap information over Bluetooth, Wi-Fi and wireless wide-area networks. "Its a lot faster and a lot nicer" than the Intermec, Kinney says. With it, he tracks the Pepsi cases he delivers to restaurants, schools and offices five days a week.

The Symbol PDT 8000 is the latest handheld computer in use at PepsiCo. But its not the only one.

An hour into Kinneys shift, Pepsi driver Dwayne McArthur starts his day in Calgary, Alberta, Canada. He has worked for the worlds biggest Pepsi bottler, the $9 billion Pepsi Bottling Group in Somers, N.Y., for the past year. When McArthur gets to a local distribution center at 5:00 a.m., he plucks his brick-shaped Intermec 6000 computer from a docking station and walks to his truck.

Intermec units have been bumping around for a decade or more in some pockets of PepsiCo—including Frito-Lay, its market-dominating salty-snack subsidiary. But more prominent at Frito-Lay, which 17 years ago became one of the first major companies in the world to use mobile technology in the field, are Fujitsu handheld devices.

Dan MacDonald, who sells and delivers chips in Westchester County, N.Y., tracks his truckloads on a gray Fujitsu device that Frito-Lay gave him when he started eight years ago. He slides it out of the back pocket of his jeans. "Theyve changed out the software a few times, but this is my original computer," he says.

Frito-Lays reputation as a technology innovator grew from its pioneering use of handheld computers and custom-written sales software. In the early 1990s, the setup let Frito-Lay shift some decisions about product pricing from headquarters in suburban Dallas to the in-the-store world of route drivers.

The surprising part about these three drivers is that they all use different handhelds even though they all work for the same corporate parent, PepsiCo.

PepsiCo likes to point out how Frito-Lay long ago led the way in what is now the hot enterprise technology: wireless data communications. When a Frito-Lay man entered a store and noticed, for example, that competitor Utz Quality Foods had its potato chips on two more shelves than usual or had dropped a few cents from each bags price, he could discuss it with the store manager and then, on the spot, lower the price on his own Lays or Ruffles. He would type the changes into the handheld. At days end, he uploaded the data to Frito-Lays mainframe sales and pricing databases via docking stations plugged into a local area network. Frito-Lay upgraded the system in 1992 and again in 1995.

But Frito-Lay is no longer even the most advanced Pepsi unit in wireless technology. PepsiCos three biggest bottlers—Pepsi Bottling Group, PepsiAmericas and Pepsi Bottling Ventures—each recently started rolling out their own new lightweight handhelds and sales software.

PepsiCos central technology service, known as the Business Solutions Group, has never successfully unified information systems across Pepsi businesses.

Now, to resuscitate cross-company technology efforts, PepsiCo is searching for a corporate-level chief information officer, to fill a position thats been vacant for three years.

Expected to be hired this year, the person who takes the job will have to stanch:

  • High turnover of technology executives. Many PepsiCo managers have left expressing disappointment in the companys lack of a clearly articulated technology strategy. Frito-Lay, once a wireless leader, has had six chief information officers in the past decade.

  • Mixed messages. PepsiCos top leaders, including Chief Executive Steve Reinemund and President Indra Nooyi, have not reined technology initiatives into a single standard, letting individual business units pursue their own interests.

  • Suffering gross margins. If Pepsi had been able to achieve the same kind of unified technology strategy as Colgate-Palmolive, another large consumer packaged goods company, its bottom line could be $1.7 billion higher today.

    The new PepsiCo CIO will also need to do spadework for carrying out a long-promoted concept in the company called the "Power of One." This principle, espoused by famed Pepsi Chief Executive Roger Enrico, is supposed to lead to the integration of selling operations and distribution logistics. Instead, the company continues to run separate distribution systems for Pepsi, Tropicana, Frito-Lay and Quaker, even though all four businesses deliver their products to the same U.S. grocery and convenience stores.

    To get a sense of how Pepsi has missed its chance to achieve billion-dollar savings by effectively transferring innovative technology throughout its business, look back to Frito-Lay.

    The snack-maker first introduced mobile data communications to its route drivers in 1986. The initial units were dinosaurs by todays standards, 10 inches long with one-line screens. But they were effective. Frito-Lay revenues jumped 14% per year between 1986 and 1990, from $3 billion to $5 billion. Operating profits grew at an even faster rate of 30%, from $348 million in 1986 to $934 million in 1990.

    But PepsiCo hasnt systematically reused Frito-Lays knowledge in other parts of the company. Each unit of PepsiCo has negotiated for and bought its handhelds separately. The same goes for the supporting software.

    Pepsi Bottling Group, PepsiAmericas and Pepsi Bottling Ventures have now eclipsed Frito-Lay in the use of advanced handheld technology. Their new wireless devices from Symbol and Intermec run all new sales software, some of which uses radio frequency tags to monitor inventory and manage pricing right from store shelves.

    Even so, the three bottlers did it independently of each other, creating a stew of hardware and software serving PepsiCo.

    Synergy Fizzles



    Synergy Fizzles

    Coordinating technology efforts, eliminating duplication and sharing best practices is something PepsiCo has been pontificating about for years, says Tom Pirko, president of BevMark, a beverage marketing consultancy in Santa Barbara, Calif.

    With good reason. Many big, diversified companies are getting rid of the separate sales teams, separate marketing departments and, in some cases, separate supply chains associated with each business unit. The goal is to act like a single company, to make it easier for stores to buy from you.

    Selling—and, more important, cross-selling—is more efficient this way. Newell Rubbermaid, The Scotts Co., CNA Financial and Unilever are all doing it, and overhauling information technology is critical to making it happen.

    At PepsiCo, though, "theyve been talking forever about how theyre going to streamline operations and integrate systems and theyre still talking," says Pirko, who has followed the company for two decades. "The commitment just hasnt been there."

    PepsiCo CEO Reinemund acknowledged as much during a recent meeting with Wall Street analysts.

    "I have to tell you, weve talked about this for years," he said. "I can remember in 1986 having a meeting with the division presidents at the time and we talked about synergistic things we could do together, and we had a nice discussion for a couple hours and went back and nothing happened."

    Larger than powerhouses such as DuPont, Sara Lee or McDonalds, the $25 billion PepsiCo is one of the most successful consumer products firms in the world. Frito-Lay rules the salty-snack business, selling $14 billion worth of Doritos, Lays and other munchies last year. Pepsi-Cola sales topped $5 billion, second only to Coca-Colas $20 billion. While Pepsis market share slipped slightly against Coke in the U.S. last year, it had gained steadily for three years before that.

    The $4 billion Tropicana juice company is also part of PepsiCo, as is the $1.5 billion Quaker Foods. In all, PepsiCo controls 55 brands of food and drink. The company also owns 35% or more of each of the three big bottlers, which together account for 75% of Pepsi sales in the U.S.

    Yet many former PepsiCo technology executives have left disappointed. "No one was willing to make the tough people-decisions," says Honorio Padron, a PepsiCo divisional CIO who left in late 1997. Padron described the climate during his 1 1/2-year term as "very volatile."

    He was hired in part to lead an integration strategy at PepsiCo, but, he says, "No one was willing to say, Guys, this is not a democracy—were going to do it this way."

    PepsiCo asks departing executives to sign agreements not to "disparage" the company in public. The result: Several of the executives who talked with Baseline about their disappointment at PepsiCo requested anonymity.

    They say the company could be even stronger than it is if it could carry out a clear, decisive information technology strategy. PepsiCo does not consistently share best practices, such as Frito-Lays groundbreaking mobile computing ideas, among business units. The company struggles to integrate information systems across divisions, which largely operate as separate entities.

    PepsiCos central Business Solutions Group is supposed to guide companywide computer plans and standards. But each business unit also has its own technology staff. The two factions frequently butt heads, according to several former technology managers.

    With no resolute action from the corporate parent to direct technology, Pepsis business units constantly duplicate work and miss the chance to bargain hard with vendors for cross-company deals. The waste adds up.

    In handhelds, for example, Pepsis bottlers have spent more than $40 million on new hardware in the past two years and a $100 million Frito-Lay purchase is pending this year. Including software and consulting, the total outlay is estimated at $200 million. If PepsiCo were to combine its purchasing power and standardize on two or three applications, analysts estimate, a bulk buy could save 20% to 30%. Thats up to $60 million saved in just this one area of technology.

    The obvious savings come from aggregating demand, but just as important are the periphery savings, says Richard Waugh, co-founder of B2eMarkets, a company in Rockville, Md., that specializes in volume purchasing.

    "When you can bundle the purchase to include software, installation, service and maintenance, the savings can be that much greater," he says.

    Former PepsiCo technology executives peg total technology spending at about $1 billion per year, with individual business units spending about $650 million together, plus another $300 million in charge-backs from the shared services group. Alinean LLC, a consulting firm in Orlando, Fla., that specializes in figuring the value of information technology, puts PepsiCos technology budget higher, at $1.6 billion annually.

    Its not as if PepsiCo hasnt tried to unify technology.

    In 1998, Steve Schuckenbrock, then chief information officer at Frito-Lay, set up the PepsiCo Business Solutions Group in Plano, Texas. The shared services group was to handle computing tasks that touched all business units, such as network infrastructure and data center operations.

    Initially, the group was to adopt cross-divisional software for human resources, finance and procurement, create a central corporate data mart and set standards for infrastructure technologies, such as for systems management.

    Later plans included integrated sales and marketing systems and a supply-chain management platform to control everything from procurement of raw materials to shipment of finished foods and beverages to stores.

    PepsiCo anticipated at the time it would save unspecified millions in yearly expenses by cutting redundant information systems.

    But five years later, there are no companywide enterprise systems. No two technology infrastructures are the same among the divisions; units use different enterprise software, different databases, different human resources systems, different financial applications, different distribution hardware and software. Frito-Lay, for example, runs Oracle software for financials and human resources and i2 Technologies software for managing its supply chain. Quaker recently aborted an SAP software project and reverted to older custom-built applications while preparing to move to Oracle financial, procurement and supply-chain applications.

    PepsiAmericas and Pepsi Bottling Group both run PeopleSoft packages. For business intelligence, Tropicana uses tools from Hyperion but Business Objects at Frito-Lay and Informatica at Quaker. Pepsi-Cola built a call center in Winston-Salem, N.C., using Siebel Systems software, and Pepsi Bottling Group later moved its call center there. But no other units have joined them.

    Even those PepsiCo executives who supported the concept of the Business Solutions Group eventually lost enthusiasm. "I believed shared services within the I.T. functions had tremendous merit," says a former divisional CIO. "I still believe that. But it was big job, a very tough assignment that required major cultural changes. And thats where things broke down."

    CEO Reinemund says the company has let divisions go their own ways because that strategy worked. As long as units met growth and profit targets, management didnt want to interfere. PepsiCos total sales grew nearly 7% last year and 5% in 2001.

    "There is an advantage in keeping the kind of ownership that weve always had at PepsiCo, where the divisions own their businesses, theyre responsible for their businesses, they know their businesses and they have focused resources against what makes them successful," Reinemund told financial analysts in February.

    PepsiCo executives declined to talk with Baseline about the issues of transferring and unifying technology between divisions and instructed other employees to refrain as well. The company generally avoids the press except for specific occasions when Reinemund or Nooyi, president and chief financial officer, grant interviews.

    Discussions with current and former PepsiCo managers, however, as well as with technology suppliers and industry experts, plus a study of public earnings reports, speeches, conference presentations and other documents, reveal an inability to successfully transfer the best technology in use at one Pepsi unit or bottler to the others.

    Muddled Mission



    Muddled Mission

    Perhaps most representative of this foregone opportunity is that PepsiCos topmost managers continue to issue mixed messages. For example, the company created the Business Solutions Group but didnt dismantle the technology management in each of the business units. Unit managers are compensated and rewarded for meeting financial goals of their divisions, not for how well or how often they cooperate with each other or with the shared services group.

    On the flip side, the shared services group, according to several former PepsiCo technology leaders, often steamrolls business unit wishes. In turn, the business units have resisted change. Its been a bad dynamic, insiders say.

    One former manager recalls how several business units had concluded after a technology evaluation that database software from NCR Corp.s Teradata division was best for a large data warehouse project.

    The Business Solutions Group, however, opted for IBMs database instead, in part because of an ongoing relationship with the vendor. The database was adequate and, as a longtime account of IBMs, PepsiCo gets rebates when it spends more than a set minimum on IBM products.

    In this case, the give-back was $500,000, the manager says, adding that the money was split between the Business Solutions Group and Pepsi Bottling Group, which was the unit that initiated the data warehouse project.

    "When they came up with a standard for the data warehouse, they never asked us for input," the manager says.

    A shared services model demands that local executives give up authority. And no one likes that. At diversified companies, each historically independent business unit often contends that its unique needs make it impossible to share much technology with others, says Rudy Hirschheim, a professor of information systems at the University of Houston.

    Texaco, which owned oil companies, gas stations and convenience stores when Hirschheim consulted there a few years ago, faced the same problem, he says.

    "The corporate unit has a job to ensure commonality. The business units felt it would hamper them and that their own I.T. people know whats best," he says. "This is a common plague."

    Indeed, Frito-Lay is now negotiating with vendors for a $100 million upgrade to its mobile systems. But rather than handheld devices similar to those chosen by the bottlers, Frito-Lay is leaning toward larger tablet computers.

    It says its field team needs a bigger screen to make effective sales pitches. The four-inch screen of a handheld, the argument goes, cant depict the full glory of an in-store display of Frito-Lays chips, dips and accompanying promotional banners the way the 10-inch screen of a tablet computer can.

    And because Frito-Lay products are located in several spots throughout a store—dips in the chip aisle but also in the condiment aisle, for example, or single-serve packs of peanuts in racks near cash registers—the company wants the handhelds to show merchandisers pictures of where everything is at each store. Itll help merchandisers refill shelves faster.

    If Frito-Lay wants tablets, Symbol, for one, will sell it tablets. If it wants handhelds, thats OK too, says Barry Issberner, a marketing vice president at Symbol in Holtsville, N.Y. "I am willing to go however the customer wants me to," Issberner says. "But there are definitely cost impacts of that [buying different computers], that I have to pass on to the customer."

    The brick buildings of the PepsiCo Business Solutions Group sit in Plano, across from a fenced field where four spotted horses grazed on a recent rainy afternoon. PepsiCo put the group on the Frito-Lay campus, hoping to build on that units past technology successes.

    But because of its location, the Business Solutions Group almost immediately drew a reputation as biased toward Frito-Lays systems and procedures. Most of the 2,300 staffers of the group come from Frito-Lay.

    "There was a suspicion on the part of other companies that this [was] Frito-Lay pushing its systems down our throat," says one former technology manager. "As a result, the discussions would all be very nice. Everyone would nod their heads. But no one made a move."

    Discord between the divisions and the Business Solutions Group has contributed to high turnover among technology managers at the business units (see "Org Chart: Popping The Top At Pepsi," p. 49).

    Frequent changes in leadership can corrode even a strong technology foundation because there is little consistency or long-term thinking, says Jerry Luftman, executive director for the graduate information systems program at the Stevens Institute of Technology, in Hoboken, N.J.

    "What PepsiCo is trying to do from a business point of view is right," says Luftman, who worked at IBM for 22 years, including as CIO. "But if you dont have the right leader and commitment, theres no way [its plans are] going to happen."

    One setback for the corporate group happened after PepsiCo had spun out Pepsi Bottling Group in a March 1999 initial public offering.

    At first, the Business Solutions Group held onto the bottlers information technology function. Later, just as leadership at the central group was changing, the bottler requested to take over its own technology "and they let them," according to a former manager. "They [Business Solutions Group] lost the opportunity" to control the information systems direction of a key Pepsi organization. "That was a huge loss."

    Implementing enterprise systems across divisions, which is a PepsiCo goal, is as much a people issue as it is a technological one. Every time a new chief information officer comes in, bridges have to be built. That doesnt always happen. "Its a source of failure with a lot of organizations," Luftman says.

    For years, PepsiCo has harbored the idea of having its products delivered to customers on one or two trucks. Frito-Lay chips, Quaker granola bars and oatmeal, Tropicana juices, Aquafina water and, of course, the high-fructose cash cow Pepsi-Cola would be packed together to arrive at a Wal-Mart or an Albertsons supermarket. A driver would unload the banquet, then, in some cases, arrange it all to PepsiCos liking on store shelves.

    Roger Enrico, chief executive from 1996 to 2001 and a 30-year PepsiCo veteran, called the concept "The Power of One." One company, one face to the customer.

    Its true that PepsiCo marketers have achieved some cross-pollination aimed at Joe and Jane Consumer. Newspaper coupons offer deals on, for example, Tropicana orange juice when buying Quaker oatmeal. In January, for the first time ever, Lays potato chips and Pepsi-Cola appeared in the same television commercial.

    But the hard part—selling and delivering groups of diverse PepsiCo products to retail stores—remains a dream. The technology to make it happen isnt there. PepsiCo actually runs on the power of five: five powerful businesses—Frito-Lay, Quaker, Pepsi, Tropicana and the bottlers—doing their own thing.

    Today, four or more trucks with items from Frito-Lay, Quaker, Pepsi and Tropicana all rumble up to a stores loading dock on different schedules.

    Quaker granola bars are now part of Frito-Lays delivery network and Quaker, Frito-Lay and Tropicana share 20 distribution centers, warehouses and offices. Quaker and Tropicana had combined some of their sales forces as of February 2002. But most facilities, by far, still belong to individual businesses. Frito-Lay, for example, operates 50 factories and 2,000 warehouses, distribution centers and offices in North America. Pepsi runs two syrup plants and seven warehouses. The Big Three bottlers run 126 separate plants.

    "Can you imagine if they truly executed on the Power of One?" asks one of the former executives. "How the heck do these organizations continue to meander around?"

    With the Power of One stalled, Reinemund in February said PepsiCo would try again to change. A so-called business process optimization plan calls for the divisions to copy much of the computer systems of Frito-Lay and some core management techniques from Quaker.

    Reinemund has put Nooyi in charge of the effort. She helped plan the $3.3 billion acquisition of Tropicana in 1998 and the $14 billion deal to buy Quaker Oats in 2001.

    Pain is the impetus for the new plan. The companys gross margin of profit has sunk from 58 cents on the dollar in 1998 to 54 cents last year. In effect, the company would have captured $1 billion of additional gross profit last year, if it had maintained its 1998 margin.

    Both its guzzle and its crunch businesses are getting hit.

    "In the beverage business, theyre losing momentum to Coke, and in snacks, consumers are putting a lot of pressure on pricing," says Caroline Levy, an analyst at UBS Warburg in New York.

    Margins are getting squeezed in the snack business as private-label competitors undercut Frito-Lays pricing. Plus, as Frito-Lay gets into healthier snacks such as baked chips and rice cakes, it faces pressure from packaged food giants Kraft and General Mills.

    Sales growth at Frito-Lay increased less than 5% last year, down from roughly 7% in 2001 and more than 11% in 2000. Operating profits grew 8% in 2002, down from 10% in 2001.

    Pepsis soda market share dipped slightly—by less than half of 1%—last year to about 31%, compared with Coca-Colas 44%. Pepsi blamed the slowdown on poor sales of its new Pepsi Blue berry cola, while the new Vanilla Coke sold well. Coca-Cola has meanwhile promised an onslaught of new flavors and packaging this year, vowing to extend its lead.

    Pepsi Bottling Group reported that sales volume was down 3% for the first quarter, as a brutal winter in the northeast kept too many soda drinkers away from stores and restaurants. PepsiAmericas cut 530 of its 10,500 U.S. jobs in March as sales dropped 7% for the quarter.

    With sales growth slipping, PepsiCo must find ways to bolster margins, Levy says.

    Early last spring, PepsiCo quietly invited technology integrators, including Electronic Data Systems, IBM and India-based Infosys, to bid on a contract to take over much of the work of the Business Solutions Group. The contract, valued at $100 million to $300 million over three to five years, according to one industry estimate, would have encompassed data center management, help desk, and network and desktop support.

    Its unclear why, and officials declined to talk about it, but PepsiCo nixed outsourcing and instead has decided to try to fix itself.

    Lining Up Converts



    Lining Up Converts

    Do Diligence, a technology strategy consulting firm in Rockport, Mass., a year ago helped revamp questionnaires PepsiCo created to assess the state of systems in 700 of its offices worldwide. PepsiCo wanted a measure of several items, including information systems security, disaster recovery, software development methods and the overall effectiveness of its information technology management.

    Soon after, PepsiCo created its optimization plan.

    One plank of that campaign is to merge at least some distribution centers so that various PepsiCo products can be delivered on the same trucks. The company hasnt talked in detail about those plans, but financial analysts expect Pepsi to continue to add certain Quaker products, such as rice cakes, cereal bars and toaster pastries, to Frito-Lays 16,300-route distribution network this year and next.

    But first up is to finally get all the divisions on one enterprise software platform: Oracle. Software for managing human resources is first, then finance and inventory.

    For the Oracle conversion, all the divisions will be required to adopt the implementation strategy Quaker had been using to install SAP software, says Karen Alber, vice president of integration at PepsiCo.

    Alber was vice president of integration at Chicago-based Quaker and oversaw at least the beginning of a three-year project to standardize on SAP R/3 software there. Key to Quakers method, she says, is to create a project management team comprised of people not only from the technology department but all affected business areas. Most important, the effort must be led by the business side, not the technology group.

    "Its a massive task being undertaken," Alber says. "Massive, but doable."

    Unfortunately for Quaker, the Oracle mandate meant killing its SAP implementation when it was 35% to 40% done, according to Alber. Quaker had managed to put in SAPs e-procurement application at 26 sites, for 1,400 users. Industry analysts figure that stopping the SAP project flushes away anywhere from $40 million to $100 million.

    While it waits for the conversion to Oracle software to begin, Quaker once again uses a mishmash of homegrown applications that it had been trying to escape by moving to SAP.

    Separately, Frito-Lay has spent $60 million since 1999 to reorganize its supply chain to, for example, ensure full and efficient truckloads with on-board computers that track the location, arrival time and load of its tractor trailers. Frito-Lay says it has gained $200 million in productivity and grown margins by nearly 3% from streamlining its supply chain.

    Pepsi executives wont reveal the overall cost of, or savings projected from, the companywide optimization plan. But Nooyi told Wall Street analysts that Frito-Lays stripping out of waste in its supply chain will save $800 million in the next three years.

    Her implication: Just wait until the whole company works efficiently.

    PepsiCo is regarded as a strong marketer, not, ultimately, a tech-savvy company.

    The two people overseeing Pepsis current efforts to "optimize" its systems—Nooyi and Shauna King, president of the Business Solutions Group—both come from finance.

    King is known as a tough executive who can rankle other managers. In the Wall Street meeting, Nooyi called King "a bull" who will push through hard changes. "Shell make sure everything gets delivered right, absolutely. No question about it," Nooyi said, laughing along with others in the room.

    Shared technology services should save money and improve efficiencies, and, in turn, help business units hit their financial goals. But it didnt always work that way at PepsiCo, says one of the former technology managers.

    At one point, the manager had cut costs at a business unit by 17% to 20%, but then the Business Solutions Group raised the charge-back prices for services it provided to that unit. The manager protested.

    "Were not paying more, I said, and they said, Well cut your services back." Eventually, the manager lost the fight. "It was a very difficult time."

    Charlie Feld, chief information officer at Frito-Lay from 1981 to 1992, created Frito-Lays revered handheld computer system. He says part of the problem with shared services anywhere, not just at PepsiCo, is the split allegiance of business-unit managers.

    "Its hard to tell a manager he has to operate within a certain budget," Feld says, "and then have a central I.T. group come in and tell him that he has to buy into a new technology initiative."

    The Business Solutions Group has succeeded in installing some common systems to replace divisional ones. For example, a central procurement system manages the purchase of diverse materials such as office supplies, the ingredients for making chips, and raw materials such as glass, plastic bottles and aluminum cans.

    A customer billing system generates reports showing a PepsiCo-wide view of customers. The system is built on mainframe software from Elevon in San Francisco (previously known as Walker Interactive). The reports show sales histories for, say, a particular 7-Eleven store or Winn-Dixie supermarket. Data from the different business units has been cleansed so that terms such as "price," "promotion" and "customer" are defined the same way by Frito-Lay, Pepsi and the other businesses, says a former CIO.

    There is a central help desk. Employees with computer problems at Tropicana, Quaker, Pepsi or Frito-Lay call a main help line run by the shared services group. If the glitch cant be fixed over the phone, the group contacts local technology staff at the business unit to walk over to the employees desk and figure it out.

    While that work is a start, senior managers are reluctant to push too hard from the top. CEO Reinemund is careful to emphasize that he will not take apart PepsiCos autonomous business-unit structure.

    "This is not about slamming businesses together," he said during a recent earnings call. "We want to add . . . a touch of collaboration that will allow us to strengthen the overall performance of our PepsiCo businesses."

    At an analyst meeting a week later, he put it another way. At PepsiCo, he said, "We have big brands and big businesses. You cant run that in a centralized fashion. You have to do it the way we have grown up doing it. Thats part of our culture."

    This is not the about-face on business-unit independence thats necessary for real change, says Jeanne Ross, a principal research scientist at the Massachusetts Institute of Technologys Sloan School of Management in Cambridge, Mass.

    The "touch of collaboration" Reinemund talked about isnt definitive. The CEO cant walk a tightrope, avoiding choosing sides between central control or business unit control. "As long as the corporate management is saying autonomous business units are measured on business-unit successes, the I.T. people associated with that business unit will do what the business unit wants and needs for it to measure up," Ross says. "The good ideal of sharing and working with a central I.T. department will always fall to second place."

    "Thats the problem," adds one of the former executives. "Theyve got one foot on the gas and one on the brake."

    By contrast, Colgate-Palmolive, the $9.5 billion consumer products giant, got tough when it decided to standardize globally on SAP enterprise software. It is tempting to leave business units alone when targets are being met, says Ed Toben, Colgates chief information officer, but making the gutsier choice to rearrange operations ultimately delivers the greatest benefits.

    It took nine years, but Colgate has installed SAP in 53 countries and eliminated 75 data centers. Direct savings have been more than $225 million, but more important, the integration has helped steadily improve gross profit margins, from 48 cents on each dollar of sales in 1994 to 55 cents in the most recent quarter.

    If PepsiCo could achieve a similar seven cents increase in gross margins, it could add $1.7 billion to its gross profits, each year.

    After


    -effect of Pre-selling">


    After-effect of Pre-selling

    The big bottlers are trying to do their part by moving away from the traditional direct store delivery (DSD) system. Under DSD, the same person who takes orders at stores also delivers the products and stocks them on shelves.

    But now they are moving to a pre-sell system that separates the jobs of sales, delivery and merchandising. The new method will give Pepsi salesmen more time to sell because they wont have to solve inventory problems and other backroom issues.

    Under DSD at Pepsi Bottling Group, for example, an agent went to the same store four or five times per week. Each visit lasted an average of 75 minutes—just four minutes of which were spent actually selling.

    Under pre-sell, the goal is to get selling time up to about 20 minutes, every few days.

    Each bottler has devised its own technology map to get to pre-sell. Pepsi Bottling Group and PepsiAmericas both rolled out Symbols handheld hardware last year. But PepsiAmericas runs mainly packaged sales software called RouteXpress from Extended Technologies in Dallas. Pepsi Bottling Group wrote software with Shelflink Inc. in Cambridge, Mass., using Microsofts .NET tools and Java.

    Pepsi Bottling Ventures, meanwhile, last year rejected Symbol. It upgraded its Intermec hardware, based on its past record for rugged reliability and a new color display. "Were all on different timelines and have different priorities for getting things done," says Steve Paladino, vice president of information technology and corporate treasurer for Pepsi Bottling Ventures in Raleigh, N.C. "We dont exactly have the luxury to coordinate our efforts."

    Beyond the direct command of either PepsiCo or the bottlers, however, are labor unions that provide drivers.

    With pre-sell comes a loss in commissions for drivers who once sold as well as delivered Pepsi products. For example, if Teamsters in Local 792 in Minneapolis must give up the sales piece of their jobs, they will lose the 6.26% commission on their route sales that they get today. With commissions and base pay, average wages are $25 or $26 per hour; some drivers reach $30 per hour.

    Pepsi may make up some of the cutback, but not all, says a union official who asked not to be named. "Pepsi is maybe willing to look at $21 an hour. It would mean a pay cut," he says.

    A year ago, Teamsters Local 744 in Chicago struck PepsiAmericas for two weeks, in part over proposed changes involving pre-sell that would have cut members pay.

    The new five-year contract signed last June requires the bottler to negotiate with the union any changes to delivery and allows pre-sell to start in Chicago this coming September.

    The bottlers have launched pre-sell in nonunion regions or in spots where labor relations are excellent. At PepsiAmericas, for example, Iowa is up on pre-sell and Symbol hardware, and Ohio began in March.

    PepsiCo hopes the new handheld technology at the bottlers, and soon at Frito-Lay, will transform the sales pitch.

    For example, the new Symbols at Pepsi Bottling Group have 64 megabytes of memory, five times the 12 megabytes of the old Intermec models. The added room allows for color images of in-store displays, new products and new packaging. Sales agents can also access a year or more of customer buying history, an improvement over the six weeks worth usually available before.

    The software also suggests ways to sell, and sell more, to a given customer by analyzing product shipments, price and point-of-sale activity with seasonal and holiday trends as well as geographic buying patterns.

    If its Wednesday and a sunny, 90-degree weekend is predicted, the application might put up a screen suggesting the salesman offer a 2% discount on Diet Pepsi if the customer buys 10 cases of slow-moving Pepsi Blue. Using sales history, the software might note this stores customers buy heavily on 2-for-1 sales of 6-packs of Pepsi cans but dont take so well to promotions that offer 50 cents off six-packs of plastic bottles.

    "At the end of every order, you can tell, Am I winning or losing today?" said Paul Hamilton, director of supply chain at Pepsi Bottling Group, speaking at a conference last fall.

    But the store managers who are the targets of these fancy expanded sales methods may not stand still for it, literally.

    At an A&P supermarket in New York on a recent morning, trucks from seven different food and beverage companies visited from 10 a.m. to 11:30 a.m. Store managers are often too busy to stop for 20 minutes to listen to a sales pitch.

    Several managers at grocery and drug stores say they are content to let Pepsi representatives back their rigs up to the loading dock, haul in the cases and put them on the shelves. Few store managers even know the names of their Pepsi guys.

    "They leave the paperwork behind and thats all I need to know," says Freddie Russo, an assistant manager at The Food Emporium supermarket in Yorktown, N.Y.

    "They have vendors coming in from every different direction," says Dennis Tuttle, director of information systems at Pepsi-Cola Bottling Co. of Delmarva, an independent bottler in Salisbury, Md. "The guy may resent you for wanting 20 minutes of his time."

    The Pepsi Challenge

    Still PepsiCo thinks pre-selling, combined with the business process optimization plan, will set up salesmen and deliverymen to carry out the Power of One; to finally move Pepsi soda, Frito-Lay snacks, Quaker breakfast foods and Tropicana juice as if the different products come from a single company. But the question remains: Does PepsiCo have the commitment to see it through this time, or will it have to experience more pain first?

    While PepsiCo appears more committed to achieving efficiencies this time around, thats not enough, says BevMarks Pirko. "In terms of the kind of change that is possible, the kind of change that will really make this company work much more effectively by using information— I think that still really is a dream."

    PepsiCo Base Case



    PepsiCo Base Case

    Headquarters: 700 Anderson Hill Road, Purchase, NY 10577

    Phone: (914) 253-2000

    Business: Beverage and snacks producer. Key divisions: Frito-Lay, Pepsi-Cola, Gatorade/Tropicana, and Quaker Foods.

    Chief Technology Officer: Shauna King, President of PepsiCo Business Solutions Group.

    Financials: $25.1 billion in revenue in 2002; $3.3 billion net profit.

    Challenge: To move from a melange of computer systems maintained by the individual business units, to a central technology strategy with common platforms and shared resources.

    BASELINE GOALS

  • Improve gross profits, which have fallen from 58.2% of sales to 54.2% in four years.
  • Revenue growth targets 2002 to 2005: 7% a year, for company as a whole.
  • Grow revenue of Frito-Lay North America, 7% to 8% a year; Pepsi-Cola N.A., 6% to 7%; Gatorade/Tropicana, 6% to 7%; Quaker Foods, 2%.

    The Pepsi Roster



    The Pepsi Roster

    INSIDERS

    Steve Reinemund

    Chairman, Chief Executive Officer, PepsiCo

    Despite announcing a new plan to share technology and best practices across divisions, vows not to dismantle business-unit structure.

    Indra Nooyi

    President, Chief Financial Officer, PepsiCo

    Overseeing push to unify basic technologies and processes across the company. Ranked #4 on Fortune magazines 2002 list of the 50 most powerful women in business.

    Shauna King

    President, Pepsi Business Solutions Group

    Known as "a bull" who pushes through projects despite protests, such as an IBM data warehouse in 2001. Named chief transformation officer in February to manage key technology aspects of PepsiCos bid to make operations more efficient.

    Ken Johnsen

    Chief Information Officer, PepsiAmericas

    Leading the rollout of $16 million worth of new handheld computers from Symbol Technologies. Also oversaw 2001 PeopleSoft project.

    Paul Hamilton

    Vice President of Supply Chain, Pepsi Bottling Group

    Leading the bottlers $20 million project to implement Symbol Technologies handheld devices. Using more custom software for pre-sell than is PepsiAmericas.

    Karen Alber Vice President, PepsiCo Integration Management Office

    Managing Oracle conversion at Quaker; leading effort to disseminate Quakers management methods throughout PepsiCo.

    OUTSIDERS

    Steve Schuckenbrock

    Chief Operating Officer, The Feld Group

    While chief information officer at Frito-Lay created the PepsiCo Business Solutions Group in 1998, a shared services organization to unify technology across business units.

    Mark Hampton

    Executive Vice President of Product Development and

    Sandra MacGillivray

    Director of Product Management and Professional Services, Extended Technologies Corp.

    Consultants focusing on handheld computer projects and direct store delivery systems; working with PepsiAmericas since 2001 to equip route drivers and sales staff with wireless handheld devices and new software.

    Barry Issberner

    Vice President of Vertical Marketing, Symbol Technologies

    Led sales and technical team to pitch Symbol products to PepsiAmericas and Pepsi Bottling Group. Now vying for $100 million Frito-Lay contract.

    Brian Schulte

    Consumer Goods Industry Director, Intermec Technologies

    Responsible for handheld computer accounts with Frito-Lay, Pepsi Bottling Group, Pepsi Bottling Ventures and several other Pepsi bottlers. Involved in negotiations for new handheld rollout at Frito-Lay.

    Pepsi Base Technologies



    Base Technologies

    No two technology setups are alike within PepsiCo—a situation that costs the company more in initial investment, maintenance and support than it has to. PepsiCo is trying to unify technology across divisions this year but hasnt yet chosen standards for all applications. A sample:

    Pepsi-Cola North America
    Technology Product Description
    Handheld computer Norand 6100 from Intermec Technologies
    Enterprise software Oracle
    Inventory software Great Lakes Software CIMSPAD from Microsoft
    Databases Red Brick Warehouse from IBM; Sybase
    Analysis tools Various Cognos tools
    Servers HP 9000 from Hewlett-Packard
    Frito-Lay
    Handheld computer Devices from Intermec and Fujitsu Transaction Solutions
    Sales software Custom systems
    Enterprise software Oracle financials and human resources; i2 supply chain
    Analysis tools Tools from Business Objects and Hyperion
    Databases IBM DB2; Oracle
    Transportation system OmniTracs and OmniExpress from Qualcomm; DigitalFreight from Manugistics
    Servers IBM 3090 mainframes, RS/6000s and various PC servers
    Tropicana
    Handheld computer Fujitsu
    Sales software CMS-Pro from Interactive Edge
    Enterprise software Oracle 11i E-Business
    Analysis tools Various, including tools from Comshare and Hyperion
    Transportation system RT-2000 ReeferTrak wireless and satellite railroad monitoring system from StarTrak
    Databases Oracle; Microsoft Access
    Servers Digital Equipment VAX and Alpha minicomputers from Hewlett-Packard
    Quaker Oats
    Handheld computer None
    Sales software Sales Enterprise and eConsumer Goods Sales from Siebel Systems
    Enterprise software Was SAP; now has reverted to custom-built applications
    Analysis tools PowerCenter and PowerConnect for Siebel from Informatica
    Databases Oracle 8
    Servers HP 9000 and HP rp8400, DEC Alpha and various Compaq PC servers from Hewlett-Packard
    Pepsi Business Solutions Group
    Data warehouse IBM DB2 and UDB
    Analysis tools Hyperion Essbase
    Pepsi Bottling Group
    Handheld computer Pocket PC 2002 from Symbol Technologies
    Sales software Mainly custom-coded in Java and Microsoft .NET C#; and eConsumer Goods Call Center from Siebel Systems
    Enterprise software Oracle GEMMS (modified in-house with PowerBuilder tools)
    Human Resources PeopleSoft 8
    Analysis tools Various, including tools from Business Objects, Hyperion and Informatica
    Databases IBM DB2; Microsoft SQL Server; Oracle 8; Sybase 10 and 11
    Servers IBM RS/6000 and 3090 mainframes; Hewlett-Packard Unix servers
    PepsiAmericas
    Handheld computer PDT 8000 from Symbol Technologies
    Sales software Combination of custom-coded and RouteXpress package from Extended Technologies
    Enterprise software PeopleSoft 7 and 8
    Databases Oracle 8
    Servers HP 9000 from Hewlett-Packard
    SOURCE: Baseline Research

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