CEO OF THE YEAR 1991
July 1 1991 by Chief Executive
Your will is done. Chief Executive readers have nominated and a distinguished committed of peers– all of them current or former CEOs-have confirmed Wayne Calloway of PepsiCo as 1991 Chief Executive I the Year. In this sixth year of the honor’s existence the competition was the closest on record. As impressive as PepsiCo’s 27.2 percent 10-year average annual return to shareholders, and its 14.6 percent compound annual growth rate in net income over 10 years are, financial performance was not the determining factor. (It never is.)
“Wayne demonstrates a capability to define a corporate strategy, to implement difficult restructuring, to pursue it aggressively, and finally to consistently generate significant returns,” says Lockheed CEO and 1991 judge Dan Tellep.
”His single most outstanding achievement,” according to another judge, Manufacturer Hanover’s president Tom Johnson, “is his success against strong competition in the soft drink market.” “In the food industry,” adds former CS First Boston chief Bill Mayer, “you’re always up against an extreme threat, but Calloway has improved PepsiCo’s market share.”
“PepsiCo and Calloway finish high on ay list of performance over the last several years,” adds fellow selection committee member Jim Harvey, CEO of Transamerica. In this day of global competition, his peers regard him as a world class marketer who has actually done something many chief executives talk about but seldom do: wed the incentive of ownership-to everyone throughout the company – to strategy on a worldwide scale.
“l like the things he’s done with the people in his organization, including implementing PepsiCo’s unique sharepower plan,” says committee member Bob Lear of Columbia Business School. “He’s a real people person and very involved in his organization,” says Dial Corp.’s John Teets.
Perhaps 1990 Chief Executive of the Year Heinz’s Tony O’Reilly, summed it up best: “He’s taken a very successful business, a market leader, and made it even more successful which is a very difficult thing to do. He’s taken a business that was very clear beforehand and added value and personality to it. Coming after a major industry figure like Don Kendell, that’s a real achievement.”
Chief Executive salutes Wayne Calloway, 1991 Chief Executive of the Year
PepsiCo’s Wayne Calloway inherited a strong, well-run global marketer of powerful brands. That was luck. He gave it sharper focus, greater attention to cost control, and most importantly pushed people forward with the power of ownership. That was ability. Beyond the placid country-boy manner lies a shrewd judge of character who leads by indirection.
Frito-Lay CEO Roger Enrico, formerly the Norman Schwarzkopf of the cola wars of the 1980s when he ran Pepsi-Cola, re€’ members the nervousness he felt when he sat down to tell his boss that Michael Jackson wanted S10 million instead of $5 million to re-enlist as a Pepsi promoter. ‘I told him it was an outrageous amount of money, but that it looked to me like a good idea and we ought to do it,” recalls Enrico. “Wayne just looked at me and said, ‘Well, it sounds like a big idea to me,’ and that was the end of that. Wayne works through decisions by dealing with his people.”
Pizza Hut marketing director John Lauck got stuck with $5 million in sunglasses when a sales promotion tied to the launch of Back to the Future, Part 2 misfired badly. The result? Lauck was later promoted. Pizza Hut CEO Steve Reinemund told Tom Peters in On Achieving Excellence, “People here don’t get shot for taking risks.”
People make the difference. Politicians say it. Military officers (when they are not stumbling over compound acronyms say it. And CEOs, nodding like so many backseat auto kewpie say it. With massive downsizing (oops, “rightsizing”) of U.S. corporations due to restructurings and a recession, why believe PepsoCo’s chief executive anymore than the others? “His example gets us to act on it, not just talk about it,” Enrico shoots back. Thenotion of employee empowerment, ever the buzzword of today’s management high priests, is difficult to dismiss lightly even at this $18-billion soft drinks, snack foods and restaurants company with 308,174 employees-not when a Florida employee in personnel on her own initiative convinces her local school board to consider a Pizza Hut concession in the school’s lunch program, or when a Mississippi Pepsi truck driver comes up with a money-saving scheme by using back roads to shave 100 miles off his delivery route. Then there’s the Texaco executive, who in going out to dinner one evening, met a PepsiCo accountant, with no sales responsibilities, who talked the oilman into selling pizzas in Texaco’s new European convenience stations.
Isolated anecdotes? Maybe. Yet in 1989 the Purchase, NY-based company offered to all eligible employees something that is normally reserved for the corner office types with blue suits and snappy red ties: stock options. Sharepower is a Calloway brainchild that almost didn’t happen. “The lawyers and many at corporate headquarters were dubious because no one had ever done anything like this before,” says PepsiCo VP compensation and benefits, Charles W. Rogers. (The number of options is based on employee’s earnings; 83,175 employees participate today with 19.5 million options granted of which only 0.2 percent have been exercised. Dilution is not significant.) Share-power is being closely watched by other companies. “The plan is the best expression of fairness and internal consistency in employee incentives today,” says Douglas Reid, SVP, human resources, Colgate-Palmolive.
The effects are often spontaneous: Oklahoma City KFC restaurant manager Ken Hardin scours local manufacturers for a more durable hot water hose that annually saves his store, and ultimately 12 others to whom he’s passed the idea on, $600 per restaurant. Frito-Lay employees in Plano, TX start the workday checking PepsiCo’s stock price in the financial pages. A senior corporate VP is taken aback when a secretary filling out his expenses asks, -Couldn’t you have stayed at a less expensive hotel?”
“We want to change the way this company is managed,” says the 55-yearold Elkin, NC-born CEO with a soft Blue Ridge accent. How does one do this in a company already enjoying 15 percent annual growth? Michael Jordan, CEO of Pepsico Foods International who has worked in the company for 17 years says, “It’s much calmer today compared to the days of Don Kendall. Don was dynamic, always pulsating. Since 1986 (When Calloway became CEO) we focus on consistency – margin improvement as well as growth. Cost reduction was always important, but we’re more consistent at it.”
PepsiCo more than anything is a global marketing engine with eight turbo brands each generating more than $1 billion yearly at retail. Brand Pepsi exceeded $14 billion worldwide retail in 1990. Coke still dominates with 40.9 percent of the overall market versus Pepsi’s 33.2 percent, nearly a two point gain since 1985, according to Beverage Digest. Each of its three business lines-soft drinks (37 percent), snack foods (28 percent), and restaurants (35 percent)-have managed double-digit sales growth and record operating profits. Frito-Lay, with which Pepsi-Cola merged in 1965 and which Calloway ran from 1976 to 1983, commands almost half the $12 billion salty snack market in the U.S. Use of hand-held computers by Frito-Lay’s representatives allows increased distribution control and quicker line extension introductions.
Although the U.S. market will continue to dominate, the future lies beyond. International operating profits were 7.6 of the total in 1987, but will be 20 percent by 1992. Coke has a 2.5-to-1 lead over Pepsi due mostly to its being in Europe directly after the war. Pepsi plans to grow by building the category and taking share from lesser players. Coke’s formidable distribution system in Europe, now extended throughout Germany, will assure its supremacy there unless Coke does something really stupid. Yet Pepsi’s early lead in the Soviet Union, pioneered by predecessor Don Kendall, and its presence in India, as well as recent acquisitions in Mexico, should keep the folks in Atlanta from being too smug.
Although he came up through finance (as he did earlier with ITT under Harold Geneen) Calloway sees PepsiCo’s challenge in choosing “the right people.” “He’s a mentor and cheerleader to these guys,” says John Nelson, analyst with Brown Brothers Harriman, “and generous enough to pass along plenty of the credit.” Nelson sees the stock growing 16 percent versus the S&P 500′s 7-8 percent over the next three to five years. However relentlessly upbeat, the company faces acute challenges in such areas as its fountain wars with Coca-Cola, where Coke argues to restaurant customers that buying Pepsi’s syrup funds competing PepsiCo restaurants. Burger King’s switch to Coke represented a loss of Pepsi’s biggest fountain customer. Snack profit declined 4 percent overall and 12 percent internationally in the first quarter of 1991 due to price cutting, a troubling sign since snack food profit hasn’t seen a decline since 1986.
CE caught up with 1991′s Chief Executive of the Year in his Westchester NY, headquarters office overlooking PepsiCo’s famous and beautiful landscaped sculpture garden.
Since PepsiCo doesn’t participate in rapid growth industries with favorable demographic trends in its favor, how long do you think PepsiCo can continue to be such a terrific cash machine?
First of all, I have to disagree somewhat with the premise that we aren’t in a growth industry. Last year, people said that restaurants had a bad year. Actually, the restaurant industry in the U.S. grew about six percent. Packaged goods companies, at least, would think that is terrific.
And if you look back at the history of the soft drink business and the snack food business, they’ve both averaged four or five percent growth as well. So, compared to most packaged goods businesses, we’re in very good businesses for growth. We’ve doubled our business every five years for 25 years since PepsiCo was formed in 1965. So we expect to continue that for at least another 25 years. We don’t see any reason we couldn’t. The market will grow. Since we are market leaders in our business, we expect to get more of our share of that growth.
We also have to look at the international marketplace. Much of the world, as you know, is underdeveloped. The U.S. still represents the bulk of our business. Even in a developed country such as Canada, the consumption of soft drinks is considerably less than in the U.S. And the U.K. would be half the U.S. In India, someone will drink in a year what an American would drink in soft drinks on a weekend. So, we have an enormous growth potential all around the world, and that’s true now with soft drinks as well as pizza or chicken or snacks.
BUILDING A BETTER BRAND
There are a lot of firms that are very good at marketing consumer products. What do you have that sets you apart from what other people do?
One is that we have outstanding people. I’m sure you hear that from a lot of CEOs, but I think it’s clearly true in our case. We work hard at that. So we have an outstanding group of associates at PepsiCo around the world, and a culture that says, take this, he hold.
Our second strength, which is evident, is our strong brands. We have 25 brands that have sales over $100 million. We have enormous strength in that.
The third – and probably the most overlooked for PepsiCo’s growth – is the fact that we are quite good at operating things. Generally, people think of us in terms of being a good marketing company. We do pretty well at that, but in addition, we know how to operate lots of businesses in a detailed manner.
For example, Pepsi-Cola has 10,000 sources. A normal packaged goods company-maybe a Kellogg or a General Mills-might have five or six hundred sources; we have 10,000. When you’re operating 6,000 Pizza Hut restaurants in the U.S., a lot of little transactions add up to big numbers. That is a real strength that we have that most people don’t realize.
That is a very sustainable competitive advantage, if you think, for instance, about out McDonald’s. They’re not the largest hamburger chain in the world because they’re the world’s greatest hamburger. But they have very wide distribution, a large number of restaurants, they operate them very well, and they’re clean. That is a strength that competitors have not been able to overcome.
Those operating skills are really critical for us, because we don’t sell boxcars of anything-we don’t sell million dollar orders or billion dollar orders. We sell one pizza at a time, one pack of potato chips at a time.
You continually emphasize the “power of big brands,” brand building, and brand equity. But surely your chief soft drink rival has a brand that is every bit as formidable, and some would argue is even more formidable, than any product made anywhere in the world. If your emphasis is becoming a brand company and you’re up against the world’s biggest, most powerful brand, is this going to be enough to win at the end of the game?
Coke clearly does have the world’s strongest brand, and that’s recognized by everybody. hat’s why they have a great company. So, in our case, that shows we have a great brand-among the top four or five in the world-because that gives us the strength to play against a brand as strong as Coke.
The good news for all of us is that the soft drink business is so huge, and it’s growing around the world at tremendous rates. There’s plenty of room for both of us. The beverage business is not a zero sum game.
In fact, one of the reasons we’ve done very well is that there really is a cola war, so we both keep each other on our toes. Nobody’s going to sleep in the beverage business, because it’s so competitive. And so as a result of that, you’re constantly seeing innovations and improvements in the business.
Speaking of the cola war, PepsiCo lost Burger King and Wendy’s to Coke last year, but it won from Coke Marriott and Howard Johnson. Will we continue to see a titanic struggle for distribution control where points of sale are lost back and forth like so many pawns and knights?
Oh, certainly. As I said, the cola war is real. Every time we get one of their customers they’re going to try to get back, and every time they get one of ours, we’re going to try to get back. So, that will continue. It keeps everybody sharp.
Considering that Pepsi has 15 percent of the share of the international market versus Coke’s 46 percent, how is Pepsi going to narrow that market share gap?
The international market is so huge and it’s growing so fast that it is not a zero sum game. There’s plenty of room for Coke to grow very well and for Pepsi to grow quite rapidly as well. It’s not a question of, do we have to take share from them or they have to take share from us?
The underdevelopment in all of those markets is so astounding that as they are rapidly developing, they are rapidly picking up the habits of soft drink consumption that we have in the U.S. So we can certainly grow our business at an accelerated rate, and certainly, Coke will as well. I don’t think that either one of us is going to worry much about market share. But Coke has said on many occasions that the name of the game is growing the market, really raising our market share, and that’s exactly what we’re both going to do.
DISTRIBUTION HITS THE SPOT
What sort of things do you pay special attention to in the international marketplace that might not receive the same consideration in the domestic operation?
In many of the international markets, the real issue is distribution and having the product available. One of the great things about this country is that almost anywhere you go, a Pepsi is available through a vending machine or fountain. That’s the real drive in international marketing.
How will the role of snack foods and restaurants be advanced in the international markets?
We have enormous opportunity in the restaurant side of this business. We’re in about 60 countries now with Pizza Hut and we have almost the same number of Kentucky Fried Chicken. That relates to 150 countries we’re in with Pepsi. So we have a lot of opportunity with geographic distribution. And again, the development is far behind the U.S. We have 6000 Pizza Huts in the U.S., and we have two in Brazil. That’s quite a big spread here that we can develop. The same is true in the snack business. Frito-Lay is in about 27 countries now, and we’ll be in three or four times that number before it’s all over.
We’ve more than quadrupled our investment in the international markets outside the U.S. over the last four years. We’ll do that again, I suspect, in the next four or five years as well. We have enormous potential in restaurants and snack foods as well as beverages in the international scene. That’s why we’re very comfortable about continuing to grow.
In each of your three principal businesses, it appears that PepsiCo is modifying or reorganizing the distribution system. Are we approaching the day of perhaps even eliminating the middleman?
If you look at our business over the years, like everything else, it changes. If you went back 20 years ago, Coke and Pepsi would have had maybe 500 bottlers apiece in the U.S., built on a franchise system. As the world changed, as the supermarkets got more regional, as the cost pressures began to get much tougher over the years, that began to force a restructuring of the business. So certainly PepsiCo had to participate in the restructuring. The net result of that today is that Pepsi-Cola owns and operates about half of all the bottling themselves. It’s likely to continue consolidating, but at a slower pace than it has been happening.
We won’t live to see the day that we’re going to control all of that distribution. We’re going to always have partners ultimately getting to the consumer. Now, that doesn’t mean that we don’t have our eyes on the consumer. But we also better have in our mind that getting from the manufacturer to the consumer, there is a partnership in there in many of those cases that will be a retailer or wholesaler, restaurant operator or bowling alley operator, or whatever the case may be. Ultimately, the consumer is the customer. That’s why brands are so important, because the ultimate customer is the one that consumes the product. If they have in their mind that this brand is better than that brand or no brand, then that is where you begin to have a viable business transaction. That will help you get through the distribution system in a partnership.
In the age of micro-marketing, allowing ever-greater customization of products, do you anticipate making soft drinks or potato chips or foods that are so customized that you can almost customize it to one brand per family?
That would be difficult. On the other hand, if that’s ultimately what the customer wants, you can bet your boots that’s what we’ll be doing, because whether we like it or not, the customer is king. We aren’t down yet exactly to the household, but if you pick any supermarket in the country, we have an idea of the demographics around that one supermarket, what the income is, whether there are 30,000 people or 40,000 people within three miles, what ethnic background that might be, and whether they would like a hot flavor or not so hot flavor or whatever their preferences might be. How far that kind of micro-marketing is going, we don’t know, but we want to be out in front of it, not behind it.
You have extended a lot of your brands-made variations of them-as have other companies. Just how long can you keep extending a brand?
The elasticity of the brand is a subject that is very important, and it is something for which your information system has to be very well developed. You have to listen again to the consumer. When you see that you’re not getting the incremental sales, that one extension is pulling from one extension, then you have to be sensitive enough to say, maybe it’s time to pull back.
On the other hand, the drive to get to every individual consumer is still there. One consumer wants sour cream and onion, and somebody else wants barbecue, and somebody else wants banana, and somebody else wants whatever. You constantly have to keep testing that limit. But you’d better do it very carefully, because there will come some point