Weatherup Takes on the Pepsi Challenge

Craig Weatherup loves trucks.

Truck models, truck paintings, truck sculpture all decorate the office of the Pepsi Bottling Group’s (PBG) chairman and CEO. A gleaming Pepsi 16-wheeler, bearing the corporate motto “We Sell Soda,” wraps around both covers of PBG’s first post-IPO annual report. The fact that ground transportation is the hub of his business may explain the PBG chief executive’s choice of decor. With only 450 of PBG’s 37,000 worldwide workforce based at the Somers, NY, headquarters, Weatherup knows that delivering product to “the field” is the key to the beverage giant’s growth. This 25-year veteran of Cola Wars fights for every inch of shelf, counter, rack, cooler, and floor space from Miami to Montreal, from Madrid to Moscow.

Weatherup, 55, took PBG, which manufactures and distributes 30 percent of Pepsi products worldwide, public in March of 1999 in the fifth-largest IPO in history, with parent PepsiCo as its major stockholder, holding a 40 percent stake. Suddenly, this old bricks-and-mortar company was afloat in a sea of new launches, where it stood out from its predominantly dot-corn neighbors thanks to several key differences: a legendary, century-old brand equity; deep market penetration; an established customer base and distribution network, including 7,000 trucks; and sales of more than $7 billion, with anticipated operating income in excess of $300 million.

For Weatherup, who had served as CEO of the Pepsi-Cola Co. from 1996 to 1998, the challenge of separating PepsiCo’s bottling and distribution arm from the parent company, was enormous                and an irresistible opportunity. “I didn’t want to do anything [else] at PepsiCo, and I didn’t want to be CEO of some other company, despite many, many attractive offers,” he explains. “[PBG] was a unique event, and I thought I could make a big, big difference.

“The PepsiCo bottling operation had not grown profits for three straight years, and we were losing [market] share,” he adds. “Coca-Cola spun off Coca-Cola Enterprises (CCE) in 1986. It was our time.”

Weatherup’s enthusiasm impressed Roger Enrico, chairman and CEO of PepsiCo Inc. (encompassing the Pepsi-Cola Company, Frito-Lay, and Tropicana Products). Enrico had already experienced his resolve firsthand after Chris Sinclair, then CEO of Pepsi’s troubled international operations, abruptly resigned, stalking out of a company meeting. Weatherup emerged from the meeting with Sinclair’s post and 10 days later chaired a worldwide meeting of PepsiCo management, which led to the termination of 10 senior executives and 1,300 employees (11 percent of the division), and the closing 18 of 85 overseas offices. The reorganization’s price tag was a $500 million write-off.

Ironically, three years later finds Coca-Cola weathering a similar restructuring. “Coca-Cola has taken serious write-offs-$813 million in fourth quarter 1999-and the scenario is the same as ours in ’97,” says Weatherup. “To be blunt, they got ahead of themselves. You can’t get too carried away with success. I’ve learned that even if you are the best and overplay it, you’ll pay big time.”

The turnabout has analysts reevaluating the cola players. “Wow, what a difference a year makes,” says Bill Pecoriello, beverage industry analyst for Sanford Bernstein. “There was a lot of skepticism on the street about PBG’s IPO. CCE was the gold standard of bottlers, the reason PBG even came into existence. Now PBG’s got the momentum. All the planets have aligned for Craig.”

Coke’s stumble offers PBG an opportunity to “really knock the cover off the ball,” asserts Pecoriello. “Craig’s performance has forced CCE to reevaluate their failed U.S. strategy of ‘market share at any cost.’ “

“They’re holding their own against CCE and then some,” he adds. “That’s because of Craig’s leadership. He’s motivated the troops, he’s in the trenches, and he knows that you win on a local level, store by store, one vending machine at a time.”

A believer in hands-on leadership, Weatherup has been known to pitch in on the front lines. During one field visit he recounts crawling under the bar-“a slimy, awful place”-at the Las Vegas Shark Club to replace springs in a broken beverage dispenser. “They bounced all over the place,” he says. “The real technicians enjoyed this to no end.

“People need to know that you care about them and that you’re worthy of their followership,” he says, explaining his belief that “the winning company with the highest stock price will be the one that has humanity.”

This focus on the soft side was initially met with skepticism by industry veterans, but Weatherup’s success has brought some former critics around. Tom Pirko, president of industry consulting firm Bevmark LLC, who once questioned whether Weatherup had the “basic brutality” to go head to head with Coca-Cola, now concedes, “People trust him; they perform for him.”

Weatherup’s current challenge is to beat last year’s numbers. PBG sold a billion cases of beverages to more than 800,000 customers in 1999 and posted revenues of $7.5 billion, reporting an impressive 13 percent growth that exceeded predictions of 8 to 10 percent. Net revenues were up 7 percent, while return on invested capital was up a point to 6 percent. Earnings per share (EPS) were up 318 percent over the previous year. Second quarter 2000 numbers suggest continued solid growth, with EPS up 81 percent at $.58 for the quarter, versus $.32 in 1999.

With 92 percent of PBG’s volume in North America, Weatherup plans to acquire, on average, 1 to 2 percent of the North American Pepsi bottling system annually. PBG’s bottler acquisitions to date have been contiguous to existing PBG markets, a growth strategy that couples adding volume with realizing cost savings in raw materials, manufacturing, warehousing, logistics, and general administration.

“We’re now better able to respond quickly to customers’ entire system needs as more of their outlets fall into our markets,” explains Weatherup. “This is especially true as the grocery business consolidates. The Coke system has consolidated faster than the Pepsi system in North America. Whichever system, Pepsi or Coke, consolidates best and quickest will likely have a competitive leg up with the resulting efficiencies of scale.”

 In addition to distribution, Coke and Pepsi continue to duke it out over market share, a battle made more complicated by shifting beverage market trends.Growth in the bottled water segment is now four times that of carbonated drinks, and consumer tastes have shifted from soft drinks to noncarbonated, “natural” beverages like Snapple and SoBe. Yet Pepsi’s flagship carbonated brands, Pepsi, Diet Pepsi, and Mountain Dew make up more than 70 percent of its product line, and its Aquafina brand holds a mere 2 percent share of the bottled water segment. While Pepsi ONE, Dr. Pepper, Starbucks Frappuccino, and Lipton’s Iced Tea currently make up the rest of the domestic mix, Weatherup promises that PBG’s “whole brand portfolio is undergoing major, major change. Our No. 1 charter for the balance of 2000 is to make sure we’re really playing across the entire beverage category.”

For Weatherup that’s a battle of epic proportions but one he has every intention of winning. “The Evil Empire in Star Wars always reminds me of Coke,” he said. “But if you remember [the movie], the rebellion won.”


Vital statistics

Craig VVEATHERUP

Chairman and Chief Executive

Pepsi Bottling Group

 “It staggers me that being nice is seen as being inconsistent with being tough.”

Age: 55

Birthplace: NYC

Family: Wife, Connie; Children, Clint, Christine, Scott, and Brock

Education: B.S., Arizona State University, 1967.

Recreation: Hiking, snow-skiing, reading. Recent Reading: The Charm School, The Greatest Generation

Favorite Vactation Destination: Annual “honeymoon” anniversary vacations to different remote islands.

Motto: “No time out for leaders.”

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