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The brand king's challenge
When it comes to image making, PepsiCo is one of the smartest companies around. But it has never faced a problem quite like this.

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At the Cooper Clinic, a health-and-fitness boot camp in Dallas, Ken Cooper and Steve Reinemund are collaborating to change American diets. On a basic point, though, the two men are at odds. Dr. Cooper, the renowned nutrition expert who runs the clinic and is one of President Bush's personal physicians, contends that PepsiCo is the world's largest purveyor of junk food. "No question, it is!" he says. Reinemund, the CEO of PepsiCo, disagrees: "I firmly reject that."

The two men do agree on the most important thing: PepsiCo needs a brand makeover. The need has become only more pressing since 2002, when Reinemund persuaded Cooper to advise Pepsi on product-development and marketing strategies. Later that year Wall Street began warning investors about the "health risk" in Pepsi stock. Then, in March of this year, the U.S. government reported that obesity is rapidly closing in on smoking as the No. 1 cause of death. And although Congress has been haggling over a bill that would shield fast-food companies from the kinds of lawsuits that threatened to kill Big Tobacco, the cloud of legal liability still looms over a company like PepsiCo, which earns billions in profits each year peddling sweetened drinks and fat-packed snacks. What does Reinemund intend to do about all this? To bring to fruition a plan he told Cooper about two years ago: "Steve said he wants PepsiCo to be known as the corporate leader of the wellness movement in America."

Critics aren't buying it. "What PepsiCo is doing is shocking," says New York University professor Marion Nestle, a nutrition expert and author of Food Politics. "It is aggressively marketing junk food as health food." But Reinemund is plowing ahead, pitching PepsiCo's offerings as sensible indulgences, stamping a seal of approval from Dr. Cooper on bags of reformulated potato chips, and preparing Pepsi's first-ever mass-market corporate-branding campaign designed to convince consumers that it is the model corporation for an era of healthier living.

It's hard to think of any company that has been able to remake its image so dramatically. When KFC hawked its fried chicken as healthful fare in TV ads last fall, for instance, the outcry was so great that the fast-food company wound up pulling the spots off the air. McDonald's and Kraft have been struggling, mostly unsuccessfully, to seem health-conscious; their plans to reduce portion sizes, for example, come across as profit-boosting ploys in the guise of social responsibility.

But don't count PepsiCo out. The company has successfully transformed its image before. In fact, despite the occasional misstep, it is arguably the best company around at rebranding itself -- from the drink of choice for the groovy Pepsi Generation in the 1960s to the king of the snack industry in subsequent decades to, recently, an acquirer and creator of No. 1 brands such as Gatorade, Tropicana, and Aquafina water. Today PepsiCo owns 16 brands that generate $1 billion or more in retail sales. That's more megabrands than anyone else, including consumer product juggernauts Nestle, Kraft, Unilever, Procter & Gamble, and archrival Coca-Cola.

That brand prowess has been key to Pepsi's rise in the FORTUNE 500. Now No. 62, with $27 billion in revenues, it has leaped more slots than any other company on the original list except for two (Georgia-Pacific and Bristol-Myers Squibb). Brand strength is the source of the company's newfound financial fitness too. For the first time in decades, PepsiCo's return on invested capital, a key profitability measure, exceeds Coke's: 29 percent last year, up from 9.5 percent in 1996, according to CSFB beverage analyst Andrew Conway. (Pepsi and Coke, amazingly, have notched virtually the same annualized total return to shareholders since the FORTUNE 500 began: 15.6 percent.)

Pepsi's ability to create powerful brands -- images in the consumer's head, built through persuasion and manipulation -- has been its key competitive weapon for decades. And the insecurity that comes from being the business world's most famous No. 2 (Pepsi has 32 percent of the $63.8 billion U.S. soft drink market, vs. 44 percent for Coke, according to Beverage Digest) has bred the restless creativity and risk taking that lead to great brands. "PepsiCo has always been like this open-field runner looking for spots of opportunity," says Reinemund, 55, who became CEO in 2001 after running Pepsi's snack operations in the '90s.

From that attitude -- and meager budgets -- sprang some of America's cleverest marketing schemes. From the 1930s through the '50s, when its ad budget was about one-thirtieth the size of Coke's, Pepsi famously locked up the skywriting market by signing an exclusive contract with the Skywriting Corp. of America. In 1963 it pioneered "lifestyle advertising" by concocting the Pepsi Generation, which celebrated the youthful consumer -- "because Coke owned the old people," quips Roger Enrico, 59, who was CEO of PepsiCo for five years before Reinemund. In 1964, Pepsi invented the soft drink industry's first brand extension, Diet Pepsi, and went head to head against Coca-Cola's Tab until Diet Coke came out in 1982. Then, in 1984, Pepsi fueled the trend of music marketing by hiring Michael Jackson to pitch its signature drink -- when Michael was cool and the price ($5 million) seemed outrageous to many. But not to Enrico. "I said, 'Let's do revolution advertising. Make it stand out, almost like a publicity stunt.' "

Pepsi management not only recast existing brands, but added new ones to change the corporate identity. In 1965, for example, Pepsi desperately needed financial expertise and a growth business where it did not compete with Coke. So Don Kendall, CEO from 1963 to 1986, merged Pepsi with Frito-Lay. National snack brands did not exist back then, but the soft drink marketers applied brand-building basics to Frito to create the first ones. "We gave Frito-Lay products the same prices and packaging across the country, and we promoted drinks and snacks together," Kendall, 83, recalls. The U.S. salty-snack market has nearly quadrupled in size since then. And Frito-Lay, with $9.1 billion in sales last year, now dominates with a 64 percent share. (Snacks generate 57 percent of PepsiCo's worldwide revenues.)

Near the end of Kendall's tenure, and during that of the late Wayne Calloway (CEO from 1986 to 1996), Pepsi jumped on America's growing love of eating out, acquiring restaurant chains and building Pizza Hut, Taco Bell, and KFC into multibillion-dollar brands. When Enrico took over, he figured that "the wellness issue would become more important" as baby-boomers aged. So he acquired Tropicana and Quaker Oats (which owned Gatorade) in 1998 and 2001, respectively, and spun off the restaurant chains.

Reinemund was trained as a hard-driving operations man, not a marketer. But he has proved his brand chops too. Concerned that Pepsi's image as a predominantly white suburban brand is hindering growth, he has launched an effort to appeal to urban African-American and Hispanic consumers. Pepsi studies show that these consumers tend to prefer high-intensity flavored drinks. One result: berry-flavored Gatorade Extremo!, introduced last year.

Before that, in 2001, Pepsi scored a hit with Mountain Dew Code Red, a cherry version of its caffeine-loaded Mountain Dew. To market it, PepsiCo sought the advice of its African-American advisory board, chaired by Black Enterprise founder Earl Graves. Instead of launching Code Red the suburban way, with a broad rollout in supermarkets and a blitz of TV ads, Pepsi initially distributed the drink in single-serving sizes in convenience stores. It also sent free cases to hip-hop DJs and rap celebrities and promoted the drink at such events as the "And 1 Mix Tape Tour." You don't know "And 1"? That's the point. (It's a street basketball tour that reaches 30 U.S. venues a year.) Code Red became the soft drink industry's first new product since Diet Coke to sell at least 100 million cases in its first year on the market.

The approach worked in the Frito-Lay division too. At Reinemund's urging, Frito-Lay CEO Al Bru, a native Cuban, set up a Latino-Hispanic advisory board in 2000. That group pushed for the launch last year of guacamole-flavored Lay's potato chips and Doritos, even though the company's marketers contended that their green color would be unappetizing. By pitching the green snacks on Spanish-language TV and promoting them heavily in mom-and-pop outlets, Frito sold $100 million at retail last year. "At best we expected less than $20 million," says Bru. "They started as a Hispanic product, but they sold much more broadly."

Overseas, where PepsiCo competes mainly against local snack companies, it has begun customizing more than it used to for every taste and trend. New herb-flavored Lay's Mediterraneas potato chips are a success in southern Europe and Latin America; Lay's Nori Seaweed chips were the No. 1 salty snack in Thailand last year. And in China, Pepsi's managers knew that consumers there claim to get "heatiness," a heavy feeling, if they eat fried food in the summer. So they launched Lay's Cool Lemon potato chips. They really do taste cool, and they helped Pepsi earn a profit there for the first time on $200 million in sales last year. Analysts say that this more thoughtful approach to building brands abroad has helped Pepsi increase international sales ($8.7 billion last year) and profits at twice the rate of its domestic businesses recently.

But PepsiCo's biggest brand challenge by far is transforming itself into a believable healthy-foods company. Reinemund, an ex-Marine who runs five miles every morning, began struggling with that problem a decade ago. Throughout the '90s he strong-armed the R&D folks to innovate beyond fat-fried, salty snacks. "Steve single-handedly championed moving into healthier products," says Brock Leach, PepsiCo's chief innovation officer. "There were skeptics all around him." Maybe that's because they'd tasted the early stuff. The first Baked! Lays potato chips, introduced in 1995, were "barely edible," recalls Leach.

By late 2001, Reinemund was in the CEO seat and convinced, he says, that "the health and wellness trend is real and is not going away." He recalls, "We desperately needed outside input." That's when he recruited Dr. Cooper. "We know that we're part of the problem, and we think there's an opportunity for someone to take the lead," the CEO told Cooper at a December 2001 meeting at the physician's Dallas office. Initially reluctant but then convinced that "I could change things," Cooper signed on.

In May 2002 he and another nationally known expert, Dr. Dean Ornish, reviewed each and every Pepsi product and suggested changes to make them healthier. When Frito execs said that they planned to remove saturated fats from Frito's entire product line, the doctors advised them to take out trans fats instead. Those fats -- essentially unsaturated fats on their way to becoming saturated -- are the prime dietary enemy that leads to heart disease. Frito-Lay spent $40 million last year to remove the trans fats from all Frito products -- 55 million pounds last year. Full-page newspaper ads trumpeted the feat. "They're shameless," says NYU's Nestle of the ads. "They distract consumers from the fact that Frito-Lay products are still high in calories, salt, and rapidly absorbed carbohydrates."

Reinemund contends that he is doing more than just tweaking Pepsi's products. He's wholly revamping the lineup. Guided by the doctors, PepsiCo two years ago divided its products into three categories: "good for you," "better for you," and "fun for you." "Good for you" products are naturally healthy or engineered to be beneficial, like Gatorade and its enhanced-water offshoot, Propel. "Better for you" offerings are fortified with wholesome ingredients or reformulated to reduce fat or sugar, such as new Nacho Cheesier Baked! Doritos (which have half the fat of regular Doritos) and Pepsi Edge (a "mid-calorie" cola due this summer that has half the sugar and half the carbohydrates of regular Pepsi). "Fun for you" products include mainstays like regular Pepsi and Fritos. (Fun for you, that is, if you don't eat so much of them that diabetes or heart disease sets in.)

Pepsi's effort to become a healthy-foods company "certainly isn't a scam, and it's not a sham," says former Speaker of the House Tom Foley, a member of Pepsi's health and wellness advisory board, which Reinemund created last year. (Former FDA commissioner David Kessler is a member too.) "Pepsi is actually creating alternative products." Today 40 percent of PepsiCo's domestic revenues come from "good for you" or "better for you" products. And two-thirds of the foods and drinks in development are in these categories. Healthier offerings are good for investors because they tend to sell at prices 20 percent to 50 percent higher than the core products and have deliciously richer profit margins. Goldman Sachs analyst Marc Cohen says that such products could drive 70 percent of profit growth over the next five years. Over the long term, Pepsi president and CFO Indra Nooyi sees huge opportunity for "nutritional products" overseas.

But making healthier fare is just part of the equation. Convincing people that it really is healthier is another. Pepsi hopes to do just that with the help of its corporate ad campaign, which will launch in late fall at a cost of $10 million to $20 million. The campaign will tell consumers that PepsiCo's brands include Quaker and Tropicana and will introduce "the little green dot," a so-called trustmark that will appear on packages of Pepsi's "good for you" and "better for you" products. The message will read something like: "Smart choice. Enjoy life." All products will also carry the PepsiCo logo.

At the same time, however, Reinemund is significantly increasing ad spending on basic Lay's and full-cal Pepsi. That's because the core customers who consume that stuff still bring in the bulk of PepsiCo's profits. How does Reinemund reconcile this apparent contradiction? "It's so simple," he says. "It's about choice. We're a company that offers nutritional variety."

Maybe so. But the extent of Pepsi's challenge was obvious in late February at the company's biannual senior management meeting in Colorado. After Leach unveiled the "green dot" marketing scheme to 60 executives and their spouses, Gail Reinemund asked the first question: "Do you have credible nutrition standards to back this up?" If the the CEO's wife wonders whether PepsiCo's healthier image is, as another company once said, the real thing, won't consumers wonder too?

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