PepsiCo CEO Adapts to Tough Climate

By BETSY MCKAY
September 11, 2008; Page B1

Indra Nooyi, PepsiCo Inc.'s chairman and chief executive, is steering the snack and beverage giant through its biggest challenges in nearly a decade.

Tough economic times are pummeling beverage sales in the U.S., Pepsi's biggest market. Grain, vegetable-oil and other commodity prices have climbed. Rival Coca-Cola Co. is out to grab market share from Pepsi in juices and other noncarbonated drinks. Last week, Coke offered to buy a big Chinese juice company for about $2.4 billion.

Gianni Cipriano for The Wall Street Journal

Indra Nooyi took the helm of PepsiCo in 2006.

Born in India, Ms. Nooyi, 52 years old, joined PepsiCo as head of corporate strategy 14 years ago. She was a major force behind Pepsi's decision to spin off its Pizza Hut, Taco Bell and KFC restaurants and buy Tropicana, Quaker Oats and other makers of healthy drinks and snacks. Broadening its portfolio has allowed Pepsi to take the lead in the U.S. in the beverages that are growing the fastest: juices, flavored and bottled waters, teas and other drinks.

In an interview, Ms. Nooyi talked about managing in a volatile economic climate while expanding around the globe. Excerpts:

WSJ: Why are beverages being hit harder than snacks by the economic slowdown?

Ms. Nooyi: Beverages are a much more penetrated category. We also had a lot of wastage -- people unscrewed their bottle and didn't finish it all. Now they're carrying the bottle longer and finishing the beverage.

A convenience-store operator told me we used to have a big cadre of construction workers who came in the morning and bought their Mountain Dew and their Doritos. That consumer isn't there now because the housing market is down. So what you get is the consumer who walks in and picks up a bag of Doritos but can do without the [drink]. We haven't seen this kind of slowdown in convenience-store traffic in 25 years.

WSJ: What can be done to keep beverage sales from slipping further in this economy, and to revive consumer interest in soda?

Ms. Nooyi: You really have to segment your portfolio very, very carefully. You want targeted innovation that grabs the consumer and gives people a reason to buy. If a natural zero-calorie or low-calorie sweetener is approved and it tastes good in carbonated soft drinks -- two ifs -- then there is a reason for people to come back.

People still love bubbles. I have a 15-year-old daughter, and she drinks Pepsi every day. We have to give people a reason to come back to cola. We've got to romance them.

WSJ: Is PepsiCo international enough?

Ms. Nooyi: Forty percent of our revenue comes from international. Most of our growth is coming from international. We can't help it if our North American business is also growing. We know that a lot of the growth potential is overseas, and we are going after it aggressively.

WSJ: Do you want to unseat Coke in international beverage sales?

Ms. Nooyi: What's the value of unseating Coke? Let me tell you our game. In the Middle East and parts of Asia, where we are strong, we want to remain very, very strong. Where the market growth is spectacular like China, India, Russia, we are going to keep investing so that when the music stops we have a great shot at being up there as the leader. And then in all the other markets, we want to play the noncarbonated game aggressively.

WSJ: Is the era of cheap commodity prices over?

Ms. Nooyi: I wouldn't say so. Wheat prices were at a record high six months ago, and now we are having a record wheat crop, so those things can turn on a dime. I think what needs longer-term fixing are energy costs.

WSJ: You have talked about tackling obesity. Some people would say it's insincere or hypocritical for the chairman of a company whose biggest products include Pepsi-Cola, Lay's and Doritos to do that.

Ms. Nooyi: Why should they think I am being insincere or hypocritical? There is a place for Pepsi, because it tastes great. Potato chips are part of the American diet.

I am extremely proud of our track record. Name me one other company that took out trans fats from all its products without increasing the price of its products -- four or five years before anyone else. We're doing everything possible to shift our portfolio to "better for you" or "good for you" products.

WSJ: Gatorade lost some share last year, and you changed the brand's management team. How's it doing now?

Ms. Nooyi: Brands go through ups and downs. Gatorade is an extremely strong brand. I think every five or seven years, you've got to change out the approach to the brand, because you need a new boost of energy to think about the next iteration. Brands never die. You only stop reinventing them.

WSJ: How do you keep up with what's going on in the market and get new ideas for products?

Ms. Nooyi: I do market tours all the time. Every weekend I hop in the car and go somewhere. I listen to kids talk about what they're consuming, what they're doing, what they're not doing.

I read a range of things to keep in touch with cultural and lifestyle trends -- the usual business press but also People and Vanity Fair and anything close to the cutting edge of the culture. Even the AARP magazine.

WSJ: Which PepsiCo products do you eat and drink?

Ms. Nooyi: Most days for breakfast I have a bowl of plain Quaker oatmeal and a glass of Tropicana juice with lots of pulp. At lunch, I have to have Lay's Kettle chips, slightly heated. You heat them for about 10 or 15 seconds. One of my favorite drinks is Mirinda Orange, which we make overseas.

We have Lay's chips for dinner every night. Indian cuisine has a crisp with dinner -- a papadum -- but we just use Lay's Kettle chips or Miss Vickie's Simply Sea Salt or Jalapeño.

When my daughter drinks Pepsi, I always have half a glass. Ice-cold Pepsi is to die for.

Write to Betsy McKay at betsy.mckay@wsj.com

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