Pepsico's Restaurants
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For the exclusive use of F. HENRY, 2018. Harvard Business School 9-794-078 Rev. February 27, 2001 PepsiCo’s Restaurants In early 1992, Wayne Calloway, PepsiCo’s chairman and CEO, along with the presidents of each of the company’s restaurants, and Ken Stevens, the senior vice president of strategic planning, was evaluating two opportunities to expand PepsiCo’s restaurant businesses—Carts of Colorado, a $7 million manufacturer and merchandiser of mobile food carts and kiosks, and California Pizza Kitchen, a $34 million restaurant chain in the casual dining segment. The issues before them included whether to pursue these companies, and, if so, how the relationships might be structured, given PepsiCo’s large organization and decentralized management approach. Pepsi-Cola Company: The Early Years Pepsi-Cola, a combination of Pepsi-Cola syrup and carbonated water, was invented in the 1890s by Caleb D. Bradham, a southern druggist. When he discovered how much his soda fountain customers liked his beverage, he began to sell it in bottles and to barrel the syrup for other soda fountain operators. Bradham’s business, Pepsi-Cola Company, grew quickly. By 1907, its annual syrup production exceeded one million gallons. After two bankruptcies, one caused by escalating sugar prices due to rationing during World War I and the other caused by the Great Depression, Pepsi-Cola, under a new owner, changed its selling strategy. In 1933, the company doubled the size of its bottles to 12 ounces while lowering the price of a bottle to a nickel, the same price as 6 ounces of Coca-Cola. Depression-weary customers were ready for a bargain, and Pepsi-Cola sales increased dramatically. By the end of the 1940s, higher sugar prices meant that Pepsi-Cola could no longer maintain its nickel price. Alfred N. Steele, a former marketing executive for Coca-Cola, who became Pepsi- Cola’s president and CEO in 1950, moved the company away from the low-price strategy and launched an extensive marketing campaign to boost the company’s image. Customers were urged to “Be sociable, have a Pepsi.” With the help of actress Joan Crawford, Steele’s wife, Pepsi took on a stylish, even glamorous, image. The strategy was successful—Pepsi-Cola’s profits increased to $14.2 million in 1960 from a postwar low of $1.3 million in 1950. Research Associate Dianna Magnani prepared this case under the supervision of Professor Cynthia Montgomery as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 1994 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 1 This document is authorized for use only by FRANK HENRY in GB410 Fall 2018 taught by BRIAN FOX, University of Connecticut from Aug 2018 to Jan 2019. For the exclusive use of F. HENRY, 2018. 794-078 PepsiCo's Restaurants PepsiCo Under Donald Kendall Donald M. Kendall, an amateur boxing champion and star football tackle in his youth, became Pepsi-Cola’s CEO in 1963. He quickly replaced some of Steele’s top managers and reorganized the company so that his “Whiz Team” was in control. Outsiders were also brought into the fold, including Andrall E. Pearson, a veteran management consultant and partner from McKinsey & Co., who became president and chief operating officer, and Vic Bonomo from California’s United Vinters whose primary task was to “rebuild the soft-drink [segment] around organization rather than personalities.”1 Pearson himself brought several others to the company, recruiting a dozen or so top people from corporations like General Foods and from consulting firms like McKinsey. A 1980 Business Week article asserted that under the leadership of Kendall and Pearson, the cultural emphasis at PepsiCo changed dramatically from “passivity to aggressivity”: Once the company was content in its No. 2 spot, offering Pepsi as a cheaper alternative to Coca-Cola. But today, a new employee at PepsiCo quickly learns that beating the competition, whether outside or inside the company, is the surest path to success. Because winning is the key value at Pepsi, losing has its penalties. Consistent runners-up find their jobs gone. Employees know they must win merely to stay in place—and must devastate the competition to get ahead.2 John Sculley, who was president of the firm’s U.S. beverage operations at the time and who later went on to become CEO of Apple Computer, said that “careers [at PepsiCo] ride on tenths of a market share point.” He described managers at the company as the kind of people who “would rather be in the Marines than in the Army.” The company encouraged interdepartmental sports competitions and, according to Sculley, “the more competitive it [became], the more we [enjoyed] it.”3 According to Business Week, Kendall himself set a constant example of the kind of “ingenuity and dedication to work he [expected] from his staff.”4 Once when the roads were impassable because of snow, Kendall used a snowmobile to get to work. Pearson, too, earned a reputation for his firmness and loyalty to the company. In 1980, Fortune magazine listed him as one of the “ten toughest bosses” in corporate America, stating that his subordinates may have “[hated] his guts at times, but if they [survived] and [succeeded] they [reveled] in the challenge of operating on the fast track.5 Kendall encouraged managers to take risks, boldly stating, “If you go through your career and never make a mistake, you’ve never tried anything worthwhile.”6 The corporate office set strategy and maintained financial control, but left operating decisions to its energetic and industrious division managers who were eager to take charge. For example, as head of the $4.6 billion soft drinks segment in the mid-1980s, Roger Enrico arranged for pop star Michael Jackson to shoot a Pepsi commercial at a record $5 million fee and told Kendall about the agreement only a few hours before the contract was to be signed. Believing that snack chips went well with soda, Kendall merged Pepsi-Cola, which had sales of about $450 million, with Frito-Lay Company, a $184 million snack foods concern, in 1965. The 1 J.C. Louis and Harvey Z. Yazijian, The Cola Wars: The story of the global corporate battle between the Coca-Cola Company and PepsiCo, Inc. (New York: Everest House, ©1980), p. 147. 2 "The Hard-to-Change Values that Spell Success or Failure," Business Week, October 27, 1980, p. 148. 3 Ibid, pp. 151 and 154. 4 Ibid, p. 154. 5 Hugh D. Menzies, "The Ten Toughest Bosses," Fortune, April 21, 1980, p. 148. 6 Ibid, p. 86. 2 This document is authorized for use only by FRANK HENRY in GB410 Fall 2018 taught by BRIAN FOX, University of Connecticut from Aug 2018 to Jan 2019. For the exclusive use of F. HENRY, 2018. PepsiCo's Restaurants 794-078 combined company, named PepsiCo, then purchased Pizza Hut, a fast-food pizza chain, and Taco Bell, the largest Mexican fast-food chain, in the late 1970s, partly to have more outlets for its fountain business. The company also bought a van line, a motor freight company, and a sporting goods manufacturer during this period, only to sell them off toward the end of Kendall’s tenure as CEO (Exhibit 1). PepsiCo’s Continued Growth Under Wayne Calloway Kendall’s choice of a successor was Wayne Calloway. Prior to his promotion to chairman and CEO in 1986, Calloway had held nine positions at PepsiCo with responsibilities in finance, marketing, and operations. Most recently, he had been president of Frito-Lay from 1976 to 1983. The Organization The PepsiCo organization had eight major parts: Pepsi-Cola North America, Pepsi-Cola International, Frito-Lay, Inc., PepsiCo Foods International, Pizza Hut Worldwide, Taco Bell Worldwide, Kentucky Fried Chicken Corporation, and PepsiCo Food Systems Worldwide. The heads of most of these businesses reported directly to Calloway (Exhibit 2). In many ways Calloway carried on in Kendall’s tradition. Some of his colleagues described him as “tough as nails,”7 and like Kendall, he was known for “[packing] the company with workaholics and then [expecting] a lot of them.”8 Senior managers described Calloway as a great communicator who was extraordinarily consistent. Steven Reinemund, president of Pizza Hut, remarked: “Wayne has never told me to do or not to do something. But he challenges my thought process, and often suggests people I might want to talk to about a particular issue.”9 Calloway challenged his managers to be innovative and was known for saying, “If it ain’t broke, fix it anyway.” PepsiCo flourished under Calloway. When asked by a Fortune magazine reporter to what he attributed PepsiCo’s outstanding performance during his tenure, Calloway responded, “The three Ps, people, people, people.“ The reporter, Brian Dumain, commented: Ah, touchy-feely management? Anything but. Behind Calloway’s alluring, alliterative slogan lies the country’s most sophisticated and comprehensive system for turning bright young people into strong managers. Says [Calloway]: “We take eagles and teach them to fly in formation.”10 A senior PepsiCo executive observed that, consistent with its emphasis on people, the company backed people, not projects, in its resource allocation decisions, and these decisions were made quickly.