CANNING THE COMPLEXITY

JAMES TENSER

SOMERS, N.Y. -- There is no longer any reason for Craig Weatherup to be coy about Pepsico's unconsummated courtship of Quaker Oats Co. and its flagship brand, Gatorade, last fall.

"We negotiated twice," says Weatherup, president and chief executive officer of Pepsi-Cola Co. here, Pepsico's soft drink marketing company. "Once before Coke and once after Coke. And we couldn't make it work. The reason we couldn't make it work, at least in our case, was not some great point of principle -- who controls, who's the boss and all that stuff -- it was we couldn't make the economics and the logistics work."

Quaker took on its own challenges, acquiring Snapple Beverage Co. in December. Weatherup and his team refocused on the ongoing labor of marketing Pepsi-Cola's carbonated beverage brands, while expanding the presence of its company and licensed hot-fill lines: All Sport, Ocean Spray and Lipton Iced Teas.

Welcome to the complex world of Pepsi-Cola, Total Beverage Company.

"We've gone from 120 stockkeeping units to about 240, the bulk of which have extra complexity. Not only are they different sizes and shapes and so on, but they're sourced from different places," Weatherup says.

With rare exception, its traditional bottlers' equipment cannot handle the new products, so they have been produced using scarce company-owned facilities, heavily supplemented by its strategic partner Ocean Spray and other co-packers, he explains.

"Because we have limited hot-fill manufacturing platforms, they're being

produced in limited locations and being moved to what we call break warehouses. There they are breaking down the loads and repackaging before sending them out to our warehouses. Then from there they are going straight store-door [through the bottler network]."

With the growing popularity of teas, juices and sports beverages, that system will not suffice even in the near future. Although Pepsi has enlarged its capacity from zero to five hot-fill lines, he says, "we don't have enough plants. Last summer we ran out of All Sport capacity all the time, because we didn't have enough plants up producing it. Once we did that we didn't have enough bottles anyhow."

He adds, "It's added tremendous complexity, which is why I have so much energy on this whole process subject, because if you can't solve the complexity, you are in deep, deep trouble."

When market realities -- club stores, mass merchants, new-age beverages, disinflation -- began converging on Pepsi at the beginning of this decade, the company embarked on a sweeping re-engineering program, dubbed Right Side Up, which anticipated the grocery industry's Efficient Consumer Response initiative by nearly two years. Beginning in late 1990, the company adopted Right Side Up as an icon or rallying cry.

"We use it all the time. We have product, process and equipment development teams and again, it comes up all the time -- in terms of what is the consumer telling us, and how to respond to the consumer, and how to respond to the customer level as well," Weatherup says.

"We've changed all the measures, redesigned all the work," he adds. "And we have dramatically enhanced the reliability and consistency of our processes."

Weatherup offers two examples of how the effort has changed Pepsi's interface with the retail trade:

"We load 10,000 trucks every night, and we had one measure -- cents per case, a cost measure -- and that drove one thing: speed. The faster I could load this truck with 400 cases or this trailer with 2,000 cases, the measure would improve," he says.

"The reality was that all the customer cared about was accuracy. So we changed the measure to accuracy."

A second area of dramatic change was in changeovers at the bottling plants, where the traditional thinking was to minimize them. Most bottlers would typically run a six-month supply of root beer, then run six months' worth of another flavor. In a category where store deliveries are made several times a week, that mentality valued low unit production costs over other important quality and cost-of-storage issues.

"We worked backwards from what the customer wanted, which was no out-of-stocks. The key thing was changeovers, because the plant wanted to do long runs. We quadrupled the number of changeovers in the average plant and had to find a way to make them real fast."

The movement of Pepsi-Cola's bottler system to a more timely and reliable production cycle has had a very tangible impact on its consumer marketing last year as well. Its freshness dating program for Diet Pepsi, introduced with great fanfare last spring, was designed to deliver added consumer value by putting the beverage in shoppers' refrigerators before its artificial sweetener could decline in sweetness.

"If we had not done all of this core process work to satisfy our customers, we could never have done freshness dating," he says. Weatherup says the freshness emphasis has worked. "It worked from the standpoint that we have a better product in the marketplace. If the consumer did not even care about freshness dating, or never actually used the information, we still have a huge win in that there are 4 billion Diet Pepsis out there that are better tasting than they were a year ago." Companywide, the move to more time-sensitive production also has had a favorable impact on out-of-stocks, which can be very costly in a direct-store-delivery system, he adds. "The payoffs are real. Because in our competitive industry, when the 2-liter Mountain Dew was not there, the driver went out anyway. Then, later that day, or before he went out the next morning, it would get delivered, but it would cost a fortune."

Although 55% of Pepsi-Cola's soft drink bottling volume is now company-owned, the company has about 100 franchisees left, a count Weatherup says is unlikely to change anytime soon. For the bottler community, he says, the pace of change has been the most difficult aspect. The typical franchisee is a self-styled entrepreneur who doesn't like to change and is wary of capital investment. Pepsi-Cola's annual planning process now fully includes its bottlers, he says. "In the past, we had the luxury of excess capacity, and simple systems. Life is not that simple today.

"We give them a lot more information and spend a lot more energy up front in coordination. We have a deal; this system will go to market together, or it won't be a system."

The changing nature of key retail accounts also has had an impact on the way independent bottlers participate in Pepsi-Cola's go-to-market activities. Key accounts command big dollars and may deal with numerous bottlers across their geographic range. While Pepsi has had national account sales managers coordinating the activities at headquarters for many years, says Weatherup, "now we have brought our franchisees into our account teams, their representatives making calls with us and then convincing other bottlers that this was the best deal, what we need to do to deliver against the needs of this customer. That is a big, big change."

Like every major soft-drink company, Pepsi has faced its share of pressure from major retailers demanding a shift to warehouse delivery and a lower net landed cost. While he concedes there is room for some discussion on this topic, Weatherup brooks no doubt on the viability of direct store delivery and service.

"Our starting point is that everybody agrees that there is no more efficient system that store door, than loading 2,000 cases of Pepsi from our plant onto our truck and then delivering it the next morning to your back door. For us, that is true 99% of the time. Anything other than that is going to add nonvalue-added cost to somebody.

"If there is some great savings somewhere in the system, that's great, but we have not been able to find it, and I don't think the retailer is [going to] either. That is issue one."

He continues, "The other is the quality side of it. It is the freshest; it is handled less, it looks and is better. If you believe that, I don't think there is any way you can move the facts to suggest that it is not the more efficient. If there are other pipeline costs that are a problem, then they need to be addressed." He speaks from the perspective of a hypothetical retailer: "If I had it in my warehouse, I'd know that the invoice is correct, but if the invoice costs a penny and the warehousing and handling cost a dime, there is something wrong with the math here."

When pressed, Weatherup concedes that such judgments have until very recently been made without complete financial information, a knowledge gap that is about to be bridged by new methods about to be published by the Joint Industry Committee for Efficient Consumer Response.

"The great thing about ECR is that it is going to give people a set of facts; the DSD side of the study is one of the first ones, almost ready for final publication. The data is good," he says. "I think ECR and activity-based costing are going to allow the right issues to be attacked for the right reasons." He adds, "I happen to agree with the premise that there is tremendous cost. Again, the question is, who pays it?"

Weatherup says that recently he has been offering proposals to several huge chains that go something like this: "We've got 20 million bucks to spend to service your stores. We can either waste it or use it. If we have 60% space-to-sales, and you are going to carry six [facings of] orange, carry these items that move a half a case a month, because you want variety, that is OK. If it will turn 65 times, but you know we will have somebody there everyday to fill it, that's OK. But we are wasting an awful lot of money here.

"It is $20 million. I am not going to give you 21, so how are we going to better spend the 20? It always comes back to how are we going to manage this category, this space?"

He continues, "Maybe it is our fault. We have four-day ads; maybe we ought to have 10-day ads, so we don't spend half our time changing endcaps."

Weatherup says his company has already offered proposals of this nature to a couple of chains. He thinks eventually the company can get to menu pricing, and menu costing, an area that makes more sense to him.

"So if Kroger says, 'I can guarantee you I can better do this piece of work' and the facts support the case, then we need to respond to that. 'We can better build your displays; I've got my stocking crew, I'd rather do it at night, it costs you more money, I'll do the display for half of what you can,' that would be pretty compelling. I'd listen."