It's crunch time as PepsiCo gets set to offer the Frito challenge

  • @dusborne
It was Superbowl time in the United States yesterday and the rhythmic crunching that you could hear across the land was not the sound of over- developed shoulders and leg gristle colliding on the field but of millions of viewers grazing on their TV snacks - multitudes of fists in multitudes of crisp and pretzel packets. A good day for American football fans, but an even better day for PepsiCo.

How many of these fans were also lugging cans of Pepsi from the fridge to the settee - rather than beer and, whisper it low, Coca-Cola - is less certain. But at the Purchase, New York, headquarters of PepsiCo, they will not worry too much about that. With 54 per cent of the domestic snack- food market controlled by its own Frito-Lay division, the battle of the super-crisp bowls will have assuredly been theirs.

A new PepsiCo is about to be born and Frito-Lay will be at the core of it, with some suggesting, albeit mischievously, that Frito, not Pepsi, will be the company name. The metamorphosis was begun last week when PepsiCo helmsman Roger Enrico finally announced what Wall Street had been dying to hear for months: the company was swearing off pizza, chicken and Mexican tacos for good.

The decision to spin off PepsiCo's three-chain fast food division, comprising Pizza Hut, Taco Bell and Kentucky Fried Chicken, won almost universal approval. The diversion into the restaurant business taken in the Seventies and Eighties proved a masterstroke for a while. But recently the three chains have been struggling; PepsiCo's shares have been in the dumps and management has been distracted by the problems.

So the restaurants will be released to go it alone. (In numbers of outlets it will be the biggest fast-food enterprise in the world.) What will be really interesting, now, however, is the direction that PepsiCo will take. Will Mr Enrico allow the company to become consumed once more by its decades- old rivalry with Coca-Cola? Or will he switch focus to his winning Frito- Lay brand? Or will both happen?

In the cola wars, PepsiCo was once a proud gladiator. Its successes in the 1980s included the pioneering of diet beverages and its "Take the Pepsi Challenge" campaigns. The slogan was in part responsible for the awful decision by Coca-Cola to introduce a "new" cola which then had to be replaced again by the "classic" vintage. Now, though, Pepsi is humbled. While its standing in the US remains respectable, with 31 per cent of the market against Coca-Cola's 42 per cent, worldwide the picture is much more bleak. Coca-Cola has almost 50 per cent of the global market and Pepsi only 22 per cent.

Last year was especially dreadful for Pepsi. Little impact was seen from its wildly expensive shift from red-and-white to all-blue on its cans in international markets (in spite of the blue Concorde stunt). And it suffered acute setbacks in Latin America, notably the defection of its once super-loyal Venezuelan bottler to Coca-Cola and the virtual financial collapse of its giant bottling interests in Brazil.

There is now some optimism that, freed of the restaurants, PepsiCo can do a better job of selling the fizzy brown stuff. One consequence of the spin-off should be improved opportunities to get Pepsi flowing in the crucial restaurant-fountain market. Until now, whenever PepsiCo has asked a fast-food chain to include a Pepsi tap at its bar, the answer has been not if it helps promote your restaurants.

Mr Enrico should also be liberated to concentrate on solving PepsiCo's various bottling difficulties and getting his army marching aggressively again around the globe. "Right now, PepsiCo has to attack the world, to continue to open countries such as China," said Tom Pirko of Bevmark LLC, a New York consulting firm. "It shouldn't be worrying how to survive a bloody profit crunch in the pizza business." Other hopeful Pepsi spots include the rest of Asia and eastern Europe.

And then there is Frito-Lay. If PepsiCo wants to lay aside its fixation with catching-up with Coca-Cola, it could conclude that its best hopes of growth (and of increased stock valuation) lie not in beverages at all, but in salty snacks. One version of the future would have PepsiCo as a snack-food behemoth with a healthy, but ancillary, fizzy drinks division.

Already PepsiCo has a huge lead. In 1995, its world-wide snack sales produced $30.4bn compared with just $18bn for Coca-Cola's snack brands. In 1995, the snacks division accounted for 44 per cent of PepsiCo's operating profits and the figure is still rising. Internationally, profits from snacks in the same year rose by an impressive 16 per cent.

And consider this statistic as a pointer to potential for global growth: the average non-American consumes just 2 pounds of crisps and pretzels in a year while the guzzling American puts away 17.5 pounds (a good part of it on Superbowl Sunday). All PepsiCo has to do is get the rest of the world as addicted to TV-snacking as Uncle Sam. "In the US, roughly a quarter- billion people create $6bn in sales," Steven Reinemund, who heads the snack-food division, said recently. "There are 6 billion people internationally, so imagine the opportunity."

With the pizza and chicken wings leaving by the back door, a new mantra might be apt at PepsiCo headquarters: it's time to take the Frito challenge.