Reviving Pepsi: Can the New Challenge Reverse Decades of Decline?

Ram Krishnan's task of saving Pepsi-Cola begins extremely early in the day.

During a recent visit to San Antonio, the executive overseeing PepsiCo’s beverages in the U.S. started early with a 5 a.m. session alongside the regional sales force just as dawn broke. This was immediately succeeded by an 7 a.m. roundtable gathering involving various management personnel.

By 8 a.m., they were out on the streets. They divided themselves into four groups and began their visits to various stores such as Walmart, Dollar General, Circle K, 7-Eleven, along with four additional locations. Armed with scorecards, they navigated the store aisles checking for several things: whether the shelves were fully stocked; if the appropriate PepsiCo beverages were prominently displayed; how was the variety of products arranged; did the shelf labels meet expectations; and finally, what condition was the beverage cooler near the cash register in?

After assuming control of PepsiCo’s crucial U.S. beverage division in February 2024, Krishnan has been working to address a significant issue. The brand's traditional cola, which previously aimed to surpass Coca-Cola as America’s top choice of soft drink, has now dropped to third place, trailing behind Dr Pepper. Additionally, several of the company’s other beverages, such as Gatorade, have experienced ongoing losses in market share.

"Perhaps we misplaced our concentration," Krishnan stated during an interview from Texas.

His efforts to regain customers have had him traveling relentlessly, visiting shops from Monday through Thursday across the nation for weeks on end. "Given your circumstances when aiming to implement significant changes, maintaining a brisk tempo and high energy seems beneficial," he commented.

The situation is challenging for traditional sodas, and things aren't expected to improve with Health and Human Services Secretary Robert F. Kennedy Jr.'s influence. describing sweetened, fizzy beverages as "toxic." For years, energy drinks and specialized beverages marketed as healthier options have been capturing more of the market share. Meanwhile, the U.S. soda industry is looking like an icicle gradually thawing under the sun.

Between 2010 and 2023, U.S. sales volumes for Coca-Cola-branded sodas dropped by 14%, as reported by Beverage Digest, an industry tracking firm. However, during this period, Pepsi's overall volume—including that of Diet Pepsi and Pepsi Zero Sugar—plummeted significantly more at 32%.

In February, an analyst posed the evident question to PepsiCo CEO Ramon Laguarta: What was happening?

Laguarda refrained from offering any spin. "While we do see some signs of optimism, being optimistic isn't enough," he informed analysts attending a conference in Orlando. "We are displeased with our inability to capture more market share over the past several years. In my view, this represents a failure on our part."

For many years, PepsiCo has concentrated on strengthening its food division, bolstered by popular brands like Doritos, Cheetos, and Lay’s, with food contributing to 58% of their revenues in 2024. However, Laguarta informed analysts that the core vitality behind growing the beverage sector still lies within the Pepsi brand itself.

In pursuit of this, the company aims to reclaim some of its former beverage glory, notably during the "cola wars" of the 1970s and 1980s when it was at the forefront. “Pepsi Challenge” marketing campaign assisted it in closing the gap with top-ranked Coca-Cola.

In February, the firm reintroduced the Pepsi Challenge, comparing Pepsi Zero Sugar directly with Coca-Cola Zero Sugar. Their advertisements seek to portray Pepsi as superior to Coke and other drinks when accompanying meals. They're promoting the idea that food pairs best with Pepsi.

“Scientific evidence shows that due to a distinctive blend of spices, the degree of carbonation, and the sweetness in a bottle of Pepsi, it complements most dishes quite well,” stated Krishnan, citing the company’s research.

The overall strategy is to integrate the soda and snack operations more closely by placing their distributions under one leader. A key objective is to reduce expenses—by not dispatching distinct vehicles loaded with Pepsi drinks and Lay’s chips to the same retail location.

However, several of PepsiCo’s standalone distributors — many of which are family-run enterprises with long histories of bottling Pepsi — mentioned that they hadn’t witnessed such a challenging period for the brand. They argued that the corporation had shifted focus so drastically away from its soda division that they question if it might be too late to revive it.

Pepsi Generation

In the 1960s, PepsiCo initiated the cola wars with their "Pepsi Generation" marketing push. They positioned Pepsi as the trendy choice for younger consumers, contrasting it against Coca-Cola which they portrayed as traditional and outdated. Although Pepsi never surpassed Coke entirely, it managed to become a strong runner-up—partly due to Coca-Cola’s unsuccessful launch of New Coke.

Pepsi-Cola reached its highest point in the U.S. market during the 1980s. During this time, Pepsi ran advertisements with cutting-edge celebrities such as Madonna and David Bowie, and the company set what was then a record for endorsements. $5 million sponsorship deal with Michael Jackson.

Over time, PepsiCo expanded significantly into the snack and restaurant sectors through acquiring companies like Frito-Lay, Taco Bell, Pizza Hut, and Kentucky Fried Chicken. In the late '90s, they divested their restaurant businesses, followed by an important move in 2001. bought Quaker Oats , known for producing oatmeal, Cap'n Crunch cereal, and Gatorade beverages. However, Pepsi was considered its most esteemed brand—an coveted role for company executives.

The shift started in 2006 when Chief Executive Indra Nooyi arrived. People became more attentive to reading nutrition labels on foods, and the per capita intake of sodas—which had been a key driver for growth—started decreasing in the U.S.

Nooyi redirected advertising funds from the flagship soda brand towards promoting healthier food and beverage options. Under her leadership, R&D investments were steered toward developing low-calorie and sugar-free beverages. The corporation acquired brands like Naked Juice and KeVita kombucha and established a partnership for distributing Sabra hummus.

The direction towards food was precisely the reverse of what Coca-Cola pursued. In a recent discussion, James Quincey, who leads Coca-Cola, mentioned that sticking solely to beverages allowed them to surpass Pepsi. "Our concentration has been on remaining a drink company," he stated.

In 2017, PepsiCo admitted that both Pepsi and Mountain Dew had experienced a decline in market share as the company had shifted too much advertising spending away from them.

In 2018, when Laguerta assumed the role of CEO, he committed to revitalizing the company’s soda operations in the U.S. Despite this focus, PepsiCo invested heavily in energy drinks and food products. The company purchased the Rockstar energy drink brand for $3.85 billion and launched energy-drink variants of both Mountain Dew and Gatorade. Additionally, they entered into a brief distribution partnership with the Bang energy drink brand before acquiring a minority interest in the rapidly expanding start-up Celsius.

Laguerta increased expenditure in both marketing and research and development. for the largest snack brands of the company , generating fresh alternatives like mini Doritos And Cheetos Mac 'n Cheese. His aim is for people to view PepsiCo as a food and agricultural company. He believes changing the company’s name But concluded he couldn't justify the cost.

As Americans sought solace during the COVID-19 pandemic, they turned to familiar favorites such as Coca-Cola and Pepsi. According to Beverage Digest, an industry monitor, Pepsi-Cola saw an increase in its share of U.S. carbonated soft drink sales volumes in both 2020 and 2021; however, this trend reversed in the subsequent year as it continued its decline.

Even though Pepsi’s traditional "blue can" soda dropped to third place in terms of market share, the brand points out that when considering all Pepsi-branded beverages such as Pepsi Zero Sugar and Diet Pepsi, it maintains the second spot in overall marketshare.

In 2023, PepsiCo took two steps to boost soda sales. They unveiled a fresh brand logo for Pepsi in celebration of its 125-year milestone and debuted a new lemon-lime drink named Starry, aiming to challenge Coca-Cola’s Sprite and Keurig Dr Pepper’s 7UP.

However, its advertising expenditures have remained below those of its competitor. In 2023, the Pepsi brand reportedly invested roughly half of what Coca-Cola put into U.S. advertisements, according to ad-tracking company MediaRadar. Furthermore, during the initial eleven months of 2024, Coca-Cola increased its lead over Pepsi with higher spending.

Krishnan stated that his top priority was to halt the decrease in Gatorade’s market share, which he mentioned he achieved last year. Following this, his objective was to revitalize the soft drink sector.

Following conversations with retailers, bottling operators, and former PepsiCo beverage executives, he determined that the Pepsi brand had strayed off course. "We were involved in too many initiatives," he stated. "We dabbled in music, we engaged with sports—each form of outreach seemed somewhat distinct from the others."

He mentioned that even when customers desired the company’s beverages, these products were frequently unavailable on retail store shelves.

Approximately 25 percent of PepsiCo’s beverages distributed within the U.S. are managed through independent enterprises. These independent bottlers, such as the operation led by Tim Tenney in New York’s Hudson Valley, have been impacted by falling sales figures.

His family has deep roots with Pepsi, stretching back almost a hundred years. Back in 1931, his grandfather—an investment banker—assisted a candy executive in acquiring Pepsi-Cola from bankruptcy proceedings and later joined the beverage firm's board. Additionally, his father was employed at PepsiCo’s headquarters in Queens, New York—a location where a Pepsi-Cola sign can still be seen overlooking the East River—and eventually purchased a bottling franchise.

Tenney mentioned that he began his career in the industry when he was just 13 years old. At the age of 75, he still serves as the CEO. According to him, declining sales figures have adversely affected Pepsi. Recently, he has introduced various new items into their lineup, such as C4 Energy which is backed by Keurig Dr Pepper. Currently, Tenney’s firm is entangled in legal disputes with PepsiCo over the distribution rights for Gatorade.

“I hope the team in Purchase can reverse their fortunes,” he commented regarding Pepsi’s sales performance.

Interviews with various independent bottlers across the nation revealed that Pepsi's shrinking sales figures and logistic challenges have negatively impacted both the brand and their individual enterprises.

Others argue that PepsiCo’s North American beverage operations might perform more effectively as an independent entity—something that activist investor Nelson Peltz tried without success to push for over ten years ago. According to the bottling partners, under the management of a private equity firm or hedge fund, this division would receive greater focus and resources compared to its current situation within PepsiCo.

Overhaul plans

Last December, Krishan mentioned that the firm implemented significant modifications to his sales division with the aim of addressing certain issues. They revamped their sales management framework. "The consistency of which team members visit the store and whom the store manager interacts with should now improve," he explained.

For years, PepsiCo has excelled at maintaining full stock on retail shelves for its range of snack foods and other products. Recently, in December, they promoted their top food executive, Steven Williams, to lead a newly formed unit aimed at integrating the operations across both food and drink sectors within the company, encompassing PepsiCo’s bottling and delivery networks. The objective behind this move is to reduce inefficiencies like dispatching distinct vehicles for delivering food items and beverages to identical locations.

The brand's newest advertisements emphasize their assertion that Pepsi pairs nicely with meals. A recent digital marketing effort illustrates this point. “undercover agents” Taking drinks from unknowing patrons at McDonald’s and various quick-service eateries, then substituting them with Pepsi. The advertisement declares, "Each burger merits Pepsi."

Krishnan mentioned that the firm is increasing its expenditure on promoting Pepsi, Mountain Dew, and sports beverages, while also concentrating more on social media advertising efforts.

He mentioned that the new flavor-focused campaign is proving successful. Following a dip of 1.5% in sales for regular blue-can Pepsi measured in dollars within retail outlets during 2024, there has been an uptick of 5.8% as of now this year, according to him. Additionally, both Wild Cherry Pepsi and Pepsi Zero Sugar have seen their sales grow at rates exceeding ten percent.

In the meantime, the corporation keeps investing in various drink categories. Recently, they committed to purchasing the prebiotic soda label Poppi for $1.95 billion. According to Krishnan, this purchase aids PepsiCo in attracting more health-aware young consumers.

Krishnan expressed his hope that PepsiCo’s detractors, such as independent bottlers, recognize that the recent strategies are resulting in higher beverage sales.

Not celebrating just yet as the game has only begun," he stated. However, evidence was beginning to surface, he noted, indicating that "a few of our shifts in strategy are proving effective.

Send your message to Laura Cooper laura.cooper@wsj.com