Case Study: The Pepsi ChallengeBy Anne Field | Posted 04-14-2003
Case Study: The Pepsi Challenge
Every morning at 6 o'clock, Kevin Jacks is on the road, barreling his Pepsi truck down a series of old highways that connect the sleepy, northern Indiana towns of Bremen, Nappanee and South Bend along the southern shore of Lake Michigan. By 6:30, Jacks will have made the first of his day's several dozen stops, mostly at mom-and-pop convenience stores and corner gas stations.
For 32 years, Jacks has been driving for PepsiAmericas Inc., PepsiCo Inc.'s second-largest bottler and distributor. For all that time, Jacks, 54, has done business the same way: His truck is loaded the night before, based on his best guess of what his customers might want to buy the next day. "I bring the store owners what I think they might need, and a lot of times the store manager says okay," says Jacks.
On a good day, Jacks might sell close to 90 percent of the beverages he carries. But not all days are good. When Jacks guesses wrong, he hauls his unsold cargo back to the warehouse minus any bottles that inevitably broke in transit. It's never too big of a deal, says Jacks. "If you're a good salesman," he says, "you can sometimes sell the excess down the road somewhere."
But "sometimes" and "somewhere" aren't good enough for Pepsi's two biggest bottlers anymore. Under a sweeping new wireless strategy taking hold at PepsiAmericas and Pepsi's largest bottler, Pepsi Bottling Group Inc. (PBG), Jacks and thousands of other drivers across the country are losing their responsibility for selling soft drinks. Under the bottlers' new formula, the drivers' job will be strictly delivery; they will hand over the sales job to brand new teams of PDA-toting sales professionals. The bottlers' goal: Put the pop back into profits at a time when soda sales are going flat.
For PepsiAmericas CIO Ken Johnsen, the new strategy is long overdue. "In the old days, Pepsi used to sell itself; there really were no orders," Johnsen says. "If you didn't have those six cases of Frappuccino on the truck and your customer wanted them, it was just, 'I'll catch you next time, next Wednesday.' It was leading to a tremendous loss of potential sales."
It's also a far more competitive marketplace than it used to be, says Paul Hamilton, supply chain logistics vice president for PBG. Today, there are hundreds of Pepsi product and packaging configurations targeting customers' wallets, compared to less than 50 just several years ago-yet neither Pepsi's trucks nor the stores' shelves are getting any bigger and competition from Coca-Cola Co. and new beverage upstarts remains stiff. In this climate, bottlers must find ways to better sell, price, deliver and promote soft drinks at far less cost, from one market and one store to the next. "It's time to do things differently, to arm a frontline work force with relevant, easy-to-access, real-time information," Hamilton asserts. "It's time," he says, "to pump up the volume."
For Pepsi bottlers and parent PepsiCo, that goal has rarely seemed more urgent. Following years of growth, soft-drink sales in the U.S. are losing fizz as a new generation of consumers takes the dollars that used to go to colas and spreads them around a variety of newfangled flavored sodas, bottled waters and fruit juices with names like Sobe Lizard Lava and Lipton Brisk. Indeed, now it's the non-carbonated stuff that stands to reap the most sales going forward, executives say. Sales of Pepsi's Aquafina water, for example, have grown 28 percent during the past three years, analysts say, while Pepsi's carbonated drink sales have sputtered, up just .2 percent at PBG for the first three months of this year.
The struggling economy and the war in Iraq aren't helping. On March 5, in a conference call with Wall Street analysts, PBG CEO John Cahill lowered his company's earnings forecast, citing U.S. sales volumes that would be down roughly 5 to 6 percent for the first three months of this year. PepsiAmericas expects slightly worse—a 7 to 8 percent volume decline for the first quarter.
For a while now, both Pepsi and its chief rival, Coke., have been losing the cola war to new consumers. According to Beverage Digest, Coke and Pepsi market shares of 44.5 percent and 31.4 percent, respectively, were the same in 1998 and 2002. But the average consumer is drinking fewer servings of carbonated soft drinks in favor of sports drinks and bottled water. Market shares for Coke Classic and Pepsi-Cola have eroded, from 20.6 percent in 1998 to 19.3 percent last year for Coke, and from 14.2 percent to 12.6 percent for Pepsi. "If you're a Pepsi bottler and you want to win against rivals with a broader range of products that will drive profitability, you need sophisticated technology to help you figure out the right mix of prices and products," says Wall Street analyst Carlos Laboy, who tracks PepsiCo and its bottlers for Bear Stearns & Co. With their new wireless strategies, Laboy says, the Pepsi bottlers finally should be able to cash in on their marketing and CRM investments and use them to help stores better stock the most attractive mix of Pepsi products, price them better, and put them in the right spots for maximum sales. "Our people are good," says Pepsi Bottling's CEO Cahill, "but they can be much better in terms of the tools and the information they have at their fingertips."
The NextGen of Delivery
The NextGen of Delivery
For a closer look at how Pepsi bottlers are trying to improve their vision going forward, consider what PBG is doing in Dallas. There, along 70 selling and 40 delivery routes, the bottler is test-marketing a new, next-generation wireless handheld computer it calls Pepsi SMART—for Specific, Measurable, Attainable, Relevant and Timebound. Cahill calls it a "staggering advance" in the way products are sold. Hamilton says the 400 MHz, 64-MB RAM handheld devices from Symbol Technologies Inc. can help salespeople figure out their best sales pitch for an individual customer at any given time, reflecting current market conditions and promotional deals already in play. Cahill says the new mobile sales strategy, called NextGen, should "dramatically strengthen" the ability of the sales force to give customers more choice, reduce invoicing and marketing errors, and leverage the full force of the customer data PepsiCo has been collecting for years.
Though it weighs only about 21 oz., the device packs a lot of information. Push one button and reps can compare how much they sold last week with the amount they sold last month, or see how close they came today to meeting their weekly quotas. Push another button and reps can tie demand forecasts for a particular product in a specific market to a variety of pricing, display and inventory scenarios, to help retailers keep product in stock, predict shelf space and plan special displays. Push yet another, and reps can show customers color images of new products and packaging options like Pepsi Blue, or even full-motion videos of upcoming TV ad campaigns to help explain why, say, Britney Spears is pushing some Pepsi products instead of Madonna. And the most important button? It's the one that trains people how to use the device. Push it, and you activate a talking Pepsi can that wears a white baseball cap and a neck whistle for cues.
And that's not all: PBG execs are also hoping NextGen will help bottlers and their sales teams target specific promotions to specific accounts, based on how well specific stores sell Pepsi products. That, in turn, will allow the company to give special deals to its best customers and, it hopes, build customer loyalty among store managers and claim more shelf space for Pepsi products. For example, messages can pop up on the PDA screens from headquarters urging a rep in Dallas to offer, say, the Diet Orange Slice deal only to urban accounts that buy regular Slice but not Diet, and only to those with a Slice poster on display, thereby increasing the effectiveness of a promotion and reducing sales team errors. Since the Dallas pilot began in January, Hamilton says, the PDAs have already begun to reduce the time Pepsi products are out of stock. "We are quite encouraged by what we're seeing so far," he says.
At PepsiAmericas, meanwhile, the wireless strategy is focused more on improving the back end. A key goal of the bottler's $16 million mobility play, currently being tested in seven cities in Iowa, is to get Pepsi reps to wirelessly transmit orders as they are placed into PepsiAmericas' PeopleSoft-based back-end billing and shipping systems, allowing the bottler to build orders in warehouses and load the trucks for the next morning's deliveries, without paying a lot of overtime to the warehouse dockworkers struggling to keep pace with the explosion of Pepsi product and packaging options. CIO Johnsen said he had some qualms at first: "We were very reluctant to do this initially because of the coverage issues for wireless data transmissions," he says. "But the tradeoff is that you either wait and transmit all orders at the end of the [work]day, which can be 4 or 5 o'clock, or transmit orders as they are being placed." Johnsen says 150 trucks or more can report simultaneously for loading at some PepsiAmericas distribution centers, "so we can be getting a few hundred orders that have to be built, and then a few hundred trucks to be loaded, routed and dispatched—all by 5:30 the next morning. There's just not enough time to do that. If you can reduce overtime, which is going up as you add complexity with new products and packaging options, you can get the efficiencies you're looking for." PepsiAmericas' handhelds also can scan bar codes, so drivers can help bottlers get a more precise view of store inventories, faster—freeing up the Pepsi reps in the store to provide service or sell product. "It's very important for us to be able to convert an order into a delivery in less than 24 hours," says Johnsen.
But Pepsi's wireless strategy isn't just about PDA-driven sales growth. It's also about PDA-driven cost-cutting, too. Haulbacks—the unsold soda that Jacks and other drivers have to bring back to the warehouse at the end of each day—can run as high as 30 percent to 40 percent of what's been loaded, says Johnsen. Not only is this a symptom of bad information—or no information at all—it represents millions of dollars of lost sales. Haulbacks also raise handling, inventory and storage costs that result when soda has to be double-loaded, stored somewhere longer or replaced when damaged in the turnaround. If bottlers fully switch over to a pre-order system, Johnsen says, haulbacks should become a thing of the past.
Overguessing demand, though, isn't the whole story. Both Hamilton and Johnsen say that "out-of-stocks"—when stores sell out of a particular Pepsi product-also cost big bucks. Pepsi products are out of stock roughly 9 percent of the time, on average, Johnsen says, another problem he believes the wireless system can eliminate. According to the Grocery Management Association, 40 percent of consumers who go to the store intending to buy an item only to find it's been sold out either don't buy anything at all (bad for PepsiCo), or go somewhere else to find what they want (bad for Pepsi's retailers). Overall, says the GMA, increasing product availability can boost the average supermarket's sales by as much as $200,000 per year. "Think about it," says Johnsen, "somebody wants a Pepsi but all they've got in stock is Coke—nine times out of 10, Coke or somebody else will get that sale."
And the problem only gets worse during a promotion. Stanford University supply-chain expert Hau Lee says a recent Swiss study of 50 U.S. retailers shows the average out-of-stock rate nearly doubles during special sales. Moving to a wireless model, Lee says, can solve the problem. "A wireless PDA is the first step toward a real-time supply chain," Lee says, "enabling you to have real-time information and the ability to do real-time intervention. With wireless, you can actually get both a good eye and a good arm. The eye is to see things first and the arm is to act fast on what you see."
Bumps in the Road
Bumps in the Road
Yet as promising as Pepsi bottlers' new wireless sales strategies are—the cost of selling a case of beverages is already falling for PepsiAmericas in test markets, says CIO Johnsen—wireless is no sure bet. The cultural challenges have been enormous, calling into question how fast Pepsi bottlers will be able to finish rolling out the changes.
In Ohio, Illinois, Iowa, New Jersey and elsewhere, unionized drivers for both bottlers, who represent about half of those behind the wheel, have vehemently protested the bottlers' move to the "pre-sell" strategy, and lawsuits alleging labor contract violations have been filed in some areas, says Tom Kapp, vice president of Teamsters Local 744 in Chicago. According to Kapp, some drivers have been hit with pay cuts of 20 percent or more as they've been moved off sales commissions to hourly salaries, with no overtime. Says Tony Petillo, secretary-treasurer for Teamsters Local 125 in Totowa, N.J., "The average wage before they stopped commission was $75,000, and the average wage now is probably $55,000." The result? High job turnover rates. "It used to be rare that someone would change a job," Kapp says. Now, "there is quite a bit of turnover"—between 25 to 30 percent, Kapp says. The numbers don't surprise Jacks, who estimates the switch to pre-sell means "you're looking at having to handle almost twice as many cases to make the same amount of money—roughly about 140,000 to make about the same amount of money you get now running 90,000."
As big an issue for some drivers is the change in their relationships to their customers. Drivers, many of whom have years of experience and history with their customers, aren't happy about giving up those relationships, says Petillo, a former Pepsi route salesman.
Johnsen acknowledges the challenges. "The move to the new sales model is influencing our union negotiations," he says, not to mention slowing down the rollouts in some markets. Jacks, for example, was to have given up the sales part of his job in March, but now his union, Teamsters Local 364 in South Bend, Ind., says PepsiAmericas won't be making the switchover on his route and some others until fall, a decision made, in part, to avoid upsetting the bottlers' lucrative summer selling season.
But labor woes aren't Pepsi's only headaches. Bottling executives also worry about technology problems cropping up during the rollouts. For one, wireless coverage outages continue to be a problem in some of the bottlers' rural markets in pilot tests of the new sales and delivery PDAs: Some PepsiAmericas agents using the new wireless devices in Iowa have had to resort to transmitting orders via their customers' fax machines or telephones. "Let's face it," says CIO Johnsen, "there are markets out there that don't have wireless data coverage. Your sales teams can be as wireless as anyone, but if you're out there in Iowa and you can't transmit an order, you've got a problem."
Indeed, the bottlers have shied away from setting any specific deadlines for going national, except to express hope that all will be complete by the end of 2004 or early 2005. PBG's Hamilton won't even discuss timetables. PBG's Dallas pilot of its new super-smart sales-force handhelds with full-motion video and regression analysis capabilities is going very slowly, he says, with training and detailed comparisons to the old system being conducted simultaneously—just to make sure all the kinks have been worked out first. Says Raymond Brown, PBG's director of supply chain technologies: "We want to make sure the salespeople go through Drivers' Ed before we give them the keys to the Porsche."
Smart Vending Machines?
What's next? PepsiAmericas is experimenting with wireless vending machines that would let people use their credit cards and, someday, their cellphones to buy soft drinks. Both bottlers also are tapping into UCCNet, a nonprofit cross-industry group that aims to synchronize product codes, pricing data and product specs for Web-based business transactions, enabling product data to be stored on Web servers and accessed by anyone in a corporation, from sales to marketing to the CEO.
And like many in the packaged goods industry, both bottlers are experimenting with radio frequency sensors. Working with MIT and other leading corporations across industries to develop the technology, they hope someday to be able to track who's buying what—perhaps all the way down to the individual customer. "RFID and mobile technology will significantly change the way we distribute in the future," Hamilton says.
Can Pepsi pull it all off? While Wall Street analysts applaud the bottlers' willingness to be early adopters, they wonder how valuable the mobile initiative will be to Pepsi over the long term. "It's a good move, but it won't fuel long-term growth," says Mark Swartzberg, a beverage industry analyst at Legg Mason Inc., a financial advisory firm based in Baltimore, Md.
"Only smart brands and good marketing can do that," he says. Besides, he adds, in five years or so, wireless strategies similar to what Pepsi bottlers are spearheading will be more common, as Coke and other rivals race to do similar things. "It doesn't take long for the playing field to get level," Swartzberg says.
The key to success for now, says Stanford's Lee, is making sure that labor disputes won't stall meaningful progress before the strategies have a chance to pay off. The point hasn't been lost on the bottlers. In recent months, both bottlers have attempted to avert bad morale and high turnover, offering, in some places, to give sales jobs back to drivers who meet tough sales and skill requirements, cognizant that their longstanding customer relationships have value to the bottom line. Says Petillo of Teamsters Local 125 in New Jersey, where the pre-sell model first began rolling out in late 2001: "The young, new sales force is also now experiencing some turnover. [Pepsi bottlers] are coming back to us now and offering some of us opportunities to start selling again. It's a tough job, yet some of our people have taken them up on it." The change of heart in some areas doesn't surprise Jacks. He knows most of his customers' first names by heart, as well as "when the manager's gone out to play golf, or when somebody's daughter is getting married." Relationships are important, he says, and can promote customer loyalty. "Will the new people with technology do any better?" he asks.
Still, there's no turning back, says PepsiAmericas' Johnsen. Advances in information technology continue to push companies large and small to the next levels of automation. Johnsen's hope is that the drivers' delivery role will also become more sophisticated as PDAs become more widely used to improve customer service and keep inventories neither overstocked nor underestimated. "We have to change everything now, and the nature of the jobs must change with it," Johnsen acknowledges. (See "Thinking Out Loud CIO Ken Johnson") "Getting management to understand that what we were doing before wasn't selling, it was taking orders, and then getting the organization in the field to feel comfortable with letting go of control of the customer is very, very tough. I don't know that we're there yet."
But don't tell Jacks. "Ten years ago, if you would have told me I'd be selling water, much less only delivering it to my old customers, I'd have thought you were crazy," he says. Indeed, for Jacks and thousands more drivers across the country, the future—for better or worse—is now.
Editor-in-Chief Ellen Pearlman contributed to this report.
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