Earlier this week, PepsiCo announced that paying less tax in the US is going to free it up to allocate additional funding to some upgraded digital strategic thinking. CEO Indra Nooyi confirmed in a statement:
The provisions of recently enacted tax legislation are expected to result in lower income taxes in 2018 for our operations in the United States, our largest market. We expect the benefits of the TCJ Act will enable us to further strengthen our business by enhancing the skills of our front line associates to ready them for the future, adding new digital and e-commerce capabilities to become more competitive.
It’s a timely decision - or perhaps an ‘about time-ly’ one. The firm is being propped up by growth in its snacks division, while the beverage arm performs below par. And even in the snack department, there are some operational issues, such as the recent self-inflicted branding pain caused by the release of ‘Lady Doritos’ (because apparently women don’t like eating noisy chips!).
Nooyi is aware that the PepsiCo faces some big challenges, not least in terms of disruption in the retail industry reaching across the food and drinks sector. While the likes of Starbucks and McDonald’s have played their digital cards well, that’s not so evident at PepsiCo. There’s a sense of underlying caution that comes through when talking about retail sector disruption, one that stands in stark contrast to the ‘hell for leather’ evangelism you hear from the CEOs of Starbucks and McDonald’s. Nooyi argues:
The success of the newly emerging retail channels is still a work in progress because none of them have really established a toehold in the US. But between the hard discounters, e-commerce, e-commerce of every kind, the pure play, click-and-collect, the growth of dollar stores from a few years ago, and of course, the brilliant growth of Walmart, all of this has caused the retail industry to go through a fairly significant change.
We are overbuilt in grocery in this country, and all of these alternate channels are now beginning to challenge all the square footage in the marketplace. So we are watching and waiting to see whether this disruption is just a low level of disruption that happens over many years or is this going to accelerate. It's something that we're watching.
This is an evolving story and the outlook is not perfectly clear, because the economics of many of these new digital channels is still being thought through. It's not perfectly clear that they're all going to make money.
Internationally, we have much the same phenomenon. China, I think, is the cutting edge of digital sales in the grocery channel. We are seeing Europe now grow in terms of e-commerce and the hard discounters taking a much bigger presence there. And we're seeing the same thing in Latin America. So I think China and the US are cutting edge in terms of retail disruption.
We're going to have to watch and see how it evolves in the other markets. And our teams are all connected globally and thinking through the best strategy for us to play in this new retail environment.
What that appears to mean is that from PepsiCo’s perspective, it’s about keeping an eye on how the digital transformation wave evolves. Nooyi says the reach of her firm is such that there is a lot of learnings that can be tapped into:
The good news is that our DSD (Direct Store Delivery) system reaches virtually any outlet that's out there. Whether it's convenience store, foodservice, whether it's the big supermarkets or the big hypermarkets, we reach every one of them.
So we are watching the traffic through these outlets. We are watching what kinds of products are being sold, what are people buying through e-commerce and what are people buying through brick-and-mortar. And more importantly, we're looking to see whether brick-and-mortar stores are really becoming the warehouse to pick for e-commerce, which breathes more life into them.
For all this 'watch and wait' vibe, the CEO insists there has been good foundational digital work done:
Despite the many challenges we faced over the years, from changing consumer preferences to disruption in the retail environment, to geopolitical turmoil, we have consistently and substantially reinvested savings back into the business to further build capabilities and adopt technologies that we believe will enable us to sustain our top line growth. So, for example, our investment in e-commerce across multiple channels, from e-grocery, to direct to consumer, to pure play, helped drive exceptional growth in 2017.
We are leveraging big data and predictive analytics to sharpen real-time marketing messages, dynamic merchandising and tailored offers. And we're increasingly collaborating with retail customers to make e-commerce a point of differentiation for PepsiCo. As a result, our e-commerce business is now approximately $1 billion in annualized retail sales, and we are well positioned to capitalize on what is sure to be a dynamic future in this space.
She also pitches the idea that the firm has been investing in the right technologies and skills to build better relationships with existing and potential customers:
The strength of new capabilities in e-commerce, research and development, social and digital marketing and design has helped us connect with consumers in new ways.
The strength of our customer relationships in the United States was reflected in the most recent Kantar Retail Power Ranking survey, where our retail partners, once again, named us as the number one best-in-class manufacturer.
For the first time, we received the top ranking in every functional category, including clear company strategy, most important consumer brands, growth in profitability, sales force and customer teams, insights and category management, supply chain management, and use of digital platforms. Similarly, we were highly ranked in service by Advantage in many of our markets outside the United States, including key markets like China, Russia, the UK and Mexico.
Lip-smacking, thirst-quenching, ace-tasting, motivating, good-buzzing, cool-talking, high-walking, fast-living, ever-giving, cool-fizzing, not enough digital whizzing…Pepsi. It’s to be hoped that those Trump tax dollars get put to good use. But for that to happen, there’s going to need to be a lot more evident enthusiasm on view for the disruptive potential for digital.