The mid-1990’s were not particularly kind to Pepsi Co. Its flagship Pepsi product was losing ground to Coke in the United States and abroad, and Diet Pepsi had slipped to fourth among soft drinks (behind Coca-Cola’s Sprite citrus soda). Even the fast-food chains that had provided Pepsi with substantial revenue growth over the prior two decades — Pizza Hut, Taco Bell, and Kentucky Fried Chicken — were experiencing declining revenues. Only the Frito-Lay snack division continued to outperform its rivals. In 1997 Pepsi spun off its fast-food operations into an independent company called Tricon.
When it acquired Pizza Hut and Taco Bell in the 1970s, Pepsi seemed intent on becoming the world’s largest fast-food vendor. After it successfully digested the pizza and taco chains, it was widely expected to further expand its fast-food empire. By the mid-1980s, Pepsi’s next target was rumored to be Wendy’s (Pepsi and Wendy’s executives were seen sharing meals at numerous golf clubhouses.) But RJR Nabisco was eager to leave retailing, and it set an appetizing price for its Kentucky Fried Chicken unit. Pepsi eagerly gobbled it up.
Business analysts praised the deal — Pepsi Co’s stock price rose 5 percent when the deal was announced —citing the potential for numerous synergies. Pepsi would bring its vaunted expertise in marketing and new product development to Kentucky Fried Chicken. It would have the potential to create one-stop shopping for fast food. Finally, the deal would enhance Pepsi’s share of fountain beverage sales as Kentucky Fried Chicken franchisees switched from Coke to Pepsi.
Pepsi failed to deliver on many of the promised benefits of the acquisition. Kentucky Fried Chicken trailed the market when competitors, including Boston Market and grocery stores, successfully introduced healthier roasted chicken. At the same time, Pizza Hut struggled during the decade-long “Pizza war” that its principal rivals — Domino’s and Little Caesar’s-seemed more intent on winning. (Some analysts question whether Pizza Hut has the stomach to win the pizza war). Pizza on the temporary success of new-product launches (such as the stuffed-crust pizza). Taco Bell’s new-product launches have also met with mixed success, and its attempt to attract price-conscious customers with 59-cent tacos failed when McDonald’s and Burger King engaged in a bitter price war of their own. Overall, the profitability of Pepsi restaurant division has trailed that of its soft drink and snack food divisions.
To make matters worse, the acquisition of Kentucky Fried Chicken not only failed to enhance Pepsi’s fountain beverage sales but also drove potential customers to choose Coke. Wendy’s switched its fountain purchases from Pepsi to Coke only months after the Kentucky Fried Chicken acquisition, and for the past decade, wherever a consumer has bought fast-food hamburgers and a cola, that cola has almost surely been a Coke. At the time of the Tricon spin-off, Pepsi’s share of the fountain beverage market — just on-third that of Coke-was at its lowest since the Kentucky Fried Chicken acquisition.
As its woes mounted, PepsiCo CEO Roger Enrico decide to focus the company’s efforts on its core business of soft drinks and snacks. Enrico also believed that Pepsi’s fast-food businesses needed an injection of entrepreneurial spirit, even though Pepsi had allowed them to operate with near total autonomy. Ironically, the market responded to the spin-off with the same enthusiasm that it showed when Pepsi made the acquisitions: Pepsis stock shot up 11 percent when it was announced. Tricon’s first boss, David Novak, now faces many challenges in the fiercely competitive fast-food market, including helping the firm realize the synergies that eluded its parent.
Q1. Why did Pepsi not succeed even after diversifying into the fast- food sector? Discuss.
Q2. When Pepsi decided to focus on its core business of soft drinks, it showed signs of recovery with stocks rising. What can be the reason(s) to this effect?