PepsiCo Announces Millions in Additional Ad Spend, Plans to Trim Agency Roster

Following Six-Month Strategic Review, Calls 2012 a 'Transition Year'

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PepsiCo is calling 2012 a "transition year," as it adds hundreds of millions of dollars in advertising spend, trims its agency partners, lays off thousands of employees and positions itself for growth.

Following a six-month strategic review, the company said today it will invest an additional $500 million to $600 million to advertise its brands this year, with a focus on North America. Up to $100 million in additional spending will focus on things like in-store display racks.

In the coming years, PepsiCo says it will maintain or increase that rate of support to maintain ad spending as a particular percentage of revenue. It did not disclose that specific percentage, but as a percentage of sales, Coca-Cola spent 8% on marketing in 2010, while PepsiCo spent just 3% on its beverage brands, according to analysis from Jefferies & Co.

PepsiCo CEO Indra Nooyi is looking to boost U.S. beverage sales and regain market share from Coca-Cola.
PepsiCo CEO Indra Nooyi is looking to boost U.S. beverage sales and regain market share from Coca-Cola.

The company plans to focus the additional spending on a dozen core brands, rather than spreading it across a wide swath of its beverage and snack brands. The trademarks it will focus investment on include: Pepsi, Gatorade, Tropicana, Mtn Dew, Sierra Mist, Lipton, Mirinda, Lay's, Sun Chips, Cheetos, Doritos and Quaker.

Analysts have been calling for increased investment, particularly in the North American beverage category. PepsiCo 's ad spending on beverages has trailed Coca-Cola's in both absolute terms and as a percentage of sales for years. In each of the past three years, Coca-Cola spent close to $3 billion on advertising, while PepsiCo spent less than $2 billion promoting its beverage brands.

To free up cash for the new investments, PepsiCo said it will reduce the number of agency partners and leverage the global scale of its key brands. TBWA /Chiat/Day manages the Pepsi trademark in the U.S., as well as Gatorade and Tostitos. BBDO works with Mountain Dew and remains involved with the Pepsi trademark globally. Goodby Silverstein & Partners handles Cheetos and Doritos, while Energy BBDO is responsible for Lay's and Sun Chips. Agency reductions will be limited to the beverage side of the business, where it plans to go from 150 agencies to 50.

Recently, the company has added marketing execs that have a global focus, including Brad Jakeman, president-global enjoyment and chief creative officer, and Lorraine Hansen, senior VP-global hydration. As Ad Age first reported earlier today, Massimo d'Amore, president-Global Beverage Group, is retiring at the end of February, however. The first global campaign for brand Pepsi is expected in the coming months.

Plans are also in place to lay off 8,700 employees, or about 3% of PepsiCo 's global workforce, across 30 countries. The company says it will reduce costs by an incremental $1.5 billion in the next three years, with $500 million in savings each year.

"As we implement our strategic priorities in 2012, we've had to make some tough decisions," said Hugh Johnston, chief financial officer, in a statement.

CEO Indra Nooyi is looking to boost U.S. beverage sales and regain market share from Coca-Cola. The company brought investors together in New York today to reveal a multi-year plan to boost earnings and restore confidence after two years of lowered profit targets.

Coca-Cola, however, announced its own marketing investments and productivity initiatives earlier this week. Coca-Cola said it plans to cut $550 million to $650 million in annual costs by the end of 2015. That money will be reinvested in marketing and brand building, as well as used to address rising commodity costs. The company also said it exceeded its goal of cutting $500 million in costs during the past four years.

"The long-term brand-building piece is really where [PepsiCo ] has fallen down in the last 10 years," John Faucher, an analyst with JPMorgan, told Ad Age last month. "But, if you've got the money and are still in front of the consumer, which direct-store-delivery brands always will be, there's the ability to bring the brand back. Consumers might forget what they liked about Pepsi, but they still see it every time they go to the store."

PepsiCo projects earnings per share will decrease by 5% in the coming year. Following the "transition" year, PepsiCo anticipates high single-digit earnings per share growth. Fourth-quarter net income advanced to $1.42 billion, or 89 cents a share, from $1.37 billion, or 85 cents, a year earlier, PepsiCo said.

~~~Bloomberg News contributed to this report.~~~

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