PepsiCo – Snack Business Resiliency as Consumers

Stick to Indulgence – 26 October 2021

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Specialist:

Title:

Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst

Jeff Utne (JU)

Former Director, Sales, Foodservice at PepsiCo Inc

Agenda:

1. Snacking portfolio overview and opportunities for PepsiCo (NASDAQ: PEP) across retail and

foodservice

2. Distribution in foodservice vs retail and complexities

3. Growth drivers for key brands – Lay’s, Doritos and Quaker Foods – and indulgence vs wellness trends

4. Sales growth outlook across channels

Contents

Q: What’s your overview of the state of savoury snacking? What subcategories do you think are driving

growth?

Q: Could you break down the foodservice segment across distribution channels, including some of the major

customers?

Q: Could you discuss savoury snacking and where you’d noted growth in the foodservice side pre-

coronavirus? Where was the focus and attention in retail and foodservice pre-pandemic? Was it on the

different types of foodservice channels? It seems a lot of this coincides with convenience as well.

Q: What is PepsiCo’s SKU rationalisation on both the retail and foodservice sides? Is the company

approaching foodservice with a set number of SKUs but with a bit more innovation and testing in retail?

Q: How did coronavirus throw off PepsiCo’s foodservice and retail strategies, given that Quaker Oats seems a

little more geared towards foodservice?

Q: Were any pockets within foodservice a little more resilient? New hospitals seem to be being built at a high

rate. Would this make the case for scaling some pockets or is there so much product that PepsiCo can sell to

these different entities?

Q: Could you break down PepsiCo’s market share across its portfolio? What is driving the most volume and

how much compensation you think the profit would be?

Q: How much does the distribution aspect play into the foodservice vs the retail side? Could you discuss the

sophistication needed on both sides? Would delivering to prisons be easier than delivering to 56,000

different grocers?

Q: How have the key trends you’ve noted in retail translated into foodservice, whether that’s health and

wellness, clean ingredients or clean labelling? It seems the trends you outlined start in retail and then may

spill over to foodservice. Have some not made it to foodservice, and people still want their Cheetos?

Q: Would you say there’s more spend on incentivising in foodservice vs retail?

Q: How are you measuring the return on spend and the commitment you think PepsiCo has to foodservice?

It does seem rather complex, as if a lot of things could go wrong and it could be a headache for margins. Is it

because the company is the only player who can really manage the complexities that may extend from

volumes perspective or do you expect a longer-term pull-back on its commitment to this channel?

Q: How would you assess volume across PepsiCo’s snack divisions? Is it 60/40?

Q: Who is able to compete on PepsiCo’s scale?

Q: Could you discuss market share on the foodservice side, between branded and private?

Q: How often do foodservice distributors go through a reshuffling phase? When we consider opportunities to

gain share, you spoke about some implications of PepsiCo’s long-term contracts.

Q: What’s PepsiCo’s ability to innovate across its different snacking portfolios? Is its strategy just buying

whoever is out there vs innovating in-house?

Q: Could you discuss major companies buying the smaller ones up and the ease of access, following that buy-

and-build strategy? Other industries seem to have major antitrust concerns, but CPG seems to be for

whoever can buy it first. What is the volume of new entrants vs how quickly they’re being acquired? Could

you describe the tone of the industry that allows this behaviour to exist?

Q: Could you discuss the overall balance between indulgence and health and wellness in PepsiCo’s portfolio?

Do consumers really want healthy products or is a finite segment of consumers pushing this trend where

many don’t really care?

Q: How has the packaging innovation you discussed translated to foodservice? A common tactic is to reduce

the quantity and charge the same price, effectively passing on a price increase. Is there a lot of pushback on

the foodservice side from distributors or that other network of complexity?

PepsiCo – Snack Business Resiliency as Consumers

Stick to Indulgence

Transcription begins at 00:00:02 of the recorded material

NH: Welcome to Third Bridge Forum’s Interview entitled PepsiCo – Snack Business Resiliency as Consumers

Stick to Indulgence. I’m Nyree Hinton and I’ll be facilitating today’s Interview with Mr Jeff Utne, former

Director of Sales for Foodservice at PepsiCo.

Jeff, before we get started with today’s Interview, please state I agree or I disagree to the following statement:

You understand the definition of material non-public information and agree not to disclose any such

information, or any other information which is confidential, during this Interview.

JU: I agree.

NH: Could you provide an introduction of yourself and the various roles you’ve held in the industry?

JU: My name is Jeff Utne. I was with PepsiCo from 2005 until April of this year. During that time, 13 of those

16 years was on the PepsiCo foodservice side. During that time, I managed all brands across the portfolio.

Started on the Frito-Lay side then Pepsi and then even hopped to the nutrition portfolio. My last role within

PepsiCo up through April of this year was leading the foodservice division for Quaker Oats. At that time, had

six direct reports covering North America and then those six direct reports called on the 186 PepsiCo

foodservice reps across the country. I did do stints on the natural channel, calling on accounts like Whole

Foods, the value channel, calling on accounts like Big Lots, and I also did some e-commerce strategy work for

Quaker, managing portfolio innovation for Amazon and other e-comm parts of the company. That’s the

PepsiCo background.

[00:02:09]

Q: What’s your overview of the state of savoury snacking? What subcategories do you think are driving

growth?

JU: Snacking right now is a mix between your core traditional snacks and new entrants into the market. The

core continues to see organic growth, but really the largest growth, as you see are from new entrants who have

new qualifications or new classifications to the products. Whether it’s stuff like non-GMO or other on-trend

dietary items, those are the items that you’re seeing make some waves. They typically start in the natural

channel and then work their way into core grocery. In the foodservice world, it’s a lot harder for those smaller

items to break in, so while your market share in retail for Frito-Lay is probably around the 60% mark, your

market share in foodservice is probably closer to the 80% mark. A lot of that has to do with long-term

contracts or different types of group purchasing organisations that drive the decisions. Overall, on the salty

snack side, in foodservice, you’re going to have salty snacks from Frito-Lay really drive the conversation while

the rest are fighting and clawing to get into the market.

Private and confidential 3

[00:03:46]

Q: Could you break down the foodservice segment across distribution channels, including some of the major

customers?

JU: Foodservice is really overall about USD 700bn across alcohol, beverage and food, across all categories and

all parts of foodservice. There is some data showing foodservice overall is bigger than retail, when you

combine all the retail sales made in one segment vs another. The main channels of foodservice are workplace,

which consists of college university education, K-12, healthcare and business and industry accounts like the

cafeterias that you would have at your local office building, then it’s made up of restaurants obviously. Then

last, PepsiCo calls it rec and retail. Rec being what you would think of as recreation accounts, everything from

lodging to stadiums to golf courses, and the retail piece of foodservice is speciality retail, so it’s airport

concessionaires or secondary retail locations like a TJ Maxx or things like that. You can take those three macro

channels which are workplace, restaurants, rec and retail, and break then down into, we call it 27 different

sub-segments. For example, restaurants, you break down into fine dine, mid-class dine, quick serve.

Workplace, you can break down into high schools, elementary schools, etc, and then rec and retail, you tend to

break down into the segments I gave you already, theatres, golf courses, etc. Foodservice, while it has three

macro channels, actually has 27 different unique types of operators that the segment calls on.

[00:06:10]

Q: Could you discuss savoury snacking and where you’d noted growth in the foodservice side pre-coronavirus?

Where was the focus and attention in retail and foodservice pre-pandemic? Was it on the different types of

foodservice channels? It seems a lot of this coincides with convenience as well.

JU: I’d say snacking in general and growth within foodservice pre-COVID was mainly driven by healthcare. I

think all of us see it. All of the construction that’s going on in that industry, whether it’s bigger hospitals,

newer hospitals or the largest growing part of healthcare is long-term care or nursing homes. That business

continues to grow, continues to get bigger, and foodservice being the industry where we service anything you

eat that’s not at home, so anything that’s not bought at a retail store and brought home. Healthcare was

continually the largest segment or at least the fastest-growing segment of the foodservice channel.

Restaurants, when you think of savoury snacks and things like chips, it’s more limited. You’re not going to sell

a chip to a white tablecloth restaurant, but you will sell it to sandwich shops and places like that, but it’s

harder to pinpoint those opportunities. Then the other growing, and continuing to grow, area was college

university. Those are continuing to get bigger as well, and also just in general, that’s a key demographic

segment for Frito-Lay and other snacking companies to go after because you’re going after future consumers

of your product with disposable income at the time.

[00:08:29]

Q: What is PepsiCo’s SKU rationalisation on both the retail and foodservice sides? Is the company

approaching foodservice with a set number of SKUs but with a bit more innovation and testing in retail?

JU: Retail has the benefit of, they can approach what is on shelf in a very data-forward way. They see the

scans of every item that goes across the register and they can see this particular flavour of Doritos moves faster

than that particular flavour of Doritos. Foodservice does not have that data. It’s a very data-poor channel, so a

lot of it is driven by just the buyers in the industry trying the products, believing in the products. It’s really a

pure-selling environment where you have to show them the why of this innovation item replacing whatever

they have currently on shelf.

The other piece of it is foodservice, you have a finite amount of space. If you can picture your typical college

bookstore, college gift store or college cafeteria, you have a small rack that you have to fill up, and there are

Private and confidential 4

only so many spaces. That being said, you also have to continue to drive innovation to continue to attract these

differing consumers. In that same college environment, if you continue to stock Doritos, Cheetos, and Lay’s

Classic, your typical 18-year-old may not want to see those snacks any more because of changing trends or

changing dietary styles, so innovation is key in foodservice as well. It’s just instead of bringing four flavours of

Fritos Off The Eaten Path, you may bring one core flavour into that channel, and you need to have the data

and insights to back up why to carry that item vs why not.

In my view, it was always innovate in retail first, get the data on how those items perform, use that data to

ultimately drive your selling discussion into the buyers in the foodservice arena. That’s how we did it. The goal

was to make sure that we continue to maintain our base business, but always leave room for innovation YoY.

The innovations that perform well, you tried to keep in your new core, and then always continue to bring

something new every selling cycle or every year.

[00:11:39]

Q: How did coronavirus throw off PepsiCo’s foodservice and retail strategies, given that Quaker Oats seems a

little more geared towards foodservice?

JU: Quaker, a little more geared towards foodservice. COVID really took all of foodservice and almost hit the

pause button in March-April of last year. We went from being about 10-15% over prior year and how our

business was trending, everything was looking up, the channel was continuing to grow, and then all of a

sudden the bottom fell out. The minute everybody started staying at home, buying their groceries online, every

restaurant, every office building, everywhere that we would sell product really shut down. I know our business

for Quaker specifically ended up being about 60% the prior, last year, but towards Q4, it really started to get to

a recovery standpoint where we were growing. Well, we weren’t growing, but we were outpacing Q2-Q3, and

we were starting to see volumes tick back up. The plan for 2021 was to get to the point where we met pre-

COVID levels in our numbers.

I left in April, so I can’t really speak to how that was going, but I know it was trending that way, but I’ve seen

Technomic studies and different NPD studies showing that they don’t think foodservice will fully, fully recover

to pre-COVID levels until about 2025. Retail-wise, it was almost the opposite because what you had was after

an initial fallout, you had a huge bump in sales because everybody was stocking up their pantries, so when

foodservice went down on the curve, retail went up. The challenge retail faces this year is they’re overlapping

those historical highs that they saw in the spring, and then those continued ultimately through the fall. Then if

you extrapolate COVID out even further, that’s where it gets tricky because now you’re looking at supply chain

issues driving major, major changes to how we can service the markets, and there’s a lot of noise in the

numbers this year for sure.

[00:14:19]

Q: Were any pockets within foodservice a little more resilient? New hospitals seem to be being built at a high

rate. Would this make the case for scaling some pockets or is there so much product that PepsiCo can sell to

these different entities?

JU: While everything was down, the couple of sub-channels of foodservice that didn’t go down as far as others

were healthcare, whether it was long-term care or direct hospitals. Hospitals stayed negative to prior year

though, because if you remember, guests were no longer able to visit patients for a while. If they were able to

visit patients, they didn’t have the hospital cafeteria open, so your numbers weren’t able to be as big as they

were prior year, but hospitals were still open. They didn’t close, whereas lodging and restaurants really shut

down, nobody was travelling, nobody was eating out. The other sub-segment of foodservice that stayed strong

was actually the correctional industry. As you can imagine, pun intended, it’s a captive audience, and they

continued to eat, they continued to require product, so those parts of foodservice maintained while the rest of

it dropped.

Private and confidential 5

[00:15:51]

Q: Could you break down PepsiCo’s market share across its portfolio? What is driving the most volume and

how much compensation you think the profit would be?

JU: If you look at it, foodservice specifically, market share-wise, on the Frito-Lay side, market share really

maintained itself because while foodservice was down, the contracts that were in place required the customers

to buy, when they did buy, the stuff that they had under contract, so Frito-Lay stayed strong. Quaker, we had a

little hurt in our foodservice market share overall because our biggest channels were more shut down. If you

can imagine Quaker hot oatmeal, there’s hot oatmeal at every hotel across America, and if people aren’t

staying at hotels, our oatmeal share went down, but oatmeal was still being purchased, but it was being

purchased at places like Dunkin’ Donuts or Starbucks, where it’s a private label oatmeal they’re serving you.

Foodservice numbers got a little skewed last year. With office buildings closed, Quakers numbers went down,

private label numbers went up, and what you had was almost a reshifting of the pie, where more oatmeal sales

ended up being at quick serve restaurants than where they used to be at lodging or office buildings in the past.

I think it’s just the shift in the way consumers went to market and where they bought things that drove

changes in market share more than any long-term trend. When things continue to normalise, you’re going to

see more and more shift back to the way the pie for market share worked in the past. I guess the unknowns

are, does foodservice continue to change because more companies are doing work-from-home policies and

things like that, and is it going to be more restaurant-driven where the foodservice business is? How does

PepsiCo, Frito-Lay, Quaker, whoever, change their strategies to be able to tackle where they target and where

they go as foodservice recovers but recovers differently?

The one thing I’ll say is there are not many companies better suited to figure our what those trends are, what

those insights are, where things are going, because PepsiCo has the money to spend on those insights and see

things that are happening before their competitors in many cases. They get the detail, they get the insights,

and they have the ability to then tailor what their sales force does strategy-wise based on what they’re seeing in

the market.

[00:19:08]

Q: How much does the distribution aspect play into the foodservice vs the retail side? Could you discuss the

sophistication needed on both sides? Would delivering to prisons be easier than delivering to 56,000 different

grocers?

JU: I would say it’s more complex on the foodservice side. Retail, when you look at it, Frito-Lay really is a

DSD company, so they own their own fleet, they have their own trucks, they’re going out to these markets and

they’re selling their core items, they’re setting them on shelf. They’re controlling what’s in the planogram or

what’s in the set of each store.

Foodservice, you have to rely on other distributors. You’re not going to take a Frito-Lay truck and roll it up to

the Courtyard Marriott in a suburb of Boston. You’re going to sell to a distributor who then sells to that and

Courtyard Marriott, so there’s an extra layer of distribution, and with every extra layer of distribution comes

extra cost, whether it’s marketing programming, you have to pay those distributors, or it’s damage allowance,

you have to pay those distributors, or it’s other things that come with utilising someone to deliver your product

vs having it on your own truck. From a distribution standpoint, foodservice is a little more complex, and if you

think about it, it’s not just a Courtyard Marriott in a suburb of Boston, it’s the Courtyard Marriott, and the golf

course down the street, and the restaurant, and the hospital cafeteria, and, and, and, and, and. When you

think of the infinite number of operators that you want to get your product to, you really have to rely strongly

on those distributors to do it.

Private and confidential 6

On top of that, I guess those distributors, you’re also fighting for their share of mind as well. If I’m calling on a

Sysco in Chicago, they have 180 sales reps, I want those 180 sales reps to sell more of my Frito-Lay product

than they do of the Kellogg’s Kettle Chip product, and how do you motivate those people who work outside

your company to sell more of your stuff than the other guy’s stuff? It’s less in your control, I guess is what I’m

saying. There are just a lot of other factors.

Delivering to retail is tough, it’s a lot of touchpoints, but at the same time, when it’s under your control, you

can control the costs, you can run it more efficiently. You’re more in control of the efficiencies, whereas

foodservice, you’ve got to work through other parties and other people.

[00:22:12]

Q: How have the key trends you’ve noted in retail translated into foodservice, whether that’s health and

wellness, clean ingredients or clean labelling? It seems the trends you outlined start in retail and then may

spill over to foodservice. Have some not made it to foodservice, and people still want their Cheetos?

JU: Yes, I think people still want their Cheetos, they still want the core items, so you’re always going to have to

fight to maintain those slots in the distributor’s warehouse, so they continue to sell it to the end operators, but

there is continued demand for on-trend or better-for-you items and things like that, so it’s a balance. If I’ve got

25 slots in a warehouse of Sysco Chicago servicing that market, what are the best movers of those 25? Can you

somehow cut the tail and try to put in more better-for-you items? If you do that, you better ensure those

better-for-you items move. A lot of these distributors don’t really make those decisions themselves, they want

to see you go out as a manufacturer, you sell it to the end operator or the person who’s buying it. “Jeff, you go

out to Marriott corporate. Get Marriott corporate to agree to bring in two Sabra houmous SKUs.” Marriott

corporate then comes to us as the distributor and says, “We need you to bring this in for us.”

Distributors are very risk-averse, so they want to see that you have the pull from the operators or from the

people who ultimately will purchase this product and put it in front of consumers before they make any

changes to their portfolio, so the whole thing just moves more slowly. There’s a slower ramp-up to get these

items in the distribution and then have the pull to get them in front of consumers. The only way to really do

that is you need to either pay to play and say, “Alright, distributor. I want you to bring this in. Here is the

money I’ll give you to bring it in,” or you have to sell the end operator on the data of why this is a good item

and get that end operator then to force their distributor to have it available for them. A couple of different

ways to skin the cat. The trick with all of this is you need to have a smart, engaged sales force with

relationships to go drive those transactions at the operator level to get the distributors to bring in the product

and then to change the mix that ultimately over time comes from Frito-Lay to the distributor and then flows

down the channel.

[00:25:27]

Q: Would you say there’s more spend on incentivising in foodservice vs retail?

JU: It’s hard to tell when you look at all-in spend. There’s more marketing activation that’s done in retail, so

whether it’s putting yourself into the ads or going for incremental displays on floor or trying to get an end cap

or going on Jewel-Osco’s website to promote your items, all of those spends go into the equation. There’s less

of that outward consumer-focused marketing in foodservice or paying for space in foodservice, but there is

more trade in the touchpoints it takes to get from your warehouse to the end user, to the operator.

If I’m Frito-Lay, I have to, get it into Sysco. Sometimes I can deliver that direct, sometimes I have to use a

redistributor to get it into Sysco, so I have to pay whatever my Sysco programme is, and then I have to

incentivise their reps to sell it, so maybe some type of SPIF programme to sell it. Then by the way, to be the

preferred chip at Marriott, I have to have a programme at those national accounts as well to stay the preferred

chip. Say it’s 5-10% at the operator, 5-10% at the distributor, that’s 20% spend in just pure trade, and then if

Private and confidential 7

you really want to elevate your awareness, sometimes you can also do end operator programmes. I can work

with Marriott, give them some marketing funding to put it on their TV display at the front desk, those are

minimal spends in the grand scheme of things. It’s a convoluted answer, but different types of buckets of

spending, but all in, I think it probably equalises out in the spend you do in each channel.

[00:28:00]

Q: How are you measuring the return on spend and the commitment you think PepsiCo has to foodservice? It

does seem rather complex, as if a lot of things could go wrong and it could be a headache for margins. Is it

because the company is the only player who can really manage the complexities that may extend from volumes

perspective or do you expect a longer-term pull-back on its commitment to this channel?

JU: PepsiCo’s commitment to foodservice overall is strong. If you just look at the amount of people dedicated

to the channel, there are reps in the street to the tune of 180 on Frito and there’s probably four times that on

the Pepsi side, and then they have an entire sales force dedicated to national accounts. You have an account

manager over Marriott, an account manager over Pizza Hut, Taco Bell, Subway, etc. The overall organisation is

always going to be driven by retail. It dwarfs the overall size of foodservice, and as retail goes, the companies

will go. However, retail, when you’re not dealing with these COVID spikes year to year, is a very predictable

growth rate. You can look at any churn report and see how traffic is doing and see the type of items and

estimate what your gross is going to be for the year.

The difference with foodservice is there’s an infinite amount of white space or places where you may or may

not have distribution yet. You have over, I forget what the number is, but it’s millions of different touchpoints

in millions of different places where you can sell your product in the foodservice arena. I feel like, I was there

15 years, it was almost like every three years, the cycle would change. Where people didn’t talk much about

foodservice, it just ran on its own, and then leadership would come in and say, “We’re not expecting huge

growth from retail for these particular reasons, in this particular horizon. We need to double down and do

extra focus on foodservice.” Those times were great because finally you had the resources you needed to go

tackle this arena and go get it done, but it seems to change with whoever is in leadership.

I think right now, it’s more retail-heavy, less foodservice-heavy in the overall PepsiCo focus, but I would expect

it to bounce back and forth. A lot of that’s COVID-driven and foodservice was down to almost nothing, but

when you look at where the volume is going to go and where they need to find places and new evidence to get

their product in front of people, it’s going to be foodservice in the next couple of years.

[00:31:26]

Q: How would you assess volume across PepsiCo’s snack divisions? Is it 60/40?

JU: It’s probably closer to 70/30 to retail, foodservice, but when you look at the runway for growth, it’s more

on the foodservice side. 70/30, but at the same time, with foodservice being bigger than retail overall, how

does Frito-Lay or Pepsi or Quaker go gain their fair share of that foodservice pie? It’s always going to be a

strategic plank of PepsiCo to say, “How do we go get the fair share of every rack in foodservice that we have in

retail,” or with Quaker, “We have a 30% share in foodservice, but we have a 50-60% share in retail. How do we

get that to translate over? How do we go get our fair share of the pie of this foodservice universe?” I guess

70/30 is how I would break it down.

[00:32:47]

Q: Who is able to compete on PepsiCo’s scale?

Private and confidential 8

JU: It’s your biggest players, so you will see Frito-Lay, Kellogg’s, Conagra, Mondelez, all of your typical

players are the strongest in foodservice, Mars, etc, but you will here and there see these breakthrough brands

come and steal a bunch of share because they’re new, unique, and foodservice operators like to continue to

have something different on shelf. I guess the prime example in the last couple of years is probably Kind Bar,

where historically you were selling bars on racks and you’d see a Chewy Bar, and you’d see a Kellogg’s Nutri

Grain Bar and you’d see a Rice Krispies Treat. All of a sudden, you’d start seeing a rack of Kind Bars. A lot of

that just has to do with them investing heavily in the channel, getting a foothold, and then once they get that

foothold from those operators, they get distribution, and once they get that distribution, they can ride that YoY

wave.

You don’t see those little entrants pop up as frequently as you do in retail, but you will see them, and once

different things become viral and it’s something that there’s a sell story behind it because Kind is showing up

everywhere, then you’re going to get foodservice operators seeking it out. When it comes down to it, if you’ve

looked at total dollars across manufacturers in the foodservice arena, most of it you’re going to see is going to

be your core biggest manufacturers and then a huge portion of it is going to be private label or chef label or

back of the house-type product. You’re not necessarily going to see a tube of Quaker oatmeal in the back room

of a hospital cafeteria. Lots of time you’ll see a tube of Sysco-branded oatmeal in the back house of the

cafeteria because ultimately if there’s no branding on it, it’s going to be cheaper, and a lot of times if you’re

going to make something in the back of a house, you don’t necessarily need branding on it. That’s the other

element of foodservice you got to fight with.

[00:35:49]

Q: Could you discuss market share on the foodservice side, between branded and private?

JU: I’m going to have to use Quaker to do that. When you looked at hot cereal, Quaker was about a 30%

market share of the overall hot cereal market in foodservice, the second-biggest branded player was, I think it

was Bob’s Red Mill, and they were like a 4% share, something like that. The bulk of the balance of that was

private label or distributor label or unbranded products, so Quaker was far and away the number one

manufacturer brand, but it was not the number one oatmeal overall. That was managed by private label, and

that would really apply to any foodservice item that is more back of house.

If you took, I guess this doesn’t apply any more, but Tropicana orange juice, PepsiCo’s old juice brand, you

would see the same thing. Tropicana would be the number one branded juice bulk supplier, so 128-ounce or

59-ounce multi-serve container, but private label would be trumping the Tropicana market share because you

would have people who served orange juice back of house who didn’t need to brand it on menu or utilise the

power of the Tropicana brands in their restaurant or in their hospital. Frito-Lay and Pepsi are a little insulated

from that because Frito-Lay is a front-of-house product. It’s going to show up on a rack at the register. Pepsi is

either on the fountain or a can in the cooler, so they’re always going to be needed in foodservice, but some of

the other part of the portfolio for PepsiCo gets hurt by the whole back of house, front of house side of things.

[00:37:36]

Q: How often do foodservice distributors go through a reshuffling phase? When we consider opportunities to

gain share, you spoke about some implications of PepsiCo’s long-term contracts.

JU: From a foodservice operator standpoint, you’re typically going to see contracts that are 3-5 years in

length. An example would be Marriott puts out a bid on their oatmeal business once every three years, and it’s

a request for proposal and they offer it to every oatmeal supplier and whoever comes back with the deal that

they like best and different elements of that deal, they’ll lock it in for three years.

Distributors, it’s twofold. It’s, they have to service what Marriott wants, so Sysco, if they service Marriott and

Marriott agrees that Quaker is going to be their preferred oatmeal for three years, Sysco has to have that

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oatmeal to maintain that business relationship with Marriott. However, Sysco has an uncontracted portion of

their business that they service, where they can put those uncontracted portions of their business out to bid as

well. We would typically see stuff like the hot cereal category at Sysco go up for bid every four or five years,

somewhere in there. What you would be bidding on is not the contracted stuff that Sysco has to service, but

the uncontracted stuff that they aren’t forced to sell a certain kind of oatmeal to, they just need that oatmeal

for them. The example of an operator would be a breakfast restaurant that Sysco serves oatmeal to, but that

breakfast restaurant doesn’t care if it’s Quaker oatmeal, Bob’s Red Mill oatmeal or private label, whatever,

oatmeal, as long as it’s oatmeal.

The distributors have a mix of contracted volume of items they have to serve and uncontracted volume of stuff

they have to serve. I think when you look at their volume breakdown, it’s something like 60% of their business

is contracted where they have to have those brands and 40% is not. When you look at their profit, their profit

is much stronger on the unbranded stuff because the other thing we do when we agree to a contract with

Marriott on their oatmeal is, you will be not charged more than X for this item, whereas Sysco selling oatmeal

to a restaurant, they can put whatever markup they want on it. It’s the more profitable piece of their business.

I’m going off on a tangent, but that’s kind of the way those contracts work.

[00:40:52]

Q: What’s PepsiCo’s ability to innovate across its different snacking portfolios? Is its strategy just buying

whoever is out there vs innovating in-house?

JU: This is really opinion based on me. I think PepsiCo overall should do more of purchasing the items that

are really driving the industry, but it does seem to me like while PepsiCo has bought companies and has

brought people into the fold, they do try to do more and more innovation in-house YoY. Some of it they do

great, a lot of it doesn’t go anywhere, but I guess that’s just part of the nature of trying to find out what the

next big item is going to be. In-house-wise, over the last several years, they’ve launched Imagine, they’ve

launched Off The Eaten Path, they’ve launched Red Rock Deli, they’ve launched a bunch of different brands to

try to really bring the next big on-trend item into the market through their own innovation cycle. The hard

part of that is, you’re putting something out there without any real view on, is it going to strike the interest of

the consumer vs when you look to purchase companies, you can see what’s already striking the interest of the

consumer and have that strategy where you try to hit those on the right part of their cycle to really drive more

profit in the organisation.

PepsiCo has been hit and miss on that too. I think back a couple of years ago, Quaker bought Health Warrior.

Health Warrior had probably already peaked, and by the time it got integrated and put into the fold, it was on

the downward cycle of its growth. Frito-Lay, I’m trying to think of something they purchased in the near past

where it was still continuing to grow, maybe Bare Snacks, something like that, where there was still room for it

to continue to go up in cycle. I guess my answer overall is, Frito-Lay has the ability to innovate. They have the

resources tied to that, it’s just really a crap shoot game on if whatever they put out there is going to strike the

fancy of the consumer. They need to, in my opinion, do less of that and more finding what the next big on-

trend item is and bringing that into the fold, but I think it needs to be a balance overall. You need to continue

to innovate, continue to drive something new, not stand on the merits of your core portfolio, but also have

your head on a swivel and be ready to find that next huge on-trend item and bring them into the PepsiCo

umbrella before somebody else does.

[00:44:14]

Q: Could you discuss major companies buying the smaller ones up and the ease of access, following that buy-

and-build strategy? Other industries seem to have major antitrust concerns, but CPG seems to be for whoever

can buy it first. What is the volume of new entrants vs how quickly they’re being acquired? Could you describe

the tone of the industry that allows this behaviour to exist?

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JU: I think you have such a varied portfolio of what’s sold in the CPG world, that you’re never really going to

have too much antitrust stuff pop up because there’s constant innovation, there are constant new entrants,

there are other large players in every category. You’re always going to have this world of everybody trying to

steal from everybody where, yes, Frito-Lay may have a 60-65% market share, but Kellogg’s Kettle brand chips

and Snyder’s and all these other brands are no joke. If you look at even companies that have acquired different

things like Mars, Mars is in candy, they’ve started acquiring better-for-you stuff, so they’re trying to round out

their portfolio or Coke, Coke has tried to innovate by bringing other things into their portfolio that may not be

a core competency of Coca-Cola. Coke went and started, the name’s blanking on me, but the milk company,

and they’re trying to round out their portfolio and just bring something different into the CPG world or bring

something different into their fold or their mix of products.

From a PepsiCo lens, I think what they’re trying to do is just continue to play in more categories and continue

to maintain that leadership by owning more parts of the store and bringing those brands that they do purchase

into the efficiencies of the PepsiCo supply chain. Ultimately having more influence at the retailers because

they have a bigger portfolio, and ultimately driving efficiencies and cost down because they have more

influence, because they have the supply chain and because they have the ability to get the product to market

faster than their other competitors.

[00:47:21]

Q: Could you discuss the overall balance between indulgence and health and wellness in PepsiCo’s portfolio?

Do consumers really want healthy products or is a finite segment of consumers pushing this trend where many

don’t really care?

JU: I probably have a slightly jaded opinion on this. Yes, there is demand for better-for-you items, but the one

thing that you continue to see YoY is growth in the core Frito-Lay portfolio. As much as there is more demand

for better for you, people aren’t not buying Cheetos any more. I think there’s always going to be the demand

for both. I do think there’s more overall upside in having credentialed better-for-you items than there is in

continuing to push the Cheetos or Doritos wagon, but you can’t just sit back and assume that an item as big as

Doritos is not going to always have loyal followers and people who want that item. They don’t only want

Doritos because of the nutrition portfolio. They want them because they like it and they’re going to buy it

because they like it, and there’s always going to be that balance of indulgence vs doing what’s best for my

overall diet.

I don’t know if I really answered the question, but really it’s, I think there’s more overall growth in better for

you, but I do not think you can stray away from continuing to grow and drive your core. You just have to

balance the portfolio where when you go talk to a buyer, you go talk to a retailer, you go talk to a consumer,

you have something that satisfies everybody. “You’re interested in non-GMO, here’s our non-GMO portfolio,”

or “You’re interested in driving velocity with a core SKU portfolio, we have the best core SKU portfolio out

there. You want organic items, you want to be in whole foods, you want to have that?” If PepsiCo wants to

continue to lead, they’re going to need to have an organic portfolio of items.

You’re going to need to continue to drive both sides to be able to succeed in the fractured retail environment,

and then if you take it into foodservice, you’re going to need to take all of that stuff that you’ve developed and

all those different items and have it in the right different packs for each segment of the CPG world as well.

Your family-sized bag of Doritos won’t work in foodservice, you need a single-serve size bag. A single-serve

size bag like you would buy at Subway isn’t big enough for somebody at an airport or at a concession stand.

Then if you want to tackle the e-commerce world, you’re going to need to have a variety, a pack of items that

will work to be delivered to somebody’s doorstep and you’re not going to have to be able to ship them core

family-sized bags. You’re going to need to ship them small ones because core family-sized bags shipping

through UPS are going to have too much damage and breakage on those chips. You’re always going to have to

have innovation in credentialed items, innovation in your core items, and it’s not just innovation in flavour,

you’re going to have to have innovation in pack and innovation in size.

I think the one benefit if you’re truly looking at PepsiCo’s strategic advantage or advantages vs other smaller

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companies, is they have the resources to put into those different innovations, those different items. The one

thing that I think really hurts PepsiCo is they’re a big organisation. There are a lot of processes, and there are a

finite amount of projects that they can do effectively year to year, so they’re not very nimble. Whereas

somebody like Kind Bar can probably turn a different pack size and go after a segment of business, and they

can do it in 4-5 months, get it developed, because they have less guardrails or gateways to get through.

PepsiCo doing the same thing, it’s going to take them 12-14 months because of all the process they have in

place to make sure they’re doing things as efficiently as possible as a big organisation. It’s like turning the

Titanic vs turning a yacht, and that’s the benefits and drawbacks of the huge company. A huge company has

the resources, but they don’t necessarily have the speed.

[00:52:56]

Q: How has the packaging innovation you discussed translated to foodservice? A common tactic is to reduce

the quantity and charge the same price, effectively passing on a price increase. Is there a lot of pushback on the

foodservice side from distributors or that other network of complexity?

JU: It’s almost the opposite, especially with Frito-Lay in foodservice. If you think about it, the smaller the bag,

the more overall packaging you need in a case, the more front-end costs of producing that case. Whereas if you

can get somebody in foodservice into a bigger bag that is also sold in convenient stores, you’re now driving

efficiencies on the cost stand front and you’re driving more overall profit. The best example, if you take

somebody like Subway, they always bought a 1.2-ounce Dorito. 1.2-ounce Dorito was really only sold in

foodservice, but if you look at the 1.5-ounce, if you can trade up that Subway to a 1.5-ounce, then you’re driving

efficiency because you discontinue the 1.2, you’re not only serving the 1.5 to Subway, you’re also serving it to

every convenient store in the country. You’re driving manufacturing efficiencies and you’re driving more

overall profitability. Foodservice is looking more at SKU pack rationalisation that way vs the weight-outs or

pull a couple chips out so it’s more profitable. That being said, inflationary pressures are so huge, I don’t know

how Frito-Lay is dealing with it since I left, but I think anything’s on the table at this point.

[00:55:09]

NH: I think that’s a good place to end the Interview. Let me just close by saying, thank you, Jeff, for your time

today. We were able to go really deep into a lot of details around foodservice and PepsiCo’s strategic

advantages, and thank you, clients, for joining Third Bridge Forum’s Interview. Clients, if you would like to

speak to Jeff in a private call or meeting, please let your relationship manager know. Jeff, thanks again. Have a

good one.

JU: Alright, thanks, everyone.

Transcription ends at 00:55:30 of the recorded material

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