http://www.businessweek.com/news/2012-02-16/pepsico-adds-water-to-tropicana-products-to-juice-margin-retail.html

PepsiCo Adds Water to Tropicana Products to Juice Margin: Retail

February 16, 2012, 10:12 AM EST
By Duane D. Stanford

Feb. 15 (Bloomberg) -- PepsiCo Inc. has a strategy to sell more Tropicana brand OJ: Add water to its new products.

Some consumers prefer orange juice that’s less thick. Others want juice with the “goodness” of oranges and fewer calories, said PepsiCo Global Beverages Chief Massimo D’Amore. And consumers will pay the same -- or more -- for such versions.

“They themselves add water before drinking OJ,” D’Amore said. “So why not add the water ourselves and charge for it?”

PepsiCo’s Tropicana, the best-selling orange juice in the U.S., is trying to regain space in American refrigerators after a repackaging fiasco three years ago hurt the brand and allowed Coca-Cola Co. to outflank it. The brand lost market share last year to Coca-Cola’s Minute Maid and Simply Orange brands.

Instead of trying to match Coca-Cola step-for-step in the 100-percent orange-juice category, D’Amore is focusing on products with less juice, more innovation and, therefore, higher profit margins. Trop50, a 42 percent orange juice using a natural stevia-based low-calorie sweetener, has been a bright spot for the brand. Tropicana also will target Hispanic consumers with new juice drinks and blends.

“We have lost perspective here on the primary reason we are in business, which is to make money,” D’Amore said.

PepsiCo’s gross margin, the portion of sales left after subtracting the cost of goods sold, narrowed by 1.56 percentage points last year to 52.49 percent.

Coca-Cola and PepsiCo have competed for fewer juice customers recently as job losses forced consumers to cut back on their morning shot of Vitamin C. Volume sales of 100 percent juice declined 7.1 percent to 4.57 billion liters between 2008 and 2010, according to Euromonitor International Plc.

Rebranded Tropicana

PepsiCo shares gained 1.6% percent last year, compared with a 6.4 percent gain for Coca-Cola and an 11 percent gain for the S&P 500 Consumer Staples Index.

Tropicana, which generated about $6.2 billion in revenue in 2011, is Pepsico’s fifth largest $1-billion-plus beverage brand. Three years ago, PepsiCo rebranded Tropicana. Seeking to give the package a more sophisticated look, the company ditched carton graphics featuring a straw poking into a fresh orange for a stripped-down design and added a cap shaped like an orange.

A consumer backlash ensued because OJ shoppers had trouble deciphering one version -- low acid versus high pulp, say --from another. PepsiCo was forced to reverse course. D’Amore, who greenlighted the rebranding and subsequent reversal, will retire from PepsiCo at the end of this month.

Squeeze Play

Meanwhile, Coca-Cola has put in place a squeeze play, fielding products designed to get Tropicana shoppers to trade up or down, said Bonnie Herzog, an analyst for Wells Fargo & Co. in New York. Coca-Cola’s premium Simply Orange, at $3.79 for a 59- ounce bottle, sells for 40 cents more than Tropicana, while its Minute Maid “value” brand is almost a buck less. As a result, between 2008 and 2010, Tropicana lost market share to Coca- Cola’s OJ brands, says Euromonitor.

“It’s a brilliant strategy,” Herzog said in an interview.

Now Coca-Cola wants to push Tropicana Pure Premium out of the middle market, too. The company started selling mid-priced Minute Maid Pure Squeezed late last year to snatch more share.

D’Amore scoffs at the strategy, saying he won’t be drawn into a battle over 100 percent OJs that are all essentially the same. He’d rather lure consumers with higher-margin blends.

“This is not a product where there’s a lot of added value in the process,” D’Amore said. “The real cost is the juice from the orange, then you pack it and sell it.”

Clear Labeling

When consumers buy juices and blends, they know what they’re getting. The U.S. Food & Drug Administration has strict guidelines for the clear labeling of juice content in beverages. Coca-Cola also has a stable of fruit blends, including watered- down lower calorie juices.

PepsiCo’s weapon in the OJ Wars is Trop50, the premium juice it began selling in 2009. The company is pouring money into marketing and innovation. Sales of the stevia-sweetened beverage, which PepsiCo says has half the calories of regular orange juice, have been growing as much as 50 percent a year, according to D’Amore.

While small relative to the orange juice category, Trop50 is headed to $300 million a year in sales, he said. Tropicana is extending the brand to other juices and teas.

“I prefer to flank my core business with Trop50 where I make 10 to 15 points of margin more than to flank it with a lower price product,” D’Amore said.

Fighting Coca-Cola

Instead of fighting for OJ’s mid-price tier, PepsiCo will use the Dole brand to market less-than-100-percent juice blends -- everything from watermelon to mango -- to the growing Hispanic population in the U.S.

PepsiCo is also playing catch-up to Coca-Cola’s packaging and marketing advantages. Last year, Tropicana introduced a see- through carafe for its Tropicana Pure Premium, a decade after Coca-Cola rolled out its own Simply Orange carafe. PepsiCo ads feature real farmers who tout the purity of Tropicana Pure Premium. The campaign was modeled on Frito-Lay ads, in which potato farmers tout all-natural chips.

Still, consumers may feel they’re having a case of deja vu. The Tropicana commercials look a lot like those from another leading orange juice -- Coca-Cola’s Simply Orange.

--Editors: Robin Ajello, Rick Schine