How Coke Is Kicking Pepsi’s Can (Fortune, 1996) by Patricia Sellers @FortuneMagazine November 10, 2015, 2:13 PM EST E-mail Tweet Facebook Linkedin Share icons This article was originally published in the October 28, 1996 issue of Fortune. Reporter Associate: Patty de Llosa Inside the chairman’s office on the 25th floor of Coca-Cola’s KO stately headquarters in Atlanta, in the top left-hand drawer of his desk, Roberto Goizueta has for many years kept two charts. One describes Coca-Cola’s fundamental business: selling the concentrate that transforms fizzy water into Coke. The diagram plots the four reasons Goizueta adores the business: (1) Selling concentrate requires little capital; (2) it produces superb returns; (3) it demands minimal reinvestment; (4) it spills an ocean of cash. Inside the mind of CokePhotograph by Michel Delsol One day recently, Coca-Cola’s cerebral chairman and CEO was asked to pull out the second chart. This one illustrates PepsiCo’s PEP altogether different strategy, which has involved pouring billions of dollars into capital-intensive businesses like restaurants. Goizueta slides open the drawer and riffles through the papers. “I threw it out,” he says nonchalantly. Raising his eyebrows, he dismisses the world’s most famous No. 2 with trademark dispassion. “As they’ve become less relevant,” Goizueta says, “I don’t need to look at them very much anymore.” Inside the mind of PepsiPhotograph by Michel Delsol Poor Roger Enrico. He certainly can’t say the same about Coke. Since he became PepsiCo’s chief executive in April, Enrico has been seeing a whole lot more red—Coca-Cola red—than he ever expected. Not to mention red as in ink, as in blood. PepsiCo has been badly wounded in the cola wars. Its casualties are high. Caroline Levy, who follows the soft drink industry for the investment firm Schroder Wertheim, says Pepsi is losing customers to Coke in every major foreign territory. The company has always struggled overseas, but in the past few months it has lost key strongholds in Russia and Venezuela to Coke. Even on the home turf, Pepsi is outgunned. Coke’s market share lead of 42% to 31% in the U.S. is the largest in 20 years, according to Maxwell Consumer Reports. It’s a defining moment in the world’s most ruthless corporate war. Yes, they both sell sugar water, but Coca-Cola and PepsiCo never were as similar as most people believed. In recent years they have veered in completely opposite directions. While PepsiCo diversified increasingly into restaurants and snacks, Coke focused on soft drinks. Fittingly, the commandingofficers of these historical enemies are as unalike as their respective strategies. Brash, feisty Enrico and his wary deputy, Craig Weatherup, will lead PepsiCo into the next phase of the cola wars against Goizueta and his pit bull of a deputy, M. Douglas Ivester. It seems safe to say that Enrico and Weatherup are in for the battle of their lives. Coca Cola CEO Roberto Goizueta.Photographs by Michael O’Neill/Michel Delsol Reserved and aristocratic, a chemical engineer by training, Goizueta rose almost unnoticed through the bowels of Coke’s business—technical operations—to become CEO 15 years ago. While his opponents at PepsiCo boasted about doubling revenues every five years, Goizueta, 64, heeded just two measures: return on investment and stock price. “The curse of all curses is the revenue line,” says Goizueta, who has created more wealth for shareholders than any other CEO in history. He’s also done pretty well for himself; he owns $844 million in Coke stock and hasn’t sold a share in more than 20 years. Roberto Goizueta has created more wealth for shareholders than any CEO in history. He doesn’t give a hoot about Coke’s overall sales growth. Goizueta has not met Roger Enrico, 51, nor have the two tasted each other’s drinks in over a decade. A marketing man and Vietnam veteran, Enrico has had plenty of experience in the trenches of PepsiCo. During his quarter-century at the company, he has rejuvenated each of its three businesses: first drinks; then PepsiCo’s snack operation, Frito-Lay; and recently the restaurant division, which includes Pizza Hut, Taco Bell, and KFC. Enrico, who owns $19.2 million of Pepsi stock, is a reluctant CEO. He had to be talked into the job by Wayne Calloway, who this past spring stepped down, ill with prostate cancer. Pepsi CEO Roger Enrico.Photographs by Kristine Larsen/Michel Delsol So now Enrico, the hero of an earlier campaign in the cola wars, is back in the beverage business again. He is returning to one hell of a mess inherited from Calloway, and a job not made any easier by his past. Coke has had a vendetta against Enrico ever since he gloated about the New Coke debacle a decade ago in his memoir, The Other Guy Blinked: How Pepsi Won the Cola Wars. Says Goizueta, seeming both vindicated and vindictive: “It appears that the company that claimed to have won the cola wars is now raising the white flag.” Hold on, Roberto. The war may be one-sided, but Pepsi has hardly surrendered. Quite the contrary. When Enrico is told about Goizueta’s disparaging remark—that Pepsi has become “less relevant”—he folds his arms across his burly chest, stares at the coffee table in front of him, and pauses. Smiling slyly, he says, “Good.” Craig Weatherup, Pepsi new global beverage chief, hasn’t worked abroad in 14 years .Photograph by Frank Vesonsky Enrico will need all the resolve he can get, particularly because Pepsi has been roiled by turmoil down the ranks. Weatherup, 51, became global beverage chief by default. Enrico’s original choice, Chris Sinclair, abruptly quit in July; he had wanted to be CEO and was disgruntled when Enrico got the job. Sinclair departed voluntarily but ungracefully, exercising options for 287,424 PepsiCo shares and leaving the overseas beverage mess for someone else to mop up. Weatherup hasn’t worked outside North America in 14 years. At Pepsi-Cola’s domestic arm, which he ran for six years, he was a meticulous, profit-conscious manager in a freewheeling, gung-ho environment. Weatherup describes himself as “pragmatic by nature.” His longtime friend Enrico says, “The man is a rock.” Ivester, Coca-Cola’s president, says with a hint of glee, “Craig is a nice guy.” Ivester is not a nice guy. He is, in fact, the man responsible for Coke’s ungentlemanly swagger of late. An intense, uncharismatic ex-accountant, he tells customers, “I want all your business.” He urges managers to play by the rule of Ray Kroc, the founder of McDonald’s (another PepsiCo nemesis): “What do you do when your competitor is drowning? Get a live hose and stick it in his mouth.” Tenacious and unequivocal, Ivester, 49, is Goizueta’s co-strategist and the senior executive in charge of operations and marketing. Says Goizueta: “Doug has the nerve of a night prowler.” “What do you do when your competitor is drowning?” asks Coke president Doug Ivester. “Get a live hose, and stick it in his mouth.” Unless he gets run over by a Pepsi delivery truck, Ivester will be Coca-Cola’s next CEO. “Those who need to know, know,” says Goizueta, who resists officially anointing his successor. Goizueta turns 65 next month, but he plans to remain CEO and grand strategist for “as long as I’m having fun and adding value. And the board wants me.” Portrait of Coca Cola #2 Doug Ivester by Michael O’Neill.Photograph by Michael O’Neill — Corbis Okay, those are the generals. Now for the companies they command. Coca-Cola and PepsiCo aren’t simply unalike; they are mirror images of each other. Coke generates 71% of its revenues in international markets; PepsiCo derives 71% from the U.S. Coke earns more than 80% of its income abroad, PepsiCo over 80% at home. All of Coke’s profits come from beverages. Its New York rival is highly diversified, though Pepsi is still the name on the door, and the company depends on drinks for 41% of income. Coke, which is twice as profitable as PepsiCo, has a work force of 33,000. PepsiCo, with 480,000 people, is the world’s third-largest corporate employer, after General Motors and Wal-Mart. It’s hardly surprising that the stocks aren’t so similar either. PepsiCo has rewarded shareholders magnificently this past decade. Return on equity consistently exceeded 20%, and average annual returns topped 23%. But since early July, PepsiCo’s shares have sunk by 18%. Selling at 23 times expected 1996 per share earnings, they trade at the largest discount to Coca-Cola in decades. Coke stock, meanwhile, seems insanely high to some investors who can’t justify a century-old company with a 17% growth rate selling at a price/earnings ratio of 36. Then again, not many companies can crow about a 55% return on equity. At PepsiCo’s leafy enclave in Purchase, New York, Enrico is trying hard to view his can as half full. Not so long ago, it was—more than half full, actually. For nearly 20 years, Pepsi led the fast-growing diet drink category, and its Pepsi Challenge ad campaign—claiming that consumers prefer the taste of Pepsi to Coke—helped provoke the marketing gaffe of the century: New Coke. All during the 1980s, Pepsi was more entrepreneurial than Coke and a nimbler marketer too. Enrico himself set off the hugely successful trend in celebrity advertising by hiring Michael Jackson to do Pepsi ads. What went wrong? Goizueta has an opinion: “You let me have the bottling plants and the trucks and the highly efficient systems, and I’ll let you have the TV commercials. I’ll beat you to a pulp over time.” Coca-Cola, over time, methodically invested billions of dollars in its soft drink infrastructure. PepsiCo management, led by Donald Kendall and then Calloway, produced blowout marketing campaigns and let its eye roam to potato chips, fried chicken, and pizza. “We had outstanding growth in profits and in our stock price for decades,” says Kendall, CEO until 1986. “You can’t take things that are happening now and say that the strategies or the systems are wrong.” Well, actually you could, considering the barrage of bad news that has lately come out of PepsiCo. Coke not only has declared itself No. 1 in Russia, once a Pepsi showcase, but in a midnight raid last August, the red army from Atlanta overran the Pepsi stronghold in Venezuela. By acquiring 50% of a $400-million-a-year bottling company, Coke put Pepsi out of business there overnight. The coup in Caracas is particularly painful for Pepsi, since the bottler was one of Pepsi’s most respected; the owners, the Cisneros family, had had personal ties to Enrico and other top management for decades. There’s bigger trouble elsewhere in Latin America. Pepsi’s largest foreign bottler, Baesa of Buenos Aires, is essentially bankrupt. PepsiCo owns 24% of the imploding operation, which will obliterate Pepsi’s international drink profits this year. In late September, PepsiCo announced $525 million in special charges to write down investments, primarily Baesa, and to reduce its costs abroad. Coca-Cola in early October also announced an array of one-time charges, mostly to close old plants and restructure its Minute Maid juice business. “There’s a big difference between Coke’s and Pepsi’s third-quarter write-offs,” says Emanuel Goldman, Paine Webber’s beverage industry analyst. “Pepsi’s relates to mismanagement. Coke’s doesn’t.” Coke makes up for its negative charges with one-time profit gains. Goldman adds, “The most interesting thing about Pepsi’s international soft drink trouble is that for the most part, they brought it on themselves.” Despite the problems, he recommends Pepsi stock, for two basic reasons: It’s cheap, and Enrico is in charge. The Night Prowler and the Swan Roger Enrico is still trying to make sense of the caper in Caracas, a first-of-its-kind raid. “This guy was a personal friend,” Enrico says of Oswaldo Cisneros, 55, the Venezuelan who headed one of Pepsi’s largest and oldest foreign bottling franchises. “Ozzie took his 30 pieces of silver and ran.” The turncoat and his wife, Ella, were indeed close friends of Roger and Rosemary Enrico. When Enrico headed Pepsi-Cola worldwide, the couples often traveled together. Enrico was dancing with Ella Cisneros at an Istanbul nightclub six years ago when he suffered a heart attack. The coronary was mild—”not a dramatic life experience,” Enrico says—but it helped persuade him to quit his whirlwind job at global beverages and move to Frito-Lay in Dallas. “Roger’s heart attack changed the course of Pepsi,” Oswaldo says. Shortly before Enrico left, Cisneros dangled the idea of selling his business. Not that bottling Pepsi wasn’t a terrific job. Oswaldo’s father, Antonio Cisneros, and his uncle Diego had acquired the Pepsi-Cola franchise in Venezuela in 1940. By sweetening Pepsi to local tastes and undercutting Coke on price, they created a Pepsi oasis in Coke-controlled Latin America. In Venezuela, Pepsi outsold Coke 4 to 1. Since Diego died in 1980, the business has been co-owned by Oswaldo and two of his cousins: Gustavo Cisneros, a dapper, high-profile billionaire who is one of Latin America’s leading media magnates, and Ricardo Cisneros, Gustavo’s younger brother. Ricardo, a former director of Venezuela’s Banco Latino, is more infamous than famous: He is one of scores of executives charged in the country’s largest-ever bank collapse. He lives in self-imposed exile in London. Oswaldo and Gustavo Cisneros, left, with Goizueta: For Oswaldo, the hardpart was betraying Pepsi.Photograph by Odolfo Benitez — Sipa Oswaldo’s desire to sell had little to do with high-stakes finance or corporate intrigue. It was strictly personal. “All my life I’ve had enormously high cholesterol, between 400 and 650,” he explains. Because his three daughters weren’t interested in running the business, Cisneros fretted about the future. Cisneros says Enrico told him that PepsiCo might acquire 10% of his bottling operation but no more; according to Enrico, the discussion never got that specific. What really upset Cisneros was that after Enrico left beverages in 1990, management paid scant attention to Venezuela. Calloway never visited, and Sinclair last traveled to Caracas in 1993. “That showed I wasn’t an important player in their future,” Cisneros says. Cisneros’s final meeting with Enrico must have made him feel even more insecure. According to Cisneros, during a casual lunch in 1993 on Grand Cayman Island, Enrico’s vacation hideaway, he said he was tempted to leave PepsiCo. He explained that he was being considered for the CEO job at American Express, whose board had just eased out James Robinson III. “You’re a beverage man, not a banker,” Cisneros told him. Ultimately, Enrico stayed loyal to Pepsi; Cisneros did not. People close to Coca-Cola and the Cisneroses say the parties discussed a possible partnership in the late Eighties. Flirtation began anew in 1994 when Oswaldo, Gustavo, and Ricardo Cisneros requested a meeting with Goizueta and Ivester. They met in a very private dining room on the 12th floor of Coke headquarters, and it didn’t take them long to agree that a deal looked promising. “Project Swan” became the code name for the Coke-Cisneros negotiations (cisne means “swan” in Spanish). Ivester represented top management in the ongoing talks. He and the Cisneroses met in hotels and airplane hangars—never again at Coke headquarters—about ten times altogether. To keep everything hush-hush, Weldon Johnson, Coca-Cola’s group president for Latin America, wasn’t told about the deal for two years. Where’s Oswaldo? Although the plan remained top secret, the negotiations didn’t always go smoothly. Several issues nearly broke the deal. Price was one. Another was the nature of the partnership. “Coke didn’t want to buy 50% of the business, and I told them I wouldn’t settle for a 25% partner,” recalls Oswaldo. Frustrated by Coke’s obstinacy, he says, “I walked out of one meeting early this year and said, ‘Goodbye. It’s over.’ ” One of the biggest obstacles, say some of Oswaldo’s co-conspirators, was his uneasiness about sleeping with the enemy. He earned the nickname “Casper the Ghost” because he disappeared at times during the negotiations. “I never thought we’d reach a deal,” says Oswaldo. The two sides finally came to terms early this year, when Coke agreed to pay an estimated $500 million to acquire 50% of the Cisneros bottling business, plus its homegrown beverage brands. For Enrico, the timing was awful. As soon as he became PepsiCo’s CEO in April, he began phoning Ozzie. “Roger called me four times since April,” Cisneros says. People close to Enrico say that when Cisneros didn’t return his first call, he figured something was going on. By Memorial Day he felt certain that Cisneros was conspiring with Coke. But Pepsi’s people in Latin America told him, “No, there’s nothing to the rumors”—which is what Ozzie was telling them. In early summer, anxious Pepsi management said it would consider buying up to 25% of the bottler. Says Cisneros: “Roger came back a little too late.” Besides delivering the cash, Coke played the right emotional chords. As Goizueta says, “This is a people-relations business.” That was apparent on the mid-August evening when the new partners signed their deal. Goizueta and his wife, Olgita, and Ivester and his wife, Kay, together with a few other senior executives, gathered outside Coca-Cola headquarters to greet three generations of Cisneroses. Oswaldo’s 74-year-old mother, Carmen, was there. So were several grandchildren. “It was a very family-like gathering, to symbolize that this was to be a long-term relationship,” says Gustavo Cisneros. Goizueta escorted the Cisneroses upstairs, where they shared stories about their Cuban heritage. (The Cisneros family emigrated from Cuba to Venezuela in 1928; Roberto and Olgita Goizueta fled to Florida to escape the Castro regime in 1960.) They signed their contract in the former office of legendary CEO Robert Woodruff. Forty hours later Enrico got the word that Pepsi had lost its most venerable franchise bottler. The following morning, a 727 jet carried thousands of Coke bottles to Caracas, where Cisneros’s 18 factories made the switch. Financially, the loss of its entire business in Venezuela doesn’t hurt PepsiCo much. The company, which earned $1.6 billion in net income last year, is giving up less than $10 million in profits. But symbolically, it matters a lot. Venezuela marks “a new low” in the cola wars, says Enrico. “The rules of engagement have changed.” Hosing the Soda Jerks Goizueta and Ivester view the rout in Venezuela as an aberration, a fortuitous chance to storm the opponent’s unguarded fort. But the raid also signals that Coca-Cola, whose stock price rises in line with its success overseas, will do almost anything—no, make that anything at all—to pump up its international volume. Wherever Pepsi opens a new front, Coke will emerge firing. Or, as Ivester says, hose ’em. One recent victim of this strategy was Chris Sinclair, 46, Pepsi’s much admired, go-for-growth chief of international operations. The secret of success, Sinclair used to tell his managers, is to follow the advice of a racecar driver: “Press the accelerator to the floor, and keep turning left.” But Sinclair took a wrong turn with a bottling company called Buenos Aires Embotelladora. Baesa, as it was known, was supposed to be Pepsi’s model “superbottler”—one that would buy small operators across Latin America, crank up their marketing and distribution, and assault what Sinclair called “the sharp-toothed behemoth from Atlanta.” Sinclair found a soul mate in Charles Beach, Baesa’s CEO. Beach, 61, is a passionate, hard-charging veteran of the soft drink wars. He is also a felon. In the Eighties, Beach received a $100,000 fine and a suspended prison sentence for price fixing while he was a Coke bottler in Virginia. Coca-Cola severed its ties with Beach. Pepsi took him on as a bottler. Beach assembled 20 or so investors to buy Pepsi’s Puerto Rico franchise. Then, in 1989, he acquired the exclusive Pepsi franchise for Buenos Aires. By discounting and launching new products and packages, Beach increased Pepsi’s market share in the Buenos Aires metro area from almost zero to 39% in three years. Beach’s Argentine advance caught Coke by surprise. “Fool me once, shame on you. Fool me twice, shame on me,” says Johnson, Coke’s Latin America boss. “We were a sleeping giant in Buenos Aires. This was our wake-up call.” As Coke prepared to strike, Beach continued to expand. Using lots of borrowed money, he bought major Pepsi franchises in Chile, Uruguay, and most significantly Brazil, where he built four huge ultramodern bottling plants. Through it all, PepsiCo was Beach’s cheerleader. The company put two of its own people on Baesa’s board, and Sinclair told Wall Street analysts in 1994 that Baesa was “the single largest ramp-up in Pepsi’s history.” He said he envisioned a Baesa in every part of the world. Coke, meanwhile, began spending heavily on marketing and cold-drink equipment for its choice Brazilian customers. The effect was to lock Baesa out of small retail outlets, which tend to be highly profitable for bottlers. Says Enrico: “We underestimated Coke’s strength in Brazil.” Ditto Argentina. Early this year Goizueta used his Latin leverage to meet with Argentine president Carlos Menem to discuss reducing an onerous 24% tax on cola. Two months later Menem cut the tariff to 4%. This strengthened Coke’s position against Baesa, which was earning most of its profits from non-cola drinks. By springtime Charlie Beach was drowning. His new plants in Brazil were running at a third of capacity. He was overwhelmed by distribution glitches, marketing mistakes, and management turmoil. Baesa lost almost $300 million during the first half of this year. The bottler defaulted on its debt payments. And its stock, which had reached $49 a share two and a half years ago, dipped below $5. Today Baesa trades at around $7 a share. Beach is out of Baesa, but neither one is out of trouble. Investors in Beach’s Puerto Rican bottling operation have sued him and the company for accounting irregularities (the company admits the irregularities; Beach resigned as CEO in June). At least three people knowledgeable about Beach and his debacle in Latin America suspect he might have cooked Baesa’s books. PepsiCo management says it has found no such evidence. The Real Secret Formula Coca-Cola makes mistakes too (it will never live down New Coke). But in general, Coke devises strategies, oversees operations, and develops talent in ways virtually antithetical to PepsiCo’s. Instead of a sprint, Coke opts for the long run. In Brazil, says Carlos Laboy, an analyst at Bear Stearns who watched the Baesa saga play out, “Pepsi tried to replicate in three years what Coke had built over 50 years.” Baesa was actually a misguided attempt by Pepsi to emulate Coke’s “anchor bottler” concept. Coke has eight large, solidly capitalized bottlers around the world; the company owns equity stakes in each and allows them to expand gradually. Also, Coke doesn’t rotate its hotshot managers through jobs rapidly, as PepsiCo does. “If you do that, you can never see how good the people really are,” says Goizueta. Nobody burrows as deeply into his business as Doug Ivester. A factory foreman’s son from Gainesville, Georgia, Coca-Cola’s CEO-to-be started his career as an accountant at Ernst & Whinney. He thought he’d be there for life. Coke was Ivester’s client, however, and the company plucked him from number-cruncher neverland in 1979. Ivester spent his first decade at Coke in the finance area, where he proved a wizard. Ivester’s edge was his ability to analyze arcane problems, concoct clever solutions, and maximize returns on investment—the gospel according to Goizueta. “I look at the business like a chessboard,” says Ivester. “You always need to be seeing three, four, five moves ahead. Otherwise, your first move can prove fatal.” As chief financial officer in 1986, Ivester devised the financial underpinnings of “the 49% solution.” This innovative deal turned out to be the bedrock of Coke’s global strategy, not to mention a potent stimulus to its stock price. Here’s how it worked: Coke bought a bunch of U.S. bottlers that weren’t performing well and combined them with its own bottling network, calling the new outfit Coca-Cola Enterprises (CCE). Then it spun CCE off to the public but kept 49% of the stock and the right to throw its weight around. Simultaneously—here’s the magic—Coke washed billions of dollars in debt and a low-return, capital-hungry business off its books. Now Coke uses CCE (1995 revenues: $6.8 billion) to acquire weak bottlers, shake up their management, and increase their volume. CCE’s success is a major reason Coke is winning the share wars. (PepsiCo, having shunned the spinoff strategy, owns and operates most of its bottlers.) CCE was a dud stock for a long while, particularly when private-label competition was siphoning off business, but the shares have doubled since last fall. Having proved itself at home, the bottler is expanding abroad; Coke sold its French and Belgian territories to CCE in August, and Ivester opted to sell the Americans Coke’s bottling venture in Britain as well. “We knew ten years ago we wanted CCE to have an international base,” he says. “We just didn’t know exactly when.” This is the real secret formula of Coca-Cola: senior management’s intimate engagement in the core business. By using CCE and other freestanding bottlers to execute on the ground, Ivester and Goizueta have distilled their own jobs to the essence: brand builder, deal broker, stock doctor, concentrate seller. Nothing is casual with these guys; everything is choreographed. Every Monday morning, for instance, Ivester and Goizueta get copies of their regional presidents’ weekly meeting schedules. A bottler or key customer is visiting Atlanta Thursday morning? Roberto or Doug just happens to pop by and say hi. During the Olympics in July, Goizueta and Ivester each shook hands with at least 2,000 corporate guests. The top bosses sent out hundreds of follow-up notes, personally signed, with photographs enclosed. It’s hard to imagine a more methodical executive than Ivester. When he became president of Coca-Cola USA six years ago, he asked Sergio Zyman, now Coke’s marketing chief, to teach him everything he knew about his craft. The flamboyant, hotheaded Zyman is the only senior manager at Coke who once worked for Pepsi; 19 years ago in Brazil, his boss was Enrico. According to Enrico, the two were combative even back then. All the better, then, for Ivester to pump Zyman for marketing insights—which he did for a year, on Saturdays from nine to three, in the basement office of Zyman’s home. “I learned that marketing is not a black box,” says Ivester, the reeducated bean counter. Sounding traitorous to his native trade, he adds, “Marketing can be even more logical than finance. If you ask enough questions and listen closely, you find that people are very logical.” Although he speaks no foreign languages—Georgia drawl, that’s all—Ivester visits some 30 overseas markets each year. He urges everyone at the company to forsake traditional, arbitrary goal-setting (“The market’s expanding 5%, so we’ll shoot for 6%”). He promotes what he calls “destination planning.” This requires answering three questions, which Ivester asks at virtually every stop: “What’s possible for your business? What are the barriers to achieving that? How can we remove the barriers?” Says Ivester: “We want to capture all the growth.” The Pepsi Challenge Coke isn’t capturing all the growth—just about 80% of total industry expansion in the U.S. in the first half of this year, according to Morgan Stanley analyst Andrew Conway. Pepsi has been fighting back, and its growth has accelerated lately, but it is up against a market leader that aims to swallow 50% of the U.S. market by 2001. Overseas, Coca-Cola’s share is rising past the 50% mark. Of course, there are trouble spots. But they’re minor. Sales in Africa are sluggish, due primarily to weakening economies. Europe’s summer was cold, rainy, and not thirst-generating—so Coke’s volumes there have been disappointing. “Coke doesn’t have fundamental problems in Europe,” says Conway. “The company will do better than expected in Asia and in the U.S., so worldwide volume growth should be a strong 7% to 8% this year.” Back at Pepsi headquarters, Craig Weatherup sounds defensive. Of Coke he says, “Their Achilles’ heel is their own arrogance, and it eventually will be their downfall. I hope I’m around to see it.” While he’s waiting for Coke to fall, he has a fair amount to do to keep Pepsi steady. In Venezuela he must find a bottling partner. Analysts speculate that PepsiCo will have to inject at least $200 million into Baesa to make it a viable operation. Many observers assume PepsiCo wouldn’t let Baesa file for bankruptcy. “Don’t assume that at all,” says Weatherup. “Coke’s Achilles’ heel is their own arrogance, and it eventually will be their downfall. I hope I’m around to see it,” says Pepsi’s Craig Weatherup. In late September, Weatherup presented his strategy to the PepsiCo board of directors. He’s not retreating, he told them, but realigning. He will pull back in Germany and Japan, Coke strongholds that will never be Pepsi blue. He’ll target emerging markets like India, China, and Eastern Europe—all spots where Coke leads Pepsi but where there’s room for both to grow. “We need to be a hell of a lot more pragmatic,” he says, using his favorite adjective. Though his plan is realistic, Weatherup sometimes is not. Example: “If Coke can earn $3.5 billion a year internationally, we ought to make $1.5 billion to $2 billion,” he says. A nice thought, but … Coca-Cola is expected to post more than $4 billion in foreign profits this year. Pepsi’s international beverage arm has never made more than $195 million (in 1994), and this year, as Weatherup admits, it won’t earn a dime. (In the U.S., Pepsi-Cola should earn more than $1.3 billion.) Over in the CEO’s office, Roger Enrico seems more sensible, even in the face of more difficult decisions about the future. One of his biggest problems is that Pepsi’s people are terribly stretched. Enrico was running the restaurant division—28,596 eateries worldwide—before he became CEO. Amazingly, he still is. And he intends to keep the job awhile; he claims it occupies less than a third of his time. Still, Enrico has desperately needed top-level international talent and a No. 2 in his executive suite. In September he got both, at least temporarily. He hired Karl von der Heyden, a German-born internationalist out of RJR Nabisco and H.J. Heinz, to become PepsiCo’s vice chairman and chief financial officer. Von der Heyden, 60, who was enjoying his retirement, says he will stay only a year or so to help Enrico find a permanent CFO and plot long-term strategy. Former PepsiCo president Andrall Pearson says hopefully, “My guess is that Roger will charm Karl into staying longer.” Enrico’s conundrum: How do you compete with a singularly focused, increasingly belligerent No. 1 when you’re preoccupied with fixing a conglomerate? Some people speculate that von der Heyden will spearhead a major strategic shift at PepsiCo, but the truth is that Enrico has already been doing that. To deliver big returns, not big revenues (sound familiar?), he’s moving capital away from restaurants and heavily into snacks. Fritos and Pepsi’s other munchies generate returns on investment that are twice as high as the returns from drinks and restaurants. “We could have an international snack business that looks like Coca-Cola’s international business someday,” says Enrico. He has no plans to spin off the restaurant division, he insists, even though many people wish he would. It’s a business prone to dips, and it dilutes Pepsi’s strength in beverages: Places like Burger King and Wendy’s, not to mention McDonald’s, won’t serve Pepsi because they don’t want to nourish the company that owns their fast-food rivals. Rather than disgorging the restaurant division, Enrico is slimming it down. By selling company-owned outlets to franchisees, he is generating profits and pocketing hundreds of millions of dollars in cash. Here is Enrico’s conundrum: How does he compete with a singularly focused, increasingly belligerent Coca-Cola when he is preoccupied with fixing a conglomerate? The optimistic view is that PepsiCo has been a great company over the years. It owns some of the world’s best brands, so surely it can be a great company again. Enrico is not to blame for the recent mishaps. And he is laying out priorities—greater emphasis on returns, more attention by top management to the intricacies of the business—that seem a formula for rejuvenation. Investors who have been selling PepsiCo stock should be aware that no one, not even his rivals, questions that Enrico is the right choice to redirect PepsiCo. He’s been a hero before. Here’s his chance to be a hero again. The war rages on.