PepsiCo’s Indra Nooyi: Capitalism with a purpose

Below is an unedited transcript.

STEPHANIE MEHTA: Good morning, everyone. Good morning, Indra.

INDRA NOOYI: Good morning.

STEPHANIE MEHTA: Before we get to our interview, we have a polling question for you all.

(Break for poll.)

STEPHANIE MEHTA: The person I’m about to interview today has been the subject of quite a bit of media coverage, but not necessarily the media coverage you would expect. In the last year, since you were here last, I’ve seen you at a Yankee’s game with Michael Jordan, and the camera goes right to you. You have been the subject of an episode of Gossip Girl, and yesterday on stage, Tyra Banks gave you a major shout-out. You’ve gone from CEO to pop-culture icon. (Laughter.) How does it feel?

INDRA NOOYI: No clue. I’ll be honest with you, the Michael Jordan thing got a lot more coverage in the media than the one third of one inning that he sat next to us. So, people assumed we went to the game with him. Absolutely not, he was sitting in Derek Jeter’s box. He came down to say hello for maybe five minutes or three minutes. And all of a sudden Indra Nooyi is going to a baseball game with Michael Jordan. And my husband goes, where was he through the whole —

(Crosstalk.) (Laughter.)

INDRA NOOYI: — and my husband was sitting next to me. Somehow the camera just focused on Michael Jordan and me. I think Michael Jordan is an awesome guy and a great spokesperson for Gatorade and PepsiCo (PEP), so we love him, but I think the media likes to overplay this.

In the case of Gossip Girl, it really improved my standing with my kids because I never watched the show. I don’t even know what the show is about except that I got a little text from my daughter saying, “Mom, what happened? Why are you on Gossip Girl?” And I said, “Did I do something bad that they’re gossiping about me?” She said, “No, Blair wants to be like you.”

Then I talked to myself, why would Blair want to be like me? I don’t think it has anything to do with me. If you think of a name like, you know, a simple name versus say name that’s kind of complicated like Indra Nooyi, I think it sounds a little bit more exotic. So, it has nothing to do with the person and all to do with the name. That’s my story, and I’m sticking with it.

And in the case of Tyra Banks, she’s a lovely, lovely, lovely person. And when she called me and said she’d like to come and say hello, I said, “Come on down.” And the one hour I spent with her, I think I learned more from Tyra Banks than I may have taught her. So, in the case of Tyra Banks, if she’s here, I’ll just say to you that the grace with which she came to talk with me and the grace with which she runs her TV show, I took a lot more away from her.

STEPHANIE MEHTA: Well, I will confess that I did watch that episode of Gossip Girl and it was not just because you have a complicated name that she wanted to be you.

INDRA NOOYI: Exotic name.

STEPHANIE MEHTA: There was a whole, like, matrix about Fortune powerful women and, you know, anyway. We’re glad to have you here, and we’re going to talk about way more than the pop culture issues involving being a CEO.

It’s well known to all the women here in this audience that you’ve put Pepsi on, let’s call it a diet, since you’ve become CEO of the company. You’ve changed the focus of the — you’ve moved part of the focus of the company to healthier foods, healthier products, healthier beverages. And you’ve put this under the umbrella of performance with a purpose. Talk with me about where performance with a purpose came from. Did you just wake up one morning and say, “I’m going to reinvent the mandate of Pepsi”? Or is this something you’ve been thinking about for a long time?

INDRA NOOYI: Okay, so a lot of records to be set straight here, okay? PepsiCo today is about $63 billion. And has a range of products from snacks to beverages to good-for-you products like Quaker Oats and Tropicana. And so this is not something that I built today, it’s something that we started to build in 1997 when the Frito-Lay division and the Pepsi Cola division existed and we acquired Tropicana in ’97, we acquired Quaker Oats in 2001. So, we’ve been on a journey to build a balance portfolio of products from fun-for-you just like Pepsi and Lays, to better-for-you products like Diet Pepsi and Baked Lays, to good-for-you products like Tropicana and Quaker Oats.

And why did we do that? Our belief is the following: There’s always going to be a market and a terrific market for fun-for-you, better-for-you products because people always want to have a moment of fun and want a moment of indulgence, and you’re never going to tell them not to do that because it is just fine to have all of those products.

But there’s also a growing market, and that market for good-for-you products is growing about three times as much as the market for fun-for-you products. And these are products that give you positive nutrition like fruit and vegetables, grains, protein, these markets are growing 8, 9 percent a year in the developed world.

And that’s why in 1997, we started to acquire our way into those businesses because our analysis showed that prior to 10:00 a.m. in the morning, nobody reached for a PepsiCo product and beverages. And prior to 10:00 a.m. in the morning, nobody reached for a Frito-Lay snack. So, that was almost half the day that we were not serving the consumer.

STEPHANIE MEHTA: You haven’t been in my household. (Laughter.)

INDRA NOOYI: Well, you know what? We’re talking about the majority. And we wanted a brand that played to the morning, and that was Tropicana. And we wanted a brand that played to the morning breakfast, and that was Quaker. So, we had to build that out.

Between about 2001 and 2006, what happened was we allowed those brands to atrophy.

We did not take those brands and take them to where they need to be in the good-for-you space because the fun-for-you part was growing in leaps and bounds. But society has changed. I think there’s always going to be a time and a place for fun-for-you and better-for-you products, and 80 percent of our portfolio is that and doing very well across the world.

But 20 percent that’s good for you, it’s very important we grow that because I’m watching consumer behavior around the world. And if you were doing a question with this group, I’m sure we can ask the same question. Many, many people have started to alter their eating and drinking habits to become a bit more balanced in their combination of fun-for-you, better-for-you, and good-for-you.

So, I look at the addition and the plussing-up of good-for-you as a growth opportunity, not putting PepsiCo on a diet. I mean, that’s the wrong way to approach it. It’s a way of saying how do we make sure we take the portfolio that’s growing and invest in it while at the same time keeping that core going in terms of continued focus on fun-for-you and better-for-you. So, it’s this balanced approach that we’re following. So, that’s the portfolio question.

Let me talk a bit about performance of purpose and why it came about. I grew up in the south of India in a city called Madras, about 10 million people there, now it’s maybe 15 or more. And I grew up in a city where there was no water. Every morning, my mom would get up at 3:00 or 4:00 a.m. in the morning and she’d wait for the taps to start releasing water because the corporation would release water from the central reservoir and water would trickle in.

My mom would find ever pot and pan to fill water in and to give the kids and my dad three containers of water, which was your quota for the day. And you’d learn how to wash yourself, to clean yourself, your uniform had to be washed in it, everything with those three containers of water.

At the same time, in the same town, the same city we lived in, I watched large corporations built plants, use a lot of water because we liked them, they created jobs.

Think about this, you can’t have a large corporation using excess water in a town where there’s no water to eat or drink or live. I think that’s a fundamental problem with this. You know, observation one.

Observation two: I came to the Yale School of Management in 1978. And the Yale School of Management stressed one thing in their business education then and it does now: When you’re running a company or part of a company, you have to focus on the shareholder. There’s no question about it. But there’s more to a company than just the shareholder. There’s a multiplicity of stakeholders and you’ve got to worry about all of them because when you’re worried just about today and just the shareholder, you don’t want to add cost to society that somebody else has to clean up. So, that was data point number two.

And data point number three, I watched the incredible meltdown of the global economy because there was a singular flaw in capitalism. Capitalism lost its conscience. There was a maniacal focus on today, there was a maniacal focus on 24 hours out. People forgot what the consequences of each of their decisions would be for society at large because they didn’t worry about the stakeholders, they worried very narrowly about a narrow group of shareholders.

So, performance of purpose was born, and performance of purpose only means deliver great performance while keeping an eye to all of the stakeholders. So, you as a company can do better by doing better. It is not corporate social responsibility. Every aspect of purpose delivers profit. When you use less water, you have lower costs. When you use less energy, you have lower cost. When you do a plant-based product, PET bottles and plastic bottles, you have less commodity volatility, you deliver more profit.

So, performance and purpose are linked, it is not corporate social responsibility. But it’s born out of a deep-seeded experiences that I’ve had, and it’s also born out of the nature of society today.

STEPHANIE MEHTA: We’re going to open it up for questions. (Applause.) I know people are going to want to react to what Indra has to say. Let me just ask you, going back to the portfolio, as you know, people have said perhaps the focus on the good-for-you products is coming at the expense of the 80-percent business, which has lost market share in North America. Can you talk a little bit about how you respond to those criticisms?

INDRA NOOYI: You know, if one or two narrow product lines lose some share, that’s part of the evolution. You know? There’s going to be a year where somebody’s buying share and we choose not to buy share. So, you go through this rubber-band effect. You never judge a company whose market capitalization is over $100 billion based on one or two quarters of some ugly competitive activity.

We look at, fundamentally, are we building the brand? Is the brand equity improving? Are we running this company responsibly? Do we have an overall liquid refreshment beverage business whose share is growing? Because our business is not just carbonated soft drinks. It’s carbonated soft drinks, it’s non-carbonated drinks, it’s Gatorade, it’s Tropicana. We have an extremely wide portfolio.

We look in the entire portfolio and say, “Is this range of products gaining share?” And the answer is: Yes. So, our internal metrics say we’re doing well, we’re generating great profitability, great returns, great cash flow. So, we look at our company and say performance is pretty damn good. If somebody wants to pick one narrow piece and say, hey, but let’s go back to the cola wars, we are stuck in the 1960s, hey, tough luck, can’t do much about it. (Laughter.)

STEPHANIE MEHTA: What do you think the ratio that 80-percent 20-percent ratio that you mentioned earlier, what’s that going to look like in a couple of years? Will it continue to be 80/20? Or when will there be more balance there?

INDRA NOOYI: I don’t know if it will shift meaningfully in the next five years because the market for fun-for-you, especially internationally is still growing tremendously. And the good-for-you products are growing, but since they’re only 20 percent, they would have to out-grow fun-for-you by a gigantic number to make a big difference. I suspect by 2020 that 20 percent might grow to about 30 percent of the portfolio, but that’s as much as we can shift it.

STEPHANIE MEHTA: Right. Questions from the audience? Anybody? There’s a question right there. Could you identify yourself, please?

MARIAM NAFICY: Sure. Hi, this is Mariam Naficy, I’m the CEO and Founder of Minted.com. Nice to meet you. Last year, Indra, you talked about consumers looking for the small rather than the big from your company and other companies.

INDRA NOOYI: Looking for what?

MARIAM NAFICY: Looking for the small rather than the big. They were looking for companies — they wanted to buy from companies who appeared, at least, to be small and more intimate rather than the large. I was just curious what you’re seeing right now in terms of broader consumer trends in terms of what they’re looking for a company like yours right now, if you still think that that’s a trend that you’re seeing.

INDRA NOOYI: You know, buy and build, buying little companies, little acquisitions and building them is a very desirable strategy. And I’ll tell you why, because around the world, there are companies with nifty ideas who struggle to scale them up. We have a distribution apparatus that can quickly scale up a $20-million business to a $200-million business very, very rapidly. We have purchasing scale which can bring the costs down. And we have the marketing muscle to put some weight behind those brands.

So, I think around the world, we’re constantly on the prowl for little nuggets of technology, little nuggets of products that have been sort of developed and tested, but we can then scale up in a bigger way. That’s really our general modus operandi for growing in addition to everything we do organically. So, if any of you have ideas, make sure you send it over to me. (Laughter.)

STEPHANIE MEHTA: A couple of small beverage companies here —

INDRA NOOYI: Snack companies.

STEPHANIE MEHTA: — snack companies.

INDRA NOOYI: Anything, yeah.

STEPHANIE MEHTA: Yes, in the front row.

ALENA FOLKS: Hi, Alena Folks (ph) with CVS Caremark. I wanted to ask you about how you manage the tension, if it exists, between driving innovation and expecting great execution and performance. How do you do that from a cultural point of view?

INDRA NOOYI: Yeah, look, execution is the lifeblood of our company because we have direct routes. So, in the United States, for example, we have 50,000 trucks on the road every day with route salesmen who have to put the product on the shelves. And if we minimize — our sales go up. So, it’s very, very important that everybody in the company executes at the granular level every day. That’s the lifeblood of the company, okay?

And the people who focus on execution shouldn’t be thinking about large-scale innovation because the innovators think about the consumer, the retail shelf, and then give the executors direction on how to design the shelves and the plan to execute.

Let’s now talk about innovation. I think innovation as a discipline needs to go back and get rethought and revived. There are so many models to talk about innovation, there are so many typologies of innovation, and you have to find a good innovation metric that truly captures the innovation performance of a company.

And if there’s one area I think we as a company need to improve ourselves, it’s having more patience with innovation. You know, markets are growing explosively, when you put something out there, you’ve got an actual tail wind. When market growth has slowed down substantially, you’ve got to have a lot more patience with innovation to be willing to put it on the shelves, incubate it for a while, keep putting the investment behind it, and hope that it takes off, a little bit later than it used to before.

So, I think innovation as a discipline in a slow-growth market requires a whole new mindset which we’re going through right now, the change.

STEPHANIE MEHTA: Time for one more question.

LAURIE YOLER: Hi, there. Laurie Yoler from GrowthPoint Technology Partners. You said a couple of times, I thought it was interesting when you were talking about your performance with purpose goal, you said a couple times it’s not corporate social responsibility. And I was curious why the clarification and if you feel there’s a backlash against that term for some reason.

INDRA NOOYI: I’ll tell you my biggest fear. Corporate social responsibility is something you do in the evening and something that can be shut down if the CEO changes or you don’t have the money. For us, purpose is not something you can shut down.

I’ll give you an example. If you’re opening a plant in certain countries, interior China in the north, south India, interior south India, unless you’re going to go in with the fundamental approach which says I’m going to create a net zero plant which does not take too much water out from the aquifers and I find a way to replenish it. If you don’t go in with that mindset, trust me, you will be shut down within a few years because that community has no water, and the aquifers are going down a foot or two every year.

So, if you weave purpose into the way you think about your performance, that’s now part of the business model. If you go and say I’m going to give a million dollars to some research organization to study water usage in that community, that’s corporate social responsibility. It’s like going to confession after you’ve made the mistake. I don’t want to make the mistake, okay? So what we are trying to do is to say don’t make the mistake because the price of confession is too high. Okay? So corporate social responsibility, sometimes, not all the time, sometimes can be viewed as atonement for something as opposed to if you don’t do it right, you’re not living by why a corporation operates under laws of limited liability, go back to the foundation of a corporation.

The old Robert Lowe Laws of Limited Liability said corporations operated under limited liability because they owe every society in which they operate in a duty of care. We love the limited liability part, we hate the duty of care part. All that I’m saying is let’s bring back the duty of care.

I’ll cite two things: Why is there an MBA oath at Harvard Business School and other schools now? Why? Think about it. Why does Michael Porter now talk about shared values and not just shared value? Okay? There’s a business school and a law school that always existed, why didn’t those two schools talk before? Why did the law school tell the business school: You do what you want, I’ll protect you and sue the hell out of other people. Why did that happen? Why didn’t law schools tell business schools, you owe every society a duty of care, that is the law of limited liability.

I think there’s been a failure of capitalism in the past, and if every one of you have time, there’s a fantastic speech by John Mackey, the head of Whole Foods, and that speech is called Conscious Capitalism. What is capitalism with a conscience? It’s a brilliant speech, I found it very enlightening. Listen to it if you get a chance because he lays out the new model for capitalism. And I think coming out of the recent collapse of the global economy with very little light at the end of the tunnel to recover from it in the short term, if we don’t all practice capitalism with a conscience, I think we’re doing the world a disservice, and we’re taking a world that’s already unsafe, uneven, unsustainable, and we’re going to make it more so. That’s my plea to all my fellow CEOs, and plea to everybody who’s part of the capitalistic society at large. (Applause.)

STEPHANIE MEHTA: That’s a very inspiring note on which to end our session, which unfortunately we have to do because we’re getting the hook. Indra Nooyi, thank you so much for your time. Please, round of applause for Indra.

INDRA NOOYI: Thank you. Thank you all. (Applause.)

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