Pepsi’s Aim is True

Would you shop for a soda online? Seems like a silly question. Of all the
products for sale in the universe, soda is probably the last one shoppers will
want to buy on the Internet. Even frozen food has more e-potential. But soft
drinks? They’re cheap. They require no research to purchase. And they’re
available on every street corner in America.

So why is Pepsi-Cola trying so hard online? While many traditional
advertisers have dabbled in the Net, Pepsi has a range of programs on the
virtual air, from music sites to banner ads to Internet sweepstakes. Though only
about 3% of its estimated $400 million soft drink ad budget goes online, that
belies the emphasis the company places on the Web. “This medium is here to
stay, and we buy that,’’ says John Vail, director of digital media and
marketing for Pepsi-Cola.

One reason: Despite the difficulties in measuring online ad performance,
Pepsi has crafted deals that already show benefits. In a barter arrangement with
Yahoo! this summer, Pepsi plastered the portal’s logo on 1.5 billion cans. In
return, Yahoo took the cola company’s already established loyalty program,
Pepsi Stuff, to new heights. A co-branded Web site, PepsiStuff.com, let
consumers collect points from bottle caps. The points were redeemable on the Web
site for prizes–everything from electronic goods to concert tickets.

The results were considerable. Three million consumers logged on and
registered at the PepsiStuff site, giving the cola company detailed consumer
data that normally must be paid for in market research or gleaned from focus
groups. Information that once took months could now be had in days. What’s
more, Vail was able to tweak the program while it was in progress, maintaining
the right inventory of the most popular prizes. “Instead of lag-time data,
we had real-time, and we could react to it,’’ says Vail. Sales volume rose
5% during the online promotion and the cost was about one-fifth what it had been
as a mail-project.

Pepsi has no intention of slowing its Internet rush. The Web is the medium of
choice for Pepsi’s prime demographic audience–those under 25. “They are
going to where their customer hangs out and flashing their name,’’ says Tom
Pirko, a beverage consultant for Santa Barbara-based Bevmark. “This is
aimed at flipping the next generation. For Pepsi, the Internet is serious. It’s
not a toy.’’

No, but it’s a work in progress. Pepsi’s online marketing road has been
long and bumpy. In February 1996, the company launched Pepsi World, a Web site
of sponsored content designed to attract the youthful consumer. Sports and music
news was mixed with online games and animation. A seven-figure publicity budget
backed the debut. But it quickly became clear through focus groups and traffic
numbers that Pepsi hadn’t reached its target. Eyeballs were too fleeting,
visitors too fickle. By the summer of 1997, Vail revamped the site to be less of
a sports news digest and more of a vehicle to promote Pepsi-sponsored athletes,
such as NASCAR driver Jeff Gordon.

Going forward, Pepsi plans to expand on the Web site-centric marketing
efforts. While banner ads and other more traditional ad buys have had some
success, it’s the creation of engaging Pepsi Web sites that has given the
brand the most traction online. For example, Vail would like to bring a virtual
experience to other promotions, such as Choose Your Music, a current in-store
create-a-CD promotion. “We’re looking ahead to the next evolution,’’
says Vail.

For consumer Shane Erstad, 29, that’s good news. Intrigued by the prizes
and the ability to collect the points online, he became devoted to Mountain Dew
and a fan of the PepsiStuff site. Even now that the game is over, he hasn’t
cut back. “I hope they repeat the promotion.’’ Count on it.

By Ellen Neuborne in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc

Divine overhaul

Some of the cash-rich, market-cap-poor companies are taking the opposite
approach. Realizing their original business plans were failures, they’ve done
180-degree turns and overhauled their strategies. Divine interVentures, for
example, went public as an incubator and started up more than 50 companies. In
February, with its stock market value lower than the $190 million in cash on its
balance sheet, Divine announced plans to remake itself into a software company–CEO
Andrew Filipowski’s area of expertise. It even changed its name to Divine. The
moves have helped a little: The stock of the Chicago outfit has climbed from its
low of $1 a share to $1.69, although that’s still well off the $9 a share at
which the company went public last July.

In December, the California company, Ventro, closed two of its online
business-to-business marketplaces–the Chemdex market that allowed companies to
buy and sell chemicals on the Net and the Promedix market for medical supplies.
Ventro then said it would change its focus to helping other companies build
marketplace sites. So far, they haven’t convinced investors that its new plan
is any more viable than its last one. Its market capitalization is still only
$50 million, even though it has a treasure trove of $235 million on its balance
sheet.

Free Cash? It’s
Going Fast

Some
Internet companies may look like bargains because the entire company is
valued at less than the cash it has on its balance sheet. But don’t
expect a rash of takeovers. Many companies are burning cash so fast that
the excess probably won’t last long. Here are a few examples:

COMPANY

MARKET
CAPITALIZATION

CASH

DIFFERENCE
Ventro

50.4

235.1

184.7

NetZero

101.5

217.4

115.9

NBC
Internet

124

230

106

Onvia.com

57

159.1

102.1

MyPoints.com

44.9

129.2

84.3

Webvan
Group

132.5

211.8

79.3

Drugstore.com

80.4

129.8

49.4

Quokka
Sports

7.9

50

42.1

Autobytel.com

40.7

81.9

41.2

IVillage

38.1

48.9

10.8

(All
figures are in $ millions.)

Data: Standard & Poor’s

Then there are those companies that are sticking to their guns. They simply
think the stock market is unfairly punishing them and, if they perform well,
their stocks will recover. Consider Neupert at Drugstore.com. "We’ve made
a lot of changes in the last six months–laid off a substantial part of the
workforce, dramatically reduced marketing plans, and reconstructed the business
model to break even," he says. That’s why he’s confident his business
will survive, even though its stock has dropped from $67.60 in 1999 to $1.31.

Autobytel is staying the course, too. The company, with $82 million in cash
and a $41 million market valuation, expects investors will become bullish once
it hits operating profitability in the third quarter. "We are well enough
established that we aren’t taking down marketing costs, nor are we
anticipating any large-scale layoffs," says CEO Mark Lorimer. "After
all, we’re going to post profits in a few (months)."

Despite the risks, cash can be a powerful lure for potential acquirers. If a
purchase can be completed quickly, the leftover cash can help fund the
operations of the surviving company. The women’s site iVillage acquired
Women.com Networks for stock in February, partly to get its hands on its
one-time rival’s $30 million in cash. The two sites combined some operations
to reduce expenses and now should have plenty of money to make it to the third
quarter when the business is expected to begin generating cash. "The deal
that we cut with Women.com makes sure that we have enough dollars for a rainy
day," says iVillage CEO Douglas McCormick.

There may yet be a handful of deals like McCormick’s in the wings. But it’s
a treacherous market these days and potential acquirers will have to weigh the
risks carefully–before moving licketysplit. The free cash is disappearing
fast.

Pallavi Gogoi–BusinessWeek

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