After missing one of the biggest marketing opportunities in a generation, PepsiCo says it is not about to make the same mistake twice.
Pepsi is ponying up more than $60 million to sponsor "X Factor," Simon Cowell's new talent show set to debut this fall on the Fox network. The beverage giant took a pass on sponsoring "American Idol," which long featured Cowell, when the show launched nine years ago. The singing contest went on to become one of TV's most popular programs of all time, and Pepsi, in recent years, has seen its sales decline.
On Thursday, new industry data is expected to show that Diet Coke surpassed Pepsi in 2010 in U.S. sales among sparkling sodas, knocking Pepsi to the No. 3 spot from No. 2 — a stunning fall from grace. Coca-Cola Co. has maintained the top perch in the $74-billion-a-year soft drink industry.
"We're not happy. We would obviously like to be No. 1," said Massimo d'Amore, chief executive of PepsiCo. Beverages Americas. "Our people, at the time, did not see how big "American Idol" was going to be. We lost a lot of momentum and the competition gained it."
Such candor is rare among company executives, especially when talking about the handling of billion-dollar brands. Although D'Amore acknowledged that Pepsi made a costly misstep, he predicted the company soon would make a splash with "X Factor" and begin a "renaissance." Pepsi views Cowell, the tart-tongued British judge, and his new talent show as the advantage it needs to reclaim its legacy as the soft drink drenched in pop music culture. After all, it was Michael Jackson who lent his voice to Pepsi's "new generation" marketing campaign during the 1980s.
For the last decade, however, Pepsi has been experimenting with marketing on the Internet, including social media; television ads became a lower priority. Last year, it decided to skip the Super BowI and instead plowed $20 million into its Pepsi Refresh Project, an Internet campaign that asked users to nominate schools, parks and other worthwhile community projects, which then received donations from Pepsi.
"We took the divergent path," explained Frank Cooper, chief consumer engagement officer for Pepsi. "We wanted to explore how a brand could be integrated into the digital space."
But Pepsi's loss of market share confirmed what other marketers have discovered in the last few years: the Internet alone is not effective in reinforcing major brands. Network television — and its ability to simultaneously reach tens of millions of viewers — still rules.
"The 'X Factor' is really Pepsi's admission that they needed more ammunition to power their mega-brand Pepsi," said Fran Kelly, vice chairman of Arnold Worldwide, whose firm represents Volvo, Ocean Spray and Hershey. "Pepsi has found that by backing off television too much it's hard to have enough push to keep growing the core brand."
Proving that point, archrival Coke has been spending heavily on television. In the last three years, Coca-Cola has spent more than $690 million on television commercials for all its Coke brands, including more than $30 million annually for spots in "American Idol," according to Kantar Media, which tracks advertising spending. During the same period, Kantar found that Pepsi spent less than $400 million.
Pepsi's problems do not stem solely from sitting out "American Idol" and one Super Bowl. For years, consumers have been reaching for healthier drinks — juices, teas and vitamin water — and turning away from sodas loaded with sugar. Both Coke and Pepsi steadily have been losing market share, although Pepsi has been losing it faster.
According to Beverage Digest, Coke in 2009 maintained 17% of the market with 1.5 billion cases sold. Pepsi just barely squeaked ahead of Diet Coke with nearly 10% of the market and 936 million cases sold.
Coke has had a historical advantage because 70% of the nation's restaurants exclusively sell Coke products, said John Sicher, editor of Beverage Digest. At the retail level, he said, the Coke versus Pepsi battle is a much closer horse race.
"At the retail level, consumers can choose the drink they want to buy," Sicher said.
That's why marketing is crucial. Headquartered in Purchase N.Y., Pepsi has spent much of the last year reevaluating its marketing mix. Executives concluded that they needed not only to flood the Internet, but also stand out in high-profile television events. The company spent heavily to promote its drinks in last month's Super Bowl.
"We would like to be with the big audiences to get our message across," D'Amore said.
Last fall, when Fox alerted the advertising community that it was seeking sponsors for "X Factor," Pepsi executives flew to London to personally pitch Cowell, who once appeared in a Coke commercial. Cowell left "American Idol" last year to concentrate on "X Factor."
"What made 'X Factor' so special to us was Simon Cowell and his insight into what makes great television, and his ability to identify new talent," said Pepsi's Cooper. "This is a great opportunity to go back into music in a much deeper way."
In phone interview from his London home, Cowell recalled his initial meeting with the Pepsi executives last year. "We just hit it off," he said. "I've always said that 'X Factor' would be the next generation talent show. Pepsi was an automatic fit."
Pepsi, Cowell noted, was more aggressive than its rivals in trying to snare the sponsorship rights. "I like working with hungry people," he said.
What's more, the selection of Pepsi only serves to ratchet up the rivalry between "American Idol," backed by Coke, and "X Factor," backed by Pepsi.
"Bring it on," said Cowell. "I love it."
Of course, Pepsi's big gamble could backfire if "X Factor" fails to attract the audiences that it has in Britain, where it has delivered enormous ratings and lit up the Internet with chatter about the various contestants.
Pepsi also has rights to Internet platforms related to the show.
"This is not a blind bet," D'Amore said. "We have huge confidence in Simon Cowell. He's learned a lot from "American Idol," and the ratings outside the U.S. for "X Factor" have been very strong. Not only that, but we are putting our marketing resources behind this show, so you shouldn't under estimate what we can do together to drive this property."