Performance with Purpose: PepsiCo’s Sustainability Mission
PepsiCo understands that its business success is linked to sustainability. Since 2006, it has been on a mission to improve how it interacts with the environment to help combat the effects of climate change through “Performance with Purpose.” But are consumers ready?
Climate Change Threatens Company, Shareholders, and Consumers
Extreme weather seems to be the norm these days. From Hurricane Harvey’s devastation in Texas to the Western Wildfires that have destroyed much of California’s wine country, many people are pointing fingers at climate change.
While counterintuitive, climate change is leading to more intense rainfall and more intense drought…just not in the same place. This effect is leading to lower crop yields, scarcity of water, and many other consequences [1].
For PepsiCo, climate change threatens its ability to deliver on both consumer demand and shareholder value. Extreme weather can strain PepsiCo’s value chain by hindering its ability to move product from production to the consumer, ultimately leading to either out of stocks or increased prices for the consumer. Declining crop yields can impact raw material prices, leading to higher internal costs [2]. And on top of direct business impacts, PepsiCo faces reputational risk, as company policies become more and more important for consumer purchasing decisions, regulatory relationships, and future talent acquisitions [3]. So while climate change initiatives require upfront investments, these investments likely minimize risks for the company, shareholders, and consumers in the end.
Performing with Purpose
PepsiCo publicly acknowledged “business success is inextricably linked to the sustainability of the world we share” back in 2006 with the development of the Performance with Purpose (PwP) mission. The mission aims to improve sustainability in several aspects of the world, including the environment [6]. And since 2006, PepsiCo has already achieved some progress in environmental sustainability, such as reducing its operational water use by 23% and increasing energy efficiency of legacy operations by 16% from its 2006 baseline [4]. These initiatives have also proved profitable: the company has saved +$600 million from its environmental sustainability projects since 2011 [7]. But it also recognizes that it must continue to invest in new solutions to reduce emissions and cut back on water usage, which is why it announced a new 2025 environmental agenda at the end of 2015.
In the short term, PepsiCo plans to leverage existing learnings to slowly reduce its internal dependence on water and greenhouse gasses. Specifically, one of its new goals is to build on the existing improvement in water-use efficiency with an additional 25% improvement [6]. Technology such as waterless rinsing systems to clean bottles will likely be leveraged globally to achieve this goal [5]. In addition, it is looking to continue to reduce absolute greenhouse gas emissions by at least 20% in its legacy operations through further expansion of electric-powered fleet and on-site energy generation, an effort that has already been in progress prior to 2015 [6].
However, PepsiCo’s direct carbon footprint only represents 7% of its total value chain. Over the next 10 years, management looks to work with suppliers, partners, and customers to impact the remaining 93% of PepsiCo’s carbon footprint that occurs outside of its direct operations [6]. In particular, agriculture and packaging have the two largest carbon footprints in the value chain [8]. Management has stated that it looks to help these two sectors reduce emissions through the expansion of the PepsiCo Sustainable Farming Initiative and implementing sustainable packaging materials [6]. However, it is unclear the impact that these actions will have on emissions right now.
More to Do
PepsiCo arguably is leading the pack in Food and Beverage on environmental sustainability with its progress thus far. But there is more to do. In the short term, it should be cognizant of the stress that this change can have on the organization. Setting too lofty ambitions year after year can disillusion the frontline and ultimately lead to failure. In addition, it should also be more clear on how it aims to work with partners on reducing their carbon footprint in the value chain. Ultimately, climate change initiatives should be viewed as a marathon, not a sprint.
Over the next 10 years, management should also begin to consider how it can impact the global environment outside of its direct value chain. It is creating technology and learnings that can be lifted and shifted to other competitors and industries, so it should strive to be a center of excellence and develop ways for easy dissemination of information and learnings to improve the broader environment as well.
A key question that remains, however, is how the consumer plays into PepsiCo’s environmental initiatives. While many of its initiatives have never had a direct impact on the end consumer, the action to consider sustainable packaging will surely impact a consumer’s experience. Are consumer-facing initiatives necessary? If so, are consumers truly ready for this type of initiative?
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[1] Popovich, Nadja. “From Heat Waves to Hurricanes: What We Know About Extreme Weather and Climate Change.” The New York Times, The New York Times, 15 Sept. 2017, www.nytimes.com/interactive/2017/09/15/climate/does-climate-change-cause-hurricanes-drought.html.
[2] Brown, M.E. “Climate Change, Global Food Security, and the U.S. Food System.” USDA, USDA, Dec. 2015, www.usda.gov/oce/climate_change/FoodSecurity2015Assessment/FullAssessment.pdf.
[3] Hauke Engel, Per-Anders Enkvist, and Kimberly Henderson. “How Companies Can Adapt to Climate Change.” McKinsey & Company, McKinsey & Company, July 2015, www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/how-companies-can-adapt-to-climate-change.
[4] “Sustainability Report 2014.” PepsiCo, PepsiCo, 2014, www.pepsico.com/docs/album/sustainability-reporting/pep_csr14_sus_overview.pdf.
[5] “Performance with Purpose 2006.” PepsiCo, PepsiCo, 5 Mar. 2007, www.pepsico.com/docs/album/annual-reports/2006-Annual-English.pdf.
[6] “Performance with Purpose 2025 Agenda.” PepsiCo, PepsiCo, 2015, www.pepsico.com/docs/album/sustainability-reporting/pep_csr16_091317.pdf.
[7] “2016 Annual Report.” PepsiCo, PepsiCo, 31 Dec. 2016, www.pepsico.com/docs/album/annual-reports/pepsico-inc-2016-annual-report.pdf?sfvrsn=0.
[8] “2015 Global Reporting Initiative Report.” PepsiCo, PepsiCo, 31 Dec. 2015, www.pepsico.com/docs/album/sustainability-reporting/pep_gri15_v10.pdf?sfvrsn=4.
Landen — I thought this piece was really fascinating! I found it incredibly validating that PepsiCo has been able to prove that environmental sustainability is also beneficial for its bottom line, given its $600mm in savings since 2011.
In addition to your question about consumers’ willingness to pay for sustainable supply chain and packaging as part of the product itself, I also wonder to what extent PepsiCo has incorporated sustainable agriculture practices in its raw materials sourcing. I know you mentioned that they have a Sustainable Farming Initiative, but I’m not sure if the company mandates these practices to its growers or farmers. As one of the largest food & beverage companies in the world with a legacy of being one of the first to incorporate sustainability, it seems that PepsiCo should use its industry scale to impose better standards on its suppliers. Products manufactured with sustainable sourcing would invariably cost more, but I think certain segments of consumers would be willing to pay more for these products which are more sustainable and environmentally-friendly — the same way that certain consumers pay for organic and non-GMO competitors to PepsiCo’s products.
Thanks, Landen – great piece! I think this raises a lot of really important questions about the role of large corporations – particularly consumer-facing ones – for setting the industry standard on sustainability.
To your question around the consumer’s involvement – and to Karen’s point about customer willingness to pay more for sustainably sourced products – I wonder if Pepsi should think about this only from the perspective of altering its existing products (e.g., with different packaging, different ingredients, etc.), but as an opportunity to introduce (or acquire) new product lines that more explicitly focus on sustainable sourcing as their value proposition and branding. There is quite a trend in packaged food right now toward brands and marketplaces offering more local, sustainable products (Thrive Market and Movebutter are a couple cool examples on the marketplace side) – a trend which, regardless of its beliefs about sustainability, PepsiCo needs to be aware of. I know PepsiCo has put a great deal of focus on its nutrition vertical and expanding its portfolio of healthier options – this seems like a logical extension of that strategy, as well as an opportunity to use more environmentally-friendly offerings as a way to extract higher prices from a specific customer segment rather than “imposing” it on all of its customers immediately.
Hey Landen, really liked how you ended the article and raise thought-provoking questions that I agree PepsiCo’s management should really consider. In particular, I really liked this phrase: “Ultimately, climate change initiatives should be viewed as a marathon, not a sprint.” While it is encouraging to know of more big corporations entering into conversations and changes around sustainable business, it will only prove detrimental if they do not have a long-term plan in creating the changes and disruption they are implementing. I agree that changing too much too quickly is dangerous, and adding to that – abrupt changes that can only produce short-term gain will be demotivating at best for the employee and truly damaging to the company and environment in general.
As such, I think to your question regarding consumer-facing initiative, ideally it would be great to have companies like PepsiCo partnering with government or social organizations to really discuss how to create long-lasting supply chain changes that will be more environmentally friendly while helping businesses remain profitable at the same time. I strongly believe they should think about launching consumer-facing initiative (perhaps something like Dove’s Real Beauty campaign but towards climate change) especially in today’s political climate, PepsiCo in many ways almost need to step up and play a significant role in shaping people’s mindset and help them change behaviors positively. Given how rapidly our world is changing, I’d be really curious to know how management of big companies like PepsiCo plan out their strategies for the future indeed.
Landon –
I found your comment about PepsiCo’s sustainable packaging impacting the end consumer’s experience very interesting. Just over Thanksgiving, I had a full conversation about the flimsiness of Aquafina’s plastic bottles with my mom and grandmother! Consumers can definitely identify the differences in the packaging. I think we all intuitively know that less plastic is good for the environment, but it’s hard to remember that when the sustainable packaging is so flimsy that it won’t even hold up under your grip when the attempting to untwist the cap. (Inevitably spilling water all over yourself). Hopefully PepsiCo can figure this out and make it great for the environment and consumers. Thanks for the great post!
Landen: Thank you for a thought-provoking article on a subject that I didn’t know anything about!
I was really astonished that while Pepsi can do everything in its power internally to improve their environmental impact on the world, it is truly the suppliers, partners, and customers that have a 93% share of PepsiCo’s carbon footprint!! For the suppliers and partners, my concern is what if they are resistant to environmental improvements (too hard to implement, increases their costs, etc.)? Would PepsiCo every cut ties with these suppliers/partners if they can’t reach a long term “marathon” agreement?
To follow-on Kenya’s comment about Aquafina’s flimsy bottles: A customer could easily switch companies if they find a product inferior. This is especially true in PepsiCo’s industry where so many competitors exist. To take Kenya’s comment one step further: Would a customer ever switch companies (from Pepsi to Coca-Cola, let’s say…) because of their poor environmental practices? I would think those practices would have to be REALLY terrible in order for a customer to switch….to the point where they are front headline news so that customers are informed.
Thanks again, Landen!