The supermarket potato chip aisle, once dominated by Lays, has recently been infiltrated by an army of small start-up brands. Pink Himalayan Salt Rice and Quinoa Chips from Lundberg Farms. Hemp Tortilla Chips from Food Should Taste Good. The list goes on and on. While Lays, a division of PepsiCo, still has majority share in the chip category, it has been steadily losing sales to innovative startups just like these.
Across its entire portfolio, Pepsi has been facing the threat of smaller players. In 2017, large consumer brands (such as Pepsi) grew at a meager 0.2%, versus 2.3% for small brands, a trend that has been consistent over the past several years . Pepsi must innovate to compete against these powerful startups. Historically, Pepsi has used internal R&D as its primary innovation source. However, the internal R&D process has contributed to the company’s current challenges; with numerous corporate controls and governance roadblocks, Pepsi has struggled to agilely innovate to compete with smaller, more nimble brands. Therefore, one newer strategy it has employed is acquisition; for example, in 2016 Pepsi purchased KeVita, a startup that has been a leader in the trendy Kombucha category . While growth through acquisition is a common, and popular, tool, it is not sustainable given the financing required. Therefore, what can Pepsi do to stay competitive in innovation?
One answer is open innovation. Pepsi has successfully leveraged open innovation by reaching out to consumers for flavor ideas in the short term and scientific breakthroughs in the medium term.
The best examples of these short-term efforts are Cheesy Garlic Bread chips and Wasabi Ginger potato chips, both flavors created through Lay’s “Do Us a Flavor” contest. Starting in 2012, and occurring every 1-2 years, Lays has turned to consumers to create the next great chip flavor. In this contest, consumers propose new potato chip flavors, and then vote online for their favorite. Lays then develops and launches the top flavor in stores across the U.S., awarding its creator a cash prize of $1 million . This crowdsourcing initiative is a cost-effective way to guarantee that innovation is grounded in consumer research; consumers not only create the flavor, but also vote on their favorite, all but ensuring consumer demand.
Looking towards a longer, 2-5 year horizon, Pepsi is working to crowdsource new ingredients and technologies. Food technology startups like Exo (cricket protein bars) are some of the biggest threats to Pepsi. To compete, Pepsi has partnered with open innovation platform NineSights to pose R&D challenges to the public . For example, they recently challenged consumers to suggest a novel source of protein. The posted challenge explains specifications of the request (e.g., no soy or pea protein), and potential prizes that range from a job with Pepsi to financial rewards . More sophisticated crowdsourcing efforts like this can help Pepsi develop ingredients that can drive longer-term success.
Going forward, there is still a lot that management can do to capture the power of open innovation. First, Pepsi should expand its crowdsourcing efforts to other brands. Given the proven playbook developed with Lays chips, Pepsi can host flavor-based crowdsourcing competitions with some of its other struggling brands (e.g., Quaker). Additionally, Pepsi should expand its open innovation from the consumer level to the company level. As mentioned before, acquisition has been one of Pepsi’s key strategies to stay competitive. However, a cheaper alternative is to forge partnerships with emerging brands. A partnership with a startup can improve Pepsi’s relevance with consumers and generate incremental revenue. And for a smaller brand, a partnership with Pepsi can provide the distribution and exposure needed to grow. Tactically, Pepsi could host an annual contest where start-ups compete to be Pepsi’s featured partner. Implementing a program like this can ensure that Pepsi has a regular pipeline of innovative ideas, all of which are created outside of the company.
While open innovation is a highly attractive path for Pepsi, some open questions remain. First, what impact will the success of open innovation have on internal Pepsi R&D? There is a risk that Pepsi R&D may become complacent if they feel as though they are being replaced by crowdsourcing. Second, how can Pepsi effectively partner with startups without hurting the startup’s brand image? There is a great opportunity for crowdsourced partnerships, but Pepsi needs to determine how to integrate the startup without tarnishing its authenticity. Despite these open questions, it is clear that crowdsourcing will remain an important growth lever for Pepsi in the future.
Peri Edelstein, “What the Fastest Growing CPG Companies Do Differently,” The Boston Consulting Group, June 18, 2018, https://www.bcg.com/en-us/publications/2018/what-fastest-growing-consumer-packaged-goods-companies-do-differently.aspx, accessed November 2018
 “PepsiCo Announces Definitive Agreement to Acquire KeVita, a Leader in Fermented Probiotic Beverages,” press release, January 20, 2015, on PepsiCo website, http://www.pepsico.com/live/pressrelease/pepsico-announces-definitive-agreement-to-acquire-kevita-a-leader-in-fermented-p11222016, accessed November 2018
 “Lay’s “Do Us A Flavor” Contest Returns To The U.S. With $1 Million Grand Prize For Best Potato Chip Flavor Idea,” press release, January 20, 2015, on PepsiCo website, http://www.pepsico.com/live/pressrelease/lays-do-us-a-flavor-contest-returns-to-the-us-with-1-million-grand-prize-for-bes01202015, accessed November 2018
 Nine Sigma, “Success Stories,” https://www.ninesigma.com/success-stories, accessed November 2018
 Elaine Watson, “PepsiCo seeks novel protein sources with ‘easy to pronounce’ names and ‘a good sustainability story’”, May 4 2017, https://www.foodnavigator-usa.com/Article/2017/05/05/PepsiCo-seeks-new-and-novel-protein-sources#, accessed November 2018