(FORTUNE Magazine) – Ms. Cindy Crawford c/o PepsiCo Purchase, New York 10577 Dear Cindy,

Congratulations on being selected PepsiCo's global spokesmodel and typical investor. In this role you must be pretty hooked into company news. But I have a sneaking suspicion that the brass haven't told you about some very important problems. PepsiCo is the world's largest restaurant company, as you know, with 27,000 stores around the world, compared with 15,000 McDonald's. Trouble is, that's too many. The company has binged recently, pumping billions into its three major chains--Pizza Hut, Taco Bell, and KFC--and buying into some trendy new ones. The returns are lousy. This situation is uglier than cellulite.

The rule is, After you binge, you purge, as some of your fashion friends perhaps do. So now, Cindy, PepsiCo is going on a diet. The company will sell a lot of restaurants to franchisees, build fewer new ones itself, and, most important to shareholders like you, redirect hundreds of millions of dollars into more promising investments. You're brainy--valedictorian of your 1984 high school class--so you will immediately grasp what a critical turnabout in strategy this is.

Look at the numbers. Of PepsiCo's three businesses, restaurants have operating margins of only 7%, compared with 13% in beverages and 17% in snacks; the Frito-Lay unit, which sells half the salty snacks munched in the U.S., is probably America's best-run food company. Troubles in restaurantland are what kept your PepsiCo stock as flat as a stale soda in 1993 and 1994.

The main reason shares have risen 35% this year, recently to $49, an all-time high, is that Wall Street has anticipated that management will deal with the problem. Analysts bet that PepsiCo will steer money to higher-return businesses, like selling Doritos overseas. Some cash is likely to go to buy back stock.

Any way you look at it, Cindy, these hotshot PepsiCo executives (among America's most tenacious, agile managers, right?) are admitting that they goofed. They're even borrowing ideas from (gasp!) McDonald's.

Do you know Roger Enrico, PepsiCo's vice chairman, who's directing the shakeup? He's a high-strung, fast-talking, risk-loving, workaholic pistol of a boss, equally feared and revered at PepsiCo. Enrico has already rejuvenated the company's two other businesses. First, soft drinks in the 1980s, where he restructured the bottling system. Also, he's the guy who hired Michael Jackson and Madonna to do those glitzy commercials. (Could Roger have been the one who picked you as typical investor?) In the early 1990s he revived snacks by slicing costs and focusing Frito-Lay on low prices and new products. Restaurants is a new arena. Taking charge last November, Enrico asked a basic question: Is the problem the marketplace, or is it us? As he told me, "I wanted to know whether the restaurant industry was suffering from the same disease as retailing: grossly excessive and almost irreversible overbuilding. Or is the industry healthy enough for us to compete?"

After lots of high-calorie field trips and talks with PepsiCo's restaurant honchos, Enrico concluded, "The industry's pretty healthy." He says that what got PepsiCo into the quick-service restaurant business in 1977, when it bought Pizza Hut, is still true: It's a huge industry--$91 billion in the U.S. and growing nicely--with excellent prospects abroad. Except for McDonald's (that lightweight), there are no worldwide competitors with terrific R&D and financial resources. PepsiCo reached No. 1 in restaurants by risking its own money and talent. While McDonald's uses other people's money--that of its franchisees, who own 80% of its U.S. restaurants--PepsiCo owns 60% of those Pizza Huts, Taco Bells, and KFCs.

Then success spoiled PepsiCo. "Success is all about balance and flexibility," says Enrico. "Our strategy of owning most of our restaurants worked well for a long period. But we swung that pendulum too far." PepsiCo put on some serious pounds. You can see in the chart, Cindy, that the company built a lot more stores even as it was getting tougher to bring customers through the door. Operating profits grew, but not fast enough.

Here's what went wrong, chain by chain:

As Pizza Hut, PepsiCo's biggest, got in a price war with Domino's, quality slipped, and no new types of pizza came out of the ovens. A typical store's sales fell 6% last year. Now the Hut has a hot item in Stuffed Crust Pizza, mozzarella-filled pies that have puffed up sales more than 10%. Pizza Hut's chronic problem, Cindy, is those dark, dismal dining rooms. PepsiCo is now freshening the decor every four years instead of seven.

Taco Bell's pitch as the best bargain in fast food lost its ring when McDonald's cut costs and learned to sell Big Macs profitably at 99 cents or less. The Mexican chain's new low-fat Border Lights line appeals to social X-rays and older folks who don't eat much fast food. CEO John Martin sounds downright humble, saying, "We took our eye off our heavy users." So this summer he's going after indulgent, 18- to 24-year-old fast-foodies "with a vengeance."

At KFC, the bird doesn't fly. This is a vendor of greasy food, with a fractious flock of franchisees and a lot of rundown outlets. New Rotisserie Gold Chicken has helped KFC somewhat. The big sin: leaving the market for meals that look home cooked to newcomer Boston Chicken. "I feel like the guy in the movie Network who yelled, 'I'm mad as hell and I'm not going to take it anymore,' " says new KFC chief David Novak, a kinetic ex-Pepsi-Cola man. (David's really smart, but he could chill a little. This is only chicken selling.) Unashamedly he opened Colonel's Kitchen, a knockoff of Boston Chicken's stores, in Dallas and plans to introduce chicken pot pie this fall. He's also installing Taco Bell mini-kitchens inside some KFCs, which is increasing those stores' annual sales by almost $300,000.

But the big fix for all the chains is to play the restaurant game more the way McDonald's does. Most new units will be franchises. Enrico also wants to sell to franchisees hundreds of restaurants that the company now owns. The expected impact: $300 million this year in free cash flow, which is the money left over after capital spending and acquisitions. Last year there was no free cash flow, and the company spent an additional $200 million or so to expand. As growth slows, Enrico hopes return on assets will double.

The trick is to get franchisees to buy the program. Says George Thompson, an analyst at Prudential Securities: "You've got to make the business better. People are not lined up to buy Pizza Huts." Enrico knows this. If anyone can make restaurants pay off for PepsiCo, it's him. If he does, he's in position to become the next CEO. Of course, even that won't get him on the cover of Vogue.

Yours truly,

Pattie

Patricia Sellers cc: Ani Hadjian, Reporter Associate