Case 3: PepsiCo

Morgan La Femina MBA 710

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Introduction: Donald M. Kendall of Pepsi-Cola and Herman W. Lay of Frito-Lay founded PepsiCo, Inc. through the merger of both companies in 1965 (PepsiCo Our History, nd). Caleb Bradham, who was a N.C. pharmacist, created the Pepsi-Cola company itself during the 1890s (PepsiCo Our History, nd). The FritoLay, Inc. was formed during 1961 through a merger of the Frito Company and the H. W. Lay Company (PepsiCo Our History, nd). Herman Lay is the chairman of the Board of Directors of the newly created PepsiCo company while Donald M. Kendall is president and chief executive officer (PepsiCo Our History, nd). The new company has 19,000 employees and sales of over 500 million dollars per year (PepsiCo Our History, nd). Some of the products of the Pepsi-Cola Company are Pepsi-Cola which was developed in 1898, Diet Pepsi developed in 1964 and Mountain Dew, created in 1948 (PepsiCo Our History, nd).

Mission Statement Analysis: Our mission is to be the world's premier consumer products company focused on convenient foods and beverages. We seek to produce financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate. And in everything we do, we strive for honesty, fairness and integrity (PepsiCo Our Mission and Vision, nd).

The PepsiCo mission statement talks about their products, being food products, which are easy to eat including consumer beverages. The PepsiCo mission statement also talks about the companys concern for its financial stability, its concern about the enrichment of its employees and its concern for how it operates its business. The statement shows concern about how the company will operate, with integrity and honesty. The PepsiCo mission statement also shows concern about its business partners 2|Page

and the public, operating with fairness and integrity. They are concerned about their growth and also want to be number one in their market category which is clearly stated by PepsiCos mission statement as consumer products.

Internal Factors: 1. Marketing PepsiCo is a global company with respected high quality brand name products such as Quaker Oats, Tropicana, Lays, and many Pepsi Cola products (David, 2011). These products are impulse buys which also generate significant revenue for both PepsiCo and the retailers who sell them. In addition, healthier products featuring Whole grains, fruits and nuts under their good for you portfolio are growing snack divisions. PepsiCos many brands are moving into 40 developing regions worldwide (PepsiCo Annual Reports 2009). They use their brands in commercials, TV shows, and movies, online and in print in order to facilitate brand familiarity and market expansion. 2. Management PepsiCos goal is to utilized strong corporate governance along with experienced corporate management to score high on governing metrics, manage the company effectively and provide consistent value to their shareholders. PepsiCos management leads by experience with John Compton with 26 years at the company, Eric Floss with 28 years at PepsiCo, and Massimo dAmore with 30 years in the global consumer market and 15 years with PepsiCo (PepsiCo Annual Reports 2009). 3. Operations and Technology

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PepsiCos main goals are to invest in research into more affordable, nutritionally whole products and to reduce waste while increasing efficiency. PepsiCos goal is to continually make their core products healthier and expand a variety of new snacks to the public. The company plans to reduce product packaging by 350 million pounds (PepsiCo Annual Reports 2009). Operationally PepsiCo seeks to consolidate bottling plants, expand into developing regions, and reduce water consumption while increasing energy efficiency at their facilities (PepsiCo Annual Reports 2009).

The Internal Matrix: Internal Matrix for PepsiCo

Key Internal Factors Key Strengths Weight Rating Weighted Score 1 2 3 4 5 Adjust costs downward in economic climate The unification of bottling plants Diversified product line including snacks, juice Expanding into other countries Company is run by experienced management team Key Opportunities 1 2 3 4 5 Total Adjust costs downward in economic climate Increase healthy foods divisions Expand research and development Expand marketing to web related media outlets Reduce long term debt 0.11 0.11 0.09 0.08 0.11 1 4|Page 3 3 3 4 2 0.33 0.33 0.27 0.32 0.22 0.11 0.12 0.1 0.09 0.08 3 4 4 3 4 0.33 0.48 0.40 0.27 0.32

The average total weighted score is 3.27

Rational: The average total weighted score for PepsiCo is 3.79, which is above average for companies in the consumer food category. This is to be expected since they are number two in market share with the Coca-Cola company number one. The two have battled for market share for many years, but also combined dominate this industry. PepsiCo had a diversified product line from carbonated beverages, non-carbonated teas, sports drinks, fruit juices as well as snacks like potato chips, baked snacks and various healthy snack products (PepsiCo Annual Reports 2009). They repurchased their North American bottling plants combining them and expanding heavily into China (David, 2011). They are also expanding their marketing onto the internet. PepsiCo does need to reduce its long term debt which they incurred through restructuring and they need to hold costs down internally as the cost of raw products have continued to increase (David, 2011).

External Factors: 1. Economic Forces Most food manufacturers have had significant commodity inflation over the past several years which has caused an overall cost increase of products and a decrease in per item profit. In addition, this increased manufacturing and production costs for most of them. European consumers purchasing power has been reduced due to their prolonged recession as well as American consumers purchasing

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power which has been hampered due to a slower than expected economic recovery (PepsiCo Annual Reports 2009). 2. Social, Cultural, Demographic and Environmental Forces Socially, consumers are looking for healthier snacks and beverages along with a greater variety of healthier snacks and beverages. Expanding into new regions often requires a reformulation of the original consumer food product or the need to develop new regionalized products completely. Costs of product packaging and storage have increased (PepsiCo Annual Reports 2009). Finally, transportation and distribution costs are up due to increased fuel costs. 3. Political, Governmental and Legal Forces The quality of local urban food, its price and lack of access can cause both obesity and malnutrition must be addressed. There can be significant supply chain issues from the local farmers where the base foods are grown to the manufacturing site. Small farmers in the countrys PepsiCo operate are their suppliers and require training as well as guidelines to produce more abundant crops for PepsiCo (PepsiCo Annual Reports 2009). 4. Technological Forces There has been a steady increase in the cost of energy and water required to manufacture food products. Reduced crop yields have also impacted the cost of raw products such as potatoes, corn, rice, fruits and nuts. The costs of bottling and the ever present need to bring new bottle designs to market require a more nimble, responsive and effective beverage system (PepsiCo Annual Reports 2009). 5. Competitive Forces

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PepsiCo operates in the very competitive food market. They compete against extremely large global food producers, those that are smaller private label companies. They face strong competition with CocaCola in the consumer snack division with Coca-Cola number one in terms of consumption while PepsiCo has a large share of the liquid refreshment product line then Coca-Cola (David, 2011).

External Matrix: External PepsiCo Matrix

Key External Factors Opportunities Weight Rating Weighted Score 1 Increase in carbonated soft drink usage in Asia and Europe 2 Increased demand for sports drinks and flavored waters 3 Expand into Brazil through its current acquisition of Amacoco Nordeste Ltda 4 Expand low cost line to compete against house brands 5 Threats 1 2 3 4 Carbonated soft drink market in decline Industry operates unchanged Campaign against bottle water affecting usage Kellogg and Nabiscos growing snack divisions 0.12 0.09 0.09 0.10 3 2 2 2 0.36 0.18 0.18 0.20 Gain shelf space through product synergy 0.09 3 0.27 0.08 2 0.16 0.09 4 0.36 0.12 3 0.36 0.12 3 0.36

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Extensive marketing needed driving marketing costs up

0.10

0.20

Total

2.63

The average total weighted score is 2.63

Rational: PepsiCos total weighted score is 2.63, which is slightly above average for companies in the consumer beverage and snack industry. PepsiCo is taking advantage of their opportunities but is responding poorly to its threats, many of them long term in nature. Not only are the costs of raw materials and ingredients increasing but also the substrates that are used in the packaging of the products. These is a decrease in cola and carbonated beverage consumption in the US that will need to be offset by increased consumption in other countries. PepsiCo has acquired long term debt from restructuring and the marketing of their products has always been costly (PepsiCo Annual Reports 2009). In addition, they compete against other companies already well-established in the snack division such as Kellogg and Nabisco (David, 2011). PepsiCo also has to compete from store brands which often compete with their products on cost.

Competitive Analysis: Porters Five-Forces Model: 1. Rivalry among competing firms HighThey face very strong competition from Coca-Cola in the beverage market and face strong competition in their snack division from Coca-Cola, Kellogg, Kraft and General Mills (David, 2011). This

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competition is fought out through advertising, through store shelve space and through various sponsorship opportunities.

2. Potential Entry of new competitors HighPepsiCo faces a high likelihood of potential new competitors. These new competitors can be from new products from their existing competitors such as Coca-Cola competing with PepsiCos existing brands or new companies developing new products such as Starbucks cold coffee drinks. As PepsiCo expands into other countries they will face those countries regional food manufactures who already have had developed a market presence there.

3. Potential development of substitute products HighFoods can be substitute most readily for other foods of equal quality costing less, lower quality costing less or a different product altogether. Not only can one food be substituted for another but can be purchased at a different locations. In addition, consumers can simply buy a store brand, have tap water or go without the any substitute altogether.

4. Bargaining power of suppliers Low-

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The basic food products PepsiCo needs to develop its products from originate at farms, these farms sell to intermediaries who then sell it to food processing facilities. It is these intermediaries, food processing companies and wholesalers who have the most bargaining power in relation to suppliers. However, should some of these farms experience internal or external environmental issues the result could hamper PepsiCos supply chain.

5. Bargaining power of consumers HighConsumers have a high level of bargaining power in relation to food manufactures such as PepsiCo. Shoppers can chose from a variety snacks and beverages from a wide variety of stores from within just a few miles of their home. Consumers can chose what types of food stuffs to buy in a store and they can shop at multiple stores to complete their entire purchase. In addition, shoppers can substitute one food for another, chose products based on price, quality, sale, marketing, its packaging, freshness, shelf life and many other characteristics. Consumers can buy in bulk or they can impulse buy, each determining the profit of the store supplying the snack or beverage and the return on the product for PepsiCo.

Porter Generic Strategy:

Target Scope Low Cost Product Uniqueness

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Broad

Cost Leadership Strategy

Differentiated Strategy

Narrow

Focused Strategy (low cost)

Focused Strategy (Differentiation)

X
Porter rational: PepsiCo should select continue their differentiated strategy but in addition add a focused strategy product line that offers the consumer several high quality low cost snacks to compete against store brands and market fragmentation.

The Competitive Factor Evaluations Matrix:

PepsiCo Critical Success Factors Weight Rating Score

Coca-Cola Rating Score

Nabisco Rating Score

Brand recognition Product Quality Price Competitiveness's Management Financial Position Customer Loyalty Global Expansion Market Share Total

0.14 0.13 0.12 0.12 0.13 0.11 0.12 0.13 1.00

4 4 3 3 3 3 3 3

0.56 0.52 0.36 0.36 0.39 0.33 0.36 0.39 3.27

5 4 3 3 4 4 4 4

0.70 0.52 0.36 0.36 0.52 0.44 0.48 0.52 3.90

3 4 3 3 3 3 3 3

0.42 0.52 0.36 0.36 0.39 0.33 0.36 0.39 3.13

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The Competitive Factor Evaluations Matrix shows that PepsiCo is out competing Nabisco but not its chief rival Coca-Cola. PepsiCo produces high quality brand name products that compete on price with Coca-Cola. In addition PepsiCo has a strong management team but suffers from a high level of long term debt. PepsiCo has strong customer loyalty but not as strong as Coca-Cola customers brand loyalty although both companies loyal customers can shift their loyalty should product prices increase.

Summary of Operating Results For the year ending December 31st 2008 2007 2006

In millions of dollars except per share amounts

Net Revenue Cost of Sales Selling and General Expenses Amortization Interest Expense Net Income

43,251 20,351 15,901 64 (329) 5,142

39,474 18,038 14,208 58 (224) 5,658

35,137 15,762 12,711 162 (239) 5,642

Cash and Cash Equivalents Accounts Receivable Inventories Total Current Assets

2,064 4,683 2,522 10,806

910 4,398 2,290 10,151

1,651 3,725 1,926 9,130

Short Term Liabilities Long Term Liabilities Total Liabilities

369 7,825 23,888

0 4,203 17,394

274 2,550 14,562

PepsiCos operating summary for the years 2006, 2007, 2008 show that although PepsiCos net revenue increased net income actually declined (David, 2011). Costs of sales increased over those same 12 | P a g e

three years to do an increase in raw food materials which make up PepsiCos products and interest expenses increased as well. In addition, although total current assets increased marginally total liabilities increased 9 billion dollars (David, 2011) which in the long term will be detrimental to the company should it not pay it down.

SWOT Matrix:

SWOT
Strengths S
1. Brand Recognition 2. The unification of bottling plants 3. Diversified product line including snacks, juice 4. Expanding into other countries 5. Company is run by experienced management team

Weaknesses W
1. Adjust costs downward in economic climate 2. Increase healthy foods divisions 3. Expand research and development 4. Expand marketing to web related media outlets 5. Reduce long term debt

Opportunities O
1. Increase in carbonated soft drink usage in Asia and Europe 2. Increased demand for sports drinks and flavored waters 3. Expand into Brazil through its current acquisition of Amacoco Nordeste Ltda 4. Expand low cost line to compete against house brands 5. Gain shelf space through product synergy

SO Strategies
Increase variety of sports or healthy type snacks aligned with flavored waters. (S3,O2) Use Brazilian bottler to expand into Brazil and other regions in South America. (S4,O3) Increase brand name low cost line for bargain shoppers. (S1,O4) (W2,O2)

WO Strategies
Create carbonated health waters.

Develop new low cost snacks and beverages. (W3,O4) Expand global sale to offset long term debt. (W5,O1)

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Threats T
1. Carbonated soft drink market in decline 2. Industry operates unchanged 3. Campaign against bottle water affecting usage 4. Kellogg and Nabiscos growing snack divisions 5. Extensive marketing needed driving marketing costs up

ST Strategies
Experiment with other types of beverage containers based on regional market. (S4,T2) Develop powdered drinks. (S4,T3) Management signing strategic partnerships with smaller snack companies. (S5,T5)

WT Strategies
Increase marketing of colas on alternate media outlets. (W4,T1) Restructure company by paying down debts. (W5,T2) Redesign water bottles for less plastic, or develop biodegradable bottles. (W3,T3).

PepsiCos SWOT matrix shows that they have room to create new types of products and packages for those products that will expand their market and reduce their costs. They can use these new products and packages as they expand into other countries while regionalizing those products to the areas which they serve. They must reduce their total long term debt and can do this through decreasing the amount of packaging they use in their products while reducing their fixed costs. The case shows that PepsiCo is already reducing fixed costs, however reducing package costs can only help them at this time.

Space Matrix: Financial Position Leverage Liquidity Working capital Cash flow Ratings 3 2 2 3 10 Industry Position Growth potential 4

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Profit potential Financial stability Resource utilization

3 2 2 11

Stability Position Technological changes Price range of competing products Competitive Pressure Price elasticity of demand -1 -3 -4 -4 -12 Competitive Position Market Share Product quality Customer loyalty Product lifecycle -2 -1 -3 -2 -8

Conclusions:

FP Average = 10/4 = 2.5 IP Average = 11/4 = 2.75 SP Average = -12/4 = -3 CP Average = -8/4 = -2 Space Matrix Coordinates: X-axis: CP+IP or (-2 + 2.75) = .75 Y-axis: FP+SP or (2.5 + -3) = -.5

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Space Matrix analysis:

fp 3

1 cp -3 ip 3

-2

-1 -1

-2

-3 sp

The Space Matrix shows that PepsiCo is competing fairly well in a very unstable market. Their sales are increasing and they are expanding into other countries. PepsiCo is number two in market share in the consumer snack and beverage category while having a wide portfolio of brands (David, 2011). They compete on price and quality with their number one competitor Coca-Cola while taking on companies that are already established in the snack market being Nabisco and Kellogg. They have experienced management and an active research and development department. PepsiCo is very active in managing their brands, keeping older brands fresh while creating new brands as consumer tastes change.

BGC matrix:

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High

Medium

Low

Medium

Stars Lays potato chips (7 billion 2009)

?s Aquafina water (3 billion 2009) Dogs Rice a Roni (double digit decline in sales < 500 million)

Low

Cash Cows Pepsi-Cola (20 billion 2009)

The BGC Matrix shows that PepsiCos main product Pepsi-Cola is a cash cow and this is to be expected with Pepsi-Cola, Mountain Dew and Diet Pepsi accounting for almost 30 billion dollars in sales for 2009 (PepsiCo Annual Report 2009 - Management's Discussion). Aquafina water and other noncarbonated beverages can become cash cows with additional market penetration in regions outside the United States while marketing those products overseas (PepsiCo Annual Report 2009 - Management's Discussion). Unfortunately, for PepsiCo products such as Rice a Roni and other types of PepsiCo brand salty semi-prepared foods are losing market ground as well as having sharp declines in sales (PepsiCo Annual Report 2009 - Management's Discussion) possibly due to customers being more health conscious than previous years. For these types of products PepsCo will need to either reformulate those brands or discontinue them.

Strategy Recommendations:

PepsiCo should expand its healthy line of beverages and snacks, develop carbonated flavored waters, expand overseas with carbonated sodas, sports drinks and healthy snacks, develop new types of environmentally friendly packaging, reduce high salt semi-prepared meals, reformulate older products to meet todays health conscious consumer tastes, develop targeted low cost brand name snacks, 17 | P a g e

reduce its long term debt and expand on its powdered drink line. If PepsiCo follows these strategic recommendations their brand sales will grow, they will develop new brands and they will have increased sales while having lower fixed costs. Once PepsiCo has several quarters of increased sales and lower fixed costs they will then be able to pay off their long term debt brought on by restructuring.

Income Statement (in millions unless specified) Sales Revenue Cost of Goods Sold

2008

2012 Projected

Comments

43,251 20,351

65,000 21,000

Selling and general expenses

15,901

16,000

Increased sales due to an expansion of star brand and the development of new brands. Cost of goods sold decrease due to lower fixed costs. Lower costs of goods sold through better distribution and reorganization. Increase net income due to development of new brands, reduction of dog brands and increase in healthy drinks/snacks Reduction of accounts payable do to better turnover, efficiency, reduction of long term debt through paying of principle. Reduction of current liabilities as well due to use of technology.

Net Income Accounts Payable Long Term Debt Current Liabilities

5,142 8,237 7,858 369

6,500 7,000 6,200 350

Common Stock Repurchase (or sale)

-14,122

(5,000)

Common stock sold to pay for expansion in other countries.

Cash

2,064

3,100

Cash on hand increases due to SWOT implementation

The above pro forma statement shows a portion of the Consolidated Statements of Operations and Balance sheet affected by my recommendation and the external factors discussed in the Internal, External and SWOT matrix. The above Pro Forma statement is comprised of actual 2008 data and projected 2012 data.

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Epilogue Section:

Since the case was written PepsiCos net sales have increased to 65,000 million dollars while net income grew to 6,400 million dollars (PepsiCo Annual Reports 2011). PepsiCos cost of sales increased to 31,000 million dollars while long term debt increased to 20,500 million dollars (PepsiCo Annual Reports 2011). PepsiCos cash on hand was 358 million dollars (PepsiCo Annual Reports 2011). For 2011 PepsiCos return on investment was at 17 percent while its return on equity was 31 percent (PepsiCo Annual Reports 2011). Their net revenue was up 14 percent while their operating profit rose by 7 percent (PepsiCo Annual Reports 2011). Their investment in Brazil helped them expand deeper into the backed cookie and dairy product market while distribution improvements increased operating efficiency (PepsiCo Annual Reports 2011). Currently, PepsiCos nutritional food category is at 13 billion dollars in sales annually while new products such as PepsiMax zero calorie cola was the fastest growing cola drink in the US in 2011 (PepsiCo Annual Reports 2011). The company made several debt repurchases in 2011 as well as swapping secured debt for variable interest debt (PepsiCo Annual Reports 2011), in addition to this they are still tied extensively to their repurchasing of both North American bottling plants which occurred in 2008. This is unfortunate because they are assuming their ability to repay these debts on their increased sales and increases in their portfolio of financial investments.

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References

David, F. R. (2011). Strategic management: concepts and cases (13th ed.). Upper Saddle River, N.J.: Prentice Hall. PepsiCo Annual Report 2009 - Management's Discussion and Analysis. (n.d.). PepsiCo Home | PepsiCo.com. Retrieved August 4, 2012, from http://www.pepsico.com/annual09/financialContent_mda_results_of_operations.html PepsiCo Annual Reports 2009. (n.d.). PepsiCo Annual Reports. Retrieved August 2, 2012, from https://docs.google.com/viewer?url=http%3A%2F%2Fwww.pepsico.com%2FDownload%2FPEP SICO_AR.pdf PepsiCo Annual Reports 2011. (n.d.). PepsiCo Annual Reports. Retrieved August 1, 2012, from www.pepsico.com/annual11/downloads/PEP_AR11_2011_Annual_Report.pdf PepsiCo Our History | PepsiCo.com. (n.d.). PepsiCo Home | PepsiCo.com. Retrieved August 4, 2012, from http://www.pepsico.com/Company/Our-History.html/ PepsiCo Our Mission and Vision | PepsiCo.com. (n.d.). PepsiCo Home | PepsiCo.com. Retrieved August 4, 2012, from http://www.pepsico.com/Company/Our-Mission-and-Vision.html

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